In his new paper, Do Patent Challenges Increase Competition, forthcoming in the University of Chicago Law Review, Stephen Yelderman tackles the
perception, oft-stated by courts in antitrust cases, and "taken as a given" by many scholarly commentators, that courts should be wary of permitting settlement in lieu of a challenge to a patent's validity due to the potential benefits of invalidation for competition. This preference for litigation, Yelderman observes, is an exception
to the general rule that settlement “should be facilitated at as early a stage
of the litigation as possible.” (3, citing Fed. R. Civ. P. 16(c) advisory
committee note to 1983 amendment).
So, for example, in FTC v. Actavis,133 S. Ct. 2223 (2013), a majority of the the Supreme Court held that reverse-payment settlement agreements—where a patent-holding drug company pays a generic drug company to not challenge the patent in court and to delay entering the market—"can sometimes unreasonably diminish competition in violation of the antitrust laws."
Absent a patent, our intuition would be that a settlement agreement, of any kind, is a good thing. It’s what the parties bargained for, and it reduces the burden on courts. But, due to the presence of the patent, the Court told us in Actavis that, in fact, a costly patent litigation lawsuit in federal court may well be the preferred outcome. Why? Because––while costly for the parties and the courts––a successful challenge would allow the challenger to introduce a generic and lower the prices of drugs for consumers.
Likewise, in the context of "licensee estoppel" cases, the Supreme Court has held that, contrary to ordinary contract law principles, a licensee is not estopped from challenging the validity of a licensed patent in response to allegations of infringement or breach of contract, even though she previously agreed not to. See Lear v. Adkins, 395 U.S. 653 (1969). In overruling its prior rule preventing licensees from challenging patents' validity when they had already contractually promised not to do so, the Lear Court pointed to the “powerful argument” that “[i]t is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.” Lear, 395 U.S. at 663-64, overruling Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950) (“The general rule is that the licensee under a patent license agreement may not challenge the validity of the licensed patent in a suit for royalties due under the contract.”).
So, for example, in FTC v. Actavis,133 S. Ct. 2223 (2013), a majority of the the Supreme Court held that reverse-payment settlement agreements—where a patent-holding drug company pays a generic drug company to not challenge the patent in court and to delay entering the market—"can sometimes unreasonably diminish competition in violation of the antitrust laws."
Absent a patent, our intuition would be that a settlement agreement, of any kind, is a good thing. It’s what the parties bargained for, and it reduces the burden on courts. But, due to the presence of the patent, the Court told us in Actavis that, in fact, a costly patent litigation lawsuit in federal court may well be the preferred outcome. Why? Because––while costly for the parties and the courts––a successful challenge would allow the challenger to introduce a generic and lower the prices of drugs for consumers.
Likewise, in the context of "licensee estoppel" cases, the Supreme Court has held that, contrary to ordinary contract law principles, a licensee is not estopped from challenging the validity of a licensed patent in response to allegations of infringement or breach of contract, even though she previously agreed not to. See Lear v. Adkins, 395 U.S. 653 (1969). In overruling its prior rule preventing licensees from challenging patents' validity when they had already contractually promised not to do so, the Lear Court pointed to the “powerful argument” that “[i]t is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.” Lear, 395 U.S. at 663-64, overruling Automatic Radio Manufacturing Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950) (“The general rule is that the licensee under a patent license agreement may not challenge the validity of the licensed patent in a suit for royalties due under the contract.”).
The main reason for this exceptional treatment, Yelderman
contends, is the perception that, because a patent is an exception to the
general rule against monopolies and the baseline of a free and competitive market, "a successful patent challenge can benefit the public by facilitating
free competition that would otherwise have been hindered by an invalid patent."
(8). Due to the assumption that invalidating an invalid patent will improve competition, Yelderman writes, courts see patent challenges as a “golden opportunity" to mitigate the costs of having a patent
system and benefit the public-at-large.
But Yelderman argues this “golden opportunity” argument is flawed
because it is based on four specific conditions that are
not always, or even frequently, met:
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Yelderman's insight is well-taken and has a clear implication for courts in antitrust and contract cases involving patents: declining to enforce a settlement agreement or a prior promise-not-to-challenge in favor of allowing the patent to be challenged in court (or presumably in an IPR before the Patent Trial and Appeals Board) will not necessarily promote competition. Announcing a general policy in favor of challenge versus settlement without first assessing the four conditions would be folly, especially outside the Hatch-Waxman context.
I like this article and am very glad Yelderman took the time to write it. I do, however, have two comments.
The first is that, to me, it seems incredibly obvious that these four conditions (market power, causation, future effects, success upon challenge) won't be met in every case, and that sometimes a patent challenge has no chance of benefitting competition or the public at large in any way. In those cases, it would presumably be more efficient to let the parties settle and save courts' precious resources. Without exhaustively researching the issue, I refuse to believe that judges and academic commentators (even those Yelderman quotes) did not already at some level recognize this before he spelled it out for them.
At the least, they probably were aware of the last condition––that the patent challenge actually has to be successful in order to be preferred over settlement. See, e.g., Actavis, 133 S. Ct. at 2234 ("Continued litigation, if it results in patent invalidation or a finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices.") (emphasis added). With respect to the first condition, that the patent must confer market power, we already know this isn’t true for most patents since most patents are never commercialized. That said, Yelderman discusses at length (15-24) why this isn’t necessarily true even for litigated patents involved in settlements, convincingly concluding that “[a]t a minimum, there are at least some litigated cases where the disputed patent confers no market power at all.” (24).
So even if commentators did implicitly recognize at least some of the conditions, there is value in the fact that Yelderman has spelled out all four of them and shown why each is important. This can help streamline future analysis and might even eliminate sweeping statements from the Supreme Court such as this: "In an antitrust suit instituted by a licensee against his licensor we have repeatedly held that the licensee may attack the validity of the patent under which he was licensed, because of the public interest in free competition, even though the licensee has agreed in his license not to do so." United States v. U.S. Gypsum Co. et al. 333 U.S. 364, 387-88 (1948). (In footnote 56 of his paper, Yelderman provides an impressive list of citations to courts and academic commentators making similar assumptions about patent challenges and competition.)
My second comment is that I suspect Yelderman is overplaying the extent to which promoting competition is the main reason we might favor a challenge to a settlement. As he notes, there could be other reasons patent challenges benefit the public, such as preventing patent "holdups": strategic lawsuits against companies that have already invested in commercialization prior to learning about potentially infringing patents, in order to extract settlement fees. The perceived public harms from holdups based on invalid or non-infringed patents help explain, for instance, states' recent efforts to regulate "bad faith" patent assertions.
Wouldn't a successful challenge to a patent that has little actual commercial relevance potentially halt the patent-owner from wielding that very patent against others in future? This could have a very significant impact on potentially large numbers of companies that would otherwise have been subjected to a frivolous lawsuit or licensing demand. Indeed, the less relevant the patent actually is to the real commercial world and the less market power commanded by the patent owner, the more likely the infringement assertion actually is completely frivolous. That patent should probably be challenged to avoid future negative impacts on commerce and innovation.
Yelderman recognizes this objection in part, stating that "[s]ome readers may object at this point on the grounds that cases of patent holdup are instances where the patent system isn’t functioning correctly, and that as a result the public has a special interest in how these cases are resolved." (23). His response is that this justification for favoring challenges over settlement––i.e. reducing holdups and strategic suits against vulnerable companies––is "rooted in a different theory of how patent challenges benefit the public[.]" He concedes that holdup "may well be a serious problem" and "might justify policy interventions to make holdup less profitable," even including "measures to encourage patent challenges." (23-24). He just does not see this as relevant to his own project of rebutting the assumption that patent challenges increase competition.
I think, though, that it is very important to stress this limitation: Yelderman's paper only responds to the singular theory, expressed by some commentators and some courts, especially in antitrust cases, that patent challenges mitigate the harms invalid patents pose to competition. There could be many other circumstance in which a settlement of a patent lawsuit could theoretically harm the public, and where even a costly challenge to the patent could benefit the public.
First: that the patent subject to the challenge gives its owner market power in a relevant market. Second: the challenged patent is a “but-for cause” of the firm’s market power. Third, the patent challenge does not merely allocate past value, but affects competition going forward. Fourth, the patent challenge turns out to be successful, such that this potential, prospective removal of a but-for cause of market power is actually realized. (14)Yelderman contends that even if these four conditions are "generally correct in the context of pharmaceutical patents," they are not necessarily met in other contexts, such as where there is no one-to-one relationship between patents and commercially marketed products. (58)
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Yelderman's insight is well-taken and has a clear implication for courts in antitrust and contract cases involving patents: declining to enforce a settlement agreement or a prior promise-not-to-challenge in favor of allowing the patent to be challenged in court (or presumably in an IPR before the Patent Trial and Appeals Board) will not necessarily promote competition. Announcing a general policy in favor of challenge versus settlement without first assessing the four conditions would be folly, especially outside the Hatch-Waxman context.
I like this article and am very glad Yelderman took the time to write it. I do, however, have two comments.
The first is that, to me, it seems incredibly obvious that these four conditions (market power, causation, future effects, success upon challenge) won't be met in every case, and that sometimes a patent challenge has no chance of benefitting competition or the public at large in any way. In those cases, it would presumably be more efficient to let the parties settle and save courts' precious resources. Without exhaustively researching the issue, I refuse to believe that judges and academic commentators (even those Yelderman quotes) did not already at some level recognize this before he spelled it out for them.
At the least, they probably were aware of the last condition––that the patent challenge actually has to be successful in order to be preferred over settlement. See, e.g., Actavis, 133 S. Ct. at 2234 ("Continued litigation, if it results in patent invalidation or a finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices.") (emphasis added). With respect to the first condition, that the patent must confer market power, we already know this isn’t true for most patents since most patents are never commercialized. That said, Yelderman discusses at length (15-24) why this isn’t necessarily true even for litigated patents involved in settlements, convincingly concluding that “[a]t a minimum, there are at least some litigated cases where the disputed patent confers no market power at all.” (24).
So even if commentators did implicitly recognize at least some of the conditions, there is value in the fact that Yelderman has spelled out all four of them and shown why each is important. This can help streamline future analysis and might even eliminate sweeping statements from the Supreme Court such as this: "In an antitrust suit instituted by a licensee against his licensor we have repeatedly held that the licensee may attack the validity of the patent under which he was licensed, because of the public interest in free competition, even though the licensee has agreed in his license not to do so." United States v. U.S. Gypsum Co. et al. 333 U.S. 364, 387-88 (1948). (In footnote 56 of his paper, Yelderman provides an impressive list of citations to courts and academic commentators making similar assumptions about patent challenges and competition.)
My second comment is that I suspect Yelderman is overplaying the extent to which promoting competition is the main reason we might favor a challenge to a settlement. As he notes, there could be other reasons patent challenges benefit the public, such as preventing patent "holdups": strategic lawsuits against companies that have already invested in commercialization prior to learning about potentially infringing patents, in order to extract settlement fees. The perceived public harms from holdups based on invalid or non-infringed patents help explain, for instance, states' recent efforts to regulate "bad faith" patent assertions.
Wouldn't a successful challenge to a patent that has little actual commercial relevance potentially halt the patent-owner from wielding that very patent against others in future? This could have a very significant impact on potentially large numbers of companies that would otherwise have been subjected to a frivolous lawsuit or licensing demand. Indeed, the less relevant the patent actually is to the real commercial world and the less market power commanded by the patent owner, the more likely the infringement assertion actually is completely frivolous. That patent should probably be challenged to avoid future negative impacts on commerce and innovation.
Yelderman recognizes this objection in part, stating that "[s]ome readers may object at this point on the grounds that cases of patent holdup are instances where the patent system isn’t functioning correctly, and that as a result the public has a special interest in how these cases are resolved." (23). His response is that this justification for favoring challenges over settlement––i.e. reducing holdups and strategic suits against vulnerable companies––is "rooted in a different theory of how patent challenges benefit the public[.]" He concedes that holdup "may well be a serious problem" and "might justify policy interventions to make holdup less profitable," even including "measures to encourage patent challenges." (23-24). He just does not see this as relevant to his own project of rebutting the assumption that patent challenges increase competition.
I think, though, that it is very important to stress this limitation: Yelderman's paper only responds to the singular theory, expressed by some commentators and some courts, especially in antitrust cases, that patent challenges mitigate the harms invalid patents pose to competition. There could be many other circumstance in which a settlement of a patent lawsuit could theoretically harm the public, and where even a costly challenge to the patent could benefit the public.
To reiterate, though, I really like this insightful and clearly written article and highly recommend it. Given that Yelderman is an antitrust law scholar, his singular focus on market competition should not come as a surprise. (And it's not as if the title is misleading.)
