Class 21 Antitrust, Winter, 2018 Antitrust and Patents 9/20/2018 Class 21 Antitrust, Winter, 2018 Antitrust and Patents Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2000-18 Randal C. Picker. All Rights Reserved.

IP and Antitrust September 20, 2018 Twitter, Feb 21, 2018

Kodak Again (CA9 1997) Key Issues What dealing obligations does a monopolist have when the monopolist holds a patent over the product in issue? Does the patent somehow change the analysis from Aspen Skiiing (US 1985) or Trinko (2004)? Note that this is a 1997 case September 20, 2018

Jury Instructions re Patents No. 37 “[i]f you find that Kodak engaged in monopolization or attempted monopolization by misuse of its alleged parts monopoly ... then the fact that some of the replacement parts are patented or copyrighted does not provide Kodak with a defense against any of those antitrust claims.” September 20, 2018

Jury Instructions re Patents No. 28 “[s]uch [exclusionary] conduct does not refer to ordinary means of competition, like offering better products or services, exercising superior skill or business judgment, utilizing more efficient technology, exercising lawful patents and copyrights, or exercising natural competitive advantages.” September 20, 2018

Exclusion from Patented Good Presumptively Valid Test “hold that ‘while exclusionary conduct can include a monopolist’s unilateral refusal to license a [patent or] copyright,’ or to sell its patented or copyrighted work, a monopolist’s ‘desire to exclude others from its [protected] work is a presumptively valid business justification for any immediate harm to consumers.’ Data General, 36 F.3d at 1187.” September 20, 2018

What Does It Take to Overcome the Presumption? Per the Court “The presumption may also be rebutted by evidence of pretext. … Evidence regarding the state of mind of Kodak employees may show pretext, when such evidence suggests that the proffered business justification played no part in the decision to act.” September 20, 2018

What Does It Take to Overcome the Presumption? Per the Court “Kodak’s parts manager testified that patents ‘did not cross [his] mind’ at the time Kodak began the parts policy.” September 20, 2018

And For a Different View: CSU (CAFC 2000) Per the Court “We see no more reason to inquire into the subjective motivation of Xerox in refusing to sell or license its patented works than we found in evaluating the subjective motivation of a patentee in bringing suit to enforce that same right. …” September 20, 2018

And For a Different View: CSU (CAFC 2000) Per the Court “We therefore will not inquire into his subjective motivation for exerting his statutory rights, even though his refusal to sell or license his patented invention may have an anticompetitive effect, so long as that anticompetitive effect is not illegally extended beyond the statutory patent grant.” September 20, 2018

Fed Trade Comm Act Sec 5 Current Sec. 5 9/20/2018 Fed Trade Comm Act Sec 5 Current Sec. 5 “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” Language change was made on March 21, 1938. September 20, 2018

Understanding Patent Market Exit Payments 9/20/2018 Understanding Patent Market Exit Payments Consider a series of hypos Start with IP investment incentives Next consider how litigation over IP rights interacts with incentives Then consider settlement incentives for IP rights litigation September 20, 2018

Doing R&D Hypo A firm has available a research project 9/20/2018 Doing R&D Hypo A firm has available a research project It costs the firm $100 to do the project With probability p, the project is a complete bust and generates nothing September 20, 2018

9/20/2018 Doing R&D With prob 1-p, the project succeeds and produces something worth $500 to the firm and an additional $500 to the public Questions What will happen if p = 0.7? What do we want to happen? What will happen if p = .85? What do we want? September 20, 2018

9/20/2018 Answer p = .7 70% of the time the project yields 0, 30% 500 to the firm and 1000 overall to society We want the project undertaken: 300 expected value against 100 investment Firm will undertake it: 150 EV - $100 September 20, 2018

9/20/2018 Answer p = .85 85% of the time the project yields 0, 15% 500 to the firm and 1000 overall to society We want the project undertaken: 150 expected value against 100 investment Firm won’t undertake it: $75 EV - $100 September 20, 2018

Answer Takeaways Insufficient R&D incentives (here) in presence of positive spillovers (externalities) Private benefits to researcher not as great as social benefit Too little research here September 20, 2018

R&D Plus Coin Flips Hypo First stage is as before and set p = .7 9/20/2018 R&D Plus Coin Flips Hypo First stage is as before and set p = .7 Second firm has coin-flip mechanism With prob X, nothing happens: Firm 1 gets $500 as before, public gets $500 With prob 1 – x, situation changes: Firm 1 gets only $100, Firm 2 gets $100, the public gets $1000 September 20, 2018

R&D Plus Coin Flips Suppose X = .5 9/20/2018 R&D Plus Coin Flips Suppose X = .5 What will happen? What do we want to happen? How would we feel about allowing firm 1 to pay firm 2 $60 to not flip the coin? September 20, 2018

Answer Coin Flip Possibility Kills Investment Here 70%: 0 9/20/2018 Answer Coin Flip Possibility Kills Investment Here 70%: 0 30%: Succeeds Half of the time—15%--coin flip, F1: 500, F2: 0, Pub: $500 Half of the time—15%--coin flip, F1: 100, F2: 100, Pub: $1000 September 20, 2018

9/20/2018 Answer Firm 1: spend 100 to get .7x0 + .15x500 + .15x100 = 90 Allowing Firm 2 to flip the coin destroys the initial investment incentives of Firm 1 Do we want to let Firm 1 pay Firm 2 not to flip the coin? September 20, 2018

R&D, Coin Flips and Reverse Payoffs 9/20/2018 R&D, Coin Flips and Reverse Payoffs Add Payments Suppose Firm 1 can pay firm 2 $60 to not flip the coin What happens then? Is that the same as a reverse payoff? September 20, 2018

Answer Firm 2 Perspective Even with free coin flipping 9/20/2018 Answer Firm 2 Perspective Even with free coin flipping 50% get zero 50% get 100 which means EV = 50 Not flipping for 60 beats flipping for EV 50 September 20, 2018

Answer Firm 1 Perspective Firm 1 will do the investment 9/20/2018 Answer Firm 1 Perspective With payment for not flipping 70%: 0 30%: 500 – 60 = 440 EV = .7x0 + .3x440 – 100 = 32 Firm 1 will do the investment September 20, 2018

Answer Paying to Avoid the Coin Flip 9/20/2018 Answer Society wants investment as spend 100 to get EV of .3 x 1000 = 300 Paying to Avoid the Coin Flip Socially valuable here to induce (ex ante) the R&D September 20, 2018

Patent Litigation Hypo 9/20/2018 Patent Litigation Hypo Firm has patent but faces potential challenge to patent Private value of patent to firm if it wins litigation is 100 Private value if loses: 0 September 20, 2018

Patent Litigation Probability of winning: .8 9/20/2018 Patent Litigation Probability of winning: .8 Costs firm 1 to do litigation For challenger If loses lawsuit, gets 0 If wins lawsuit, gets 0 Cost of lawsuit: 1 September 20, 2018

Patent Litigation What happens? Do these numbers make sense? 9/20/2018 Patent Litigation What happens? Do these numbers make sense? September 20, 2018

Joint Interest to Preserve Patent 9/20/2018 Joint Interest to Preserve Patent Existence of Patent Never in joint interest of patent holder and challenger to run process declaring patent invalid Patent holder can just license patent to challenger, royalty-free, and it is as if the patent doesn’t exist against the challenger September 20, 2018

Joint Interest to Preserve Patent 9/20/2018 Joint Interest to Preserve Patent But patent will still exist against third parties and that will be valuable to the patent holder and the challenger September 20, 2018

Change the Numbers New Version What happens? 9/20/2018 Change the Numbers New Version Make value to the challenger 10 if it wins the lawsuit Hatch-Waxman may do exactly this by creating an exclusive period for the first generic entrant What happens? September 20, 2018

Valid Patent Licensing? 9/20/2018 Valid Patent Licensing? Hypo A patents invention A licenses invention to B to take advantage of B’s superior commercialization skills B pays A a royalty Valid under the Sherman Act? September 20, 2018

Answer Should be legal and free of antitrust challenge, given the patent September 20, 2018

Raw Market Division Hypo Valid under the Sherman Act? 9/20/2018 Raw Market Division Hypo A and B get together and split production zone: west of the Mississippi to A, east of the Mississippi to B Valid under the Sherman Act? September 20, 2018

Answer Per se illegal September 20, 2018

Valid Patent Licensing? 9/20/2018 Valid Patent Licensing? Hypo Patent holder doesn’t produce using the patent Licenses production rights west of the Mississippi to A, east of the Mississippi to B Valid under the Sherman Act? September 20, 2018

Answer Should be legal and free of antitrust challenge, given the patent September 20, 2018

Payments to Stay Out of the Market 9/20/2018 Payments to Stay Out of the Market Hypo B threatens to enter A’s market A and B agree that B will not enter and A pays B not to do so Valid under the Sherman Act? September 20, 2018

Answer Per se illegal September 20, 2018

Competing Product Exit Payments 9/20/2018 Competing Product Exit Payments Hypo Holders of Tylenol patent pay ibuprofen patent holder to keep its drug off of the market Valid under the Sherman Act? September 20, 2018

Answer Per se illegal September 20, 2018

Patent Validity Litigation 9/20/2018 Patent Validity Litigation Hypo B plans to enter A’s market by producing the same compound under A’s patent B brings a declaratory judgment action alleging that A’s patent is invalid After discovery, A and B settle the lawsuit with A paying B; B doesn’t enter Valid under the Sherman Act? September 20, 2018

Joint Interest to Limit Entry 9/20/2018 Joint Interest to Limit Entry Same Point on Competitive Entry Imagine entry and resulting post-entry profits to the patent holder and the entrant Pre-entry profits are such that the patent holder would always be better off to just pay the entrant the post-entry profits as a fee for not entering Key is not to have multiple potential entrants September 20, 2018

Joint Interest to Limit Entry 9/20/2018 Joint Interest to Limit Entry Entry benefits consumers, not producers (as a group) September 20, 2018

Summarizing Hatch-Waxman 9/20/2018 Summarizing Hatch-Waxman Streamlined approval process (ANDA) Structured Entry 45-day window for lawsuit regarding infringement 180-day exclusivity period after resolution of infringement lawsuit in entrant’s favor 2003 Amendments try to limit manipulation of 180 day window September 20, 2018

9/20/2018 The Section 1 Question Are patent settlements with “reverse payments” a per se violation of Section 1 of the Sherman Act? September 20, 2018

Early Cases: Cardizem CD: Per Se Illegality 9/20/2018 Early Cases: Cardizem CD: Per Se Illegality 332 F.3d 896 (6th Cir. 2003) Holding “By delaying Andrx’s entry into the market, the Agreement also delayed the entry of other generic competitors, who could not enter until the expiration of Andrx’s 180-day period of marketing exclusivity, which Andrx had agreed not to relinquish or transfer. September 20, 2018

Early Cases: Cardizem CD 9/20/2018 Early Cases: Cardizem CD There is simply no escaping the conclusion that the Agreement, all of its other conditions and provisions notwithstanding, was, at its core, a horizontal agreement to eliminate competition in the market for Cardizem CD throughout the entire United States, a classic example of a per se illegal restraint of trade.” September 20, 2018

Early Cases: Valley Drug: Not Per Se Illegal 9/20/2018 Early Cases: Valley Drug: Not Per Se Illegal 344 F.3d 1294 (11th Cir. 2003) Holding “… [W]e reject the district court’s characterization of the instant Agreements as illegal per se. We believe any such characterization is premature without further analysis of the kind suggested in this opinion.” September 20, 2018

11th Circuit Here: Scope of the Patent and Antitrust Immunity Said the Court: “ … [A]bsent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” September 20, 2018

Sup Ct Majority in Actavis A One Sentence Test: “In sum, a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; September 20, 2018

Sup Ct Majority in Actavis A One Sentence Test: “such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; September 20, 2018

Sup Ct Majority in Actavis A One Sentence Test: “and parties may well find ways to settle patent disputes without the use of reverse payments.” September 20, 2018

How Should the Antitrust Analysis be Done? Possible Choices Per se illegal? Presumptively unlawful and analyzed using a quick look? Rule of reason? September 20, 2018

How Should the Antitrust Analysis be Done? Rule of Reason “As in other areas of law, trial courts can structure antitrust litigation so as to avoid, on the one hand, the use of antitrust theories too abbreviated to permit proper analysis, and, on the other, September 20, 2018

How Should the Antitrust Analysis be Done? consideration of every possible fact or theory irrespective of the minimal light it may shed on the basic question—that of the presence of significant unjustified anticompetitive consequences. We therefore leave to the lower courts the structuring of the present rule-of-reason antitrust litigation.” September 20, 2018

9/20/2018 https://www.ftc.gov/news-events/blogs/competition-matters/2016/03/quo-vadis-post-actavis September 20, 2018