US Antitrust Limitations on Patent Licensing Bruce D. Sunstein Bromberg & Sunstein LLP Boston www.bromsun.com © 2008 Bromberg & Sunstein LLP

A short summary of antitrust law in patent licensing—Chapter I Bement v. Nat’l Harrow Co., 186 U.S. 70, 91 (1902)(license fixing sale price of patented goods is OK under antitrust laws, etc.) Standard Oil Co. v. United States, 283 U.S. 163 (1931)(patent pooling subject to rule of reason analysis; important precedent) Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488 (1942)(purchase of unpatented salt tablets as condition for patent license held per se patent misuse rendering patent unenforceable; no further analysis required)

A short summary of antitrust law in patent licensing—Chapter II—The Nine No-Nos, 1970s (1) requiring a licensee to purchase unpatented materials (2) requiring a licensee to assign future patents (3) restricting a purchaser of a patented product in the resale of the product (4) restricting a licensee's ability to deal in products or services not within the scope of the patent (5) a patent holder agreeing with a licensee not to grant future licenses to others without the licensee's consent

A short summary of antitrust law in patent licensing—Chapter II—The Nine No-Nos (cont’d) (6) mandatory package licensing (7) requiring payment of royalties on the total sales price of products containing unpatented items (8) restricting a licensee's sale of products made by use of the patented process (9) requiring a licensee to adhere to any price with respect to the licensee's sale of the licensed product (Bruce B. Wilson, Address Before Michigan State Bar Antitrust Section and Patent, Trademark and Copyright Section (September 21, 1972), partial text reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,125)

A short summary of antitrust law in patent licensing—Chapter III—Mostly rule of reason Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)(patent misuse will be found only if Supreme Court says it is per se misuse or if it is an antitrust violation) 1998 Patent Misuse Reform Act, 35 U.S.C. §271(d)(4)-(5)(patent misuse requires proof of market power) Illinois Tool Works, Inc. v. Independent Ink, Inc., 126 S.Ct. 1281 (2006) (market power must be proven in tying case involving a patent)

A short summary of antitrust law in patent licensing—Chapter III—Mostly rule of reason (cont’d) Antitrust Guidelines for the Licensing of Intellectual Property (1995), by DOJ & FTC http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007) by DOJ & FTC http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf

Ex. 1. Drug Developer, patented drug, minimum drug price specified in license. Drug developer exclusively licenses big Pharma Co. (which has market power) License to make and market patented drug License specifies minimum price to be charged for the drug

Ex. 1. Drug Developer, patented drug, minimum drug price specified in license. Drug developer exclusively licenses big Pharma Co. (which has market power) License to make and market patented drug License specifies minimum price to be charged for the drug Minimum price restriction on resale is per se violation: Dr. Miles Medial Co. v. John D. Park & Sons Co., 220 U.S. 373, 408 (1911); DOJ-FTC Guidelines §§ 3.4 and 5.2

Ex. 1A. Drug Developer, patented drug, maximum drug price specified in license. Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market patented drug License specifies maximum price to be charged for the drug

Ex. 1A. Drug Developer, patented drug, maximum drug price specified in license. Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market patented drug License specifies maximum price to be charged for the drug State Oil v. Kahn, 522 U.S. 3 (1997)(maximum resale price governed by rule of reason); but see DOJ-FTC Guidelines §§ 3.4 and 5.2 (price maintenance as per se violation)

Ex. 2. Drug Developer, patented drug, exclusive territorial licensees each have minimum drug price specified in license. Drug developer exclusively licenses: Big Pharma Co. 1 (which has market power) in US, and Big Pharma Co. 2 (which has market power) in EU, License to make and market patented drug Licenses specifies different minimum prices to be charged for the drug in US and EU

Ex. 2. Drug Developer, patented drug, exclusive territorial licensees each have minimum drug price specified in license. Drug developer exclusively licenses: Big Pharma Co. 1 (which has market power) in US, and Big Pharma Co. 2 (which has market power) in EU, License to make and market patented drug Licenses specifies different minimum prices to be charged for the drug in US and EU Price fixing; Territorial division: 35 U.S.C. § 261. But see Guidelines, § 3.4, Ex. 7 (horizontal restraints evaluated under rule of reason).

Ex. 2A. Drug Developer, patented drug, exclusive territorial licensees each have maximum drug price specified in license. Drug developer exclusively licenses: Big Pharma Co. 1 (which has market power) in US, and Big Pharma Co. 2 (which has market power) in EU, License to make and market patented drug Licenses specifies different maximum prices to be charged for the drug in US and EU

Ex. 2A. Drug Developer, patented drug, exclusive territorial licensees each have maximum drug price specified in license. Drug developer exclusively licenses: Big Pharma Co. 1 (which has market power) in US, and Big Pharma Co. 2 (which has market power) in EU, License to make and market patented drug Licenses specifies different maximum prices to be charged for the drug in US and EU Price fixing; Territorial division: 35 U.S.C. § 261. But see Guidelines, § 3.4, Ex. 7 (horizontal restraints evaluated under rule of reason).

Ex. 3. Drug developer, exclusive license, non-exclusive royalty-free license back Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Drug developer has non-exclusive royalty-free license back on improvements made by Big Pharma Co. in field of skin cancer

Ex. 3. Drug developer, exclusive license, non-exclusive royalty-free license back Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Drug developer has non-exclusive royalty-free license back on improvements made by Big Pharma Co. in field of skin cancer Transparent-Wrap Machine Corp. v. Stokes & Smith, 329 U.S. 637 (1947)(grant back governed by rule of reason); Guidelines, § 5.6

Ex. 4. Drug developer, exclusive license, exclusive royalty-free license back Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Drug developer has exclusive royalty-free license back on improvements made by Big Pharma Co. in field of skin cancer

Ex. 4. Drug developer, exclusive license, exclusive royalty-free license back Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Drug developer has exclusive royalty-free license back on improvements made by Big Pharma Co. in field of skin cancer Transparent-Wrap Machine Corp. v. Stokes & Smith, 329 U.S. 637 (1947)(grant back governed by rule of reason); Guidelines, § 5.6

Ex. 5. Big Pharma, exclusive license, non-exclusive royalty-free license back Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Big Pharma Co. has non-exclusive royalty-free license back on improvements made by Small Oncology Drug Co. in field of skin cancer

Ex. 5. Big Pharma, exclusive license, non-exclusive royalty-free license back Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Big Pharma Co. has non-exclusive royalty-free license back on improvements made by Small Oncology Drug Co. in field of skin cancer Transparent-Wrap Machine Corp. v. Stokes & Smith, 329 U.S. 637 (1947)(grant back governed by rule of reason); Guidelines, § 5.6

Ex. 6. Big Pharma, exclusive license, exclusive royalty-free license back Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Big Pharma Co. has exclusive royalty-free license back on improvements made by Small Oncology Drug Co. in field of skin cancer

Ex. 6. Big Pharma, exclusive license, exclusive royalty-free license back Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Big Pharma Co. has exclusive royalty-free license back on improvements made by Small Oncology Drug Co. in field of skin cancer Transparent-Wrap Machine Corp. v. Stokes & Smith, 329 U.S. 637 (1947)(grant back governed by rule of reason); Guidelines, § 5.6

Ex. 7. Drug developer, exclusive license, with tie-out Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Big Pharma Co. agrees not to develop or market a competing drug in field of skin cancer

Ex. 7. Drug developer, exclusive license, with tie-out Drug developer exclusively licenses Big Pharma Co. (which has market power) License to make and market a patented drug in field of skin cancer Big Pharma Co. agrees not to develop or market a competing drug in field of skin cancer Exclusive dealing, non-competition governed by rule of reason, Guidelines, § 5.4; In re Recombinant DNA Tech. Patent &Contract Litig., 850 F. Supp. 769 (S.D. Ind. 1994)

Ex. 8. Big Pharma, exclusive license, with tie-out Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Small Oncology Drug Co. agrees not to develop or market a competing drug in field of skin cancer

Ex. 8. Big Pharma, exclusive license, with tie-out Big Pharma Co. exclusively licenses Small Oncology Drug Co. License to make and market a patented drug in field of skin cancer Small Oncology Drug Co. agrees not to develop or market a competing drug in field of skin cancer Exclusive dealing, non-competition governed by rule of reason, Guidelines, § 5.4; In re Recombinant DNA Tech. Patent &Contract Litig., 850 F. Supp. 769 (S.D. Ind. 1994)

Ex. 9. Tie-in by Drug Developer in license grant makes and sells aspirin has patent for drug delivery device for delivering an anti-inflammatory drug (such as aspirin) patent covers both the device and the method of making a product including the device in combination with the anti-inflammatory drug License to Big Pharma Co. to make the drug delivery device and to bundle the device in combination with aspirin conditioned on Big Pharma Co.’s buying aspirin from Drug Developer

Ex. 9. Tie-in by Drug Developer in license grant to Big Pharma Co. to make the drug delivery device and to bundle the device in combination with aspirin conditioned on Big Pharma Co.’s buying aspirin from Drug Developer Normally governed by rule of reason analysis. Guidelines, § 5.3; 1998 Patent Misuse Reform Act, 35 U.S.C. §271(d)(4)-(5); In re Indep. Servs. Orgs. Antitrust Litig., 203 F.3d 1322 (Fed. Cir. 2000); but see Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1214 n.7 (9th Cir. 1997) (statute does not apply to antitrust, just misuse)

Ex. 10. Tie-in by Big Pharma in license grant Big Pharma Co.: makes and sells aspirin has patent for drug delivery device for delivering an anti-inflammatory drug (such as aspirin) patent covers both the device and the method of making a product including the device in combination with the anti-inflammatory drug License to Small Drug Co. to make the drug delivery device and to bundle the device in combination with aspirin conditioned on Small Drug Co.’s buying aspirin from Big Pharma

Ex. 10. Tie-in by Big Pharma in license grant to Small Drug Co. to make the drug delivery device and to bundle the device in combination with aspirin conditioned on Small Drug Co.’s buying aspirin from Big Pharma Normally governed by rule of reason analysis. Guidelines, § 5.3; 1998 Patent Misuse Reform Act, 35 U.S.C. §271(d)(4)-(5); In re Indep. Servs. Orgs. Antitrust Litig., 203 F.3d 1322 (Fed. Cir. 2000); but see Image Tech. Servs., Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1214 n.7 (9th Cir. 1997) (statute does not apply to antitrust, just misuse)

Ex. 11. Downstream market control with method claims Drug Developer: has patent for drug delivery device for delivering an anti-inflammatory drug (such as aspirin) patent covers both the device and the method of making a product including the device in combination with the anti-inflammatory drug makes and sells aspirin and the drug delivery device has a license and supply agreement with Big Pharma

Ex. 11. Downstream market control with method claims (cont’d) License: grants right Big Pharma the right to make and sell the combination product excludes the right to make a combination of the drug delivery device with aspirin supplied by a company other than Drug Developer Big Pharma bundles the drug delivery device it buys from Drug developer with aspirin, as intended but makes its own aspirin for use in the bundle Drug Developer sues for infringement—who wins?

Ex. 11. Downstream market control with method claims (cont’d) Drug Developer sues for infringement—who wins? Big Pharma wins. Quanta Computer v. LG Electronics, 128 S.Ct. 2109, ___U.S. __ (2008)(method patent claims will not trump patent exhaustion doctrine; licensee can do what it wants with product purchased from licensor)

Parting thoughts Antitrust problems can show up in unexpected places Enforcement by government Also private enforcement Treble damages, 15 U.S.C. § 15 Injunction, 15 U.S.C. § 26 Analyze the big picture in patent licensing transactions to test for compliance, keeping public perspective in mind