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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Understanding Patent Market Exit Payments
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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

13. Doing R&D Hypo A firm has available a research project
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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

14. 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

15. 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

16. 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

17. 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

18. 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

19. R&D Plus Coin Flips Suppose X = .5
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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

20. Answer Coin Flip Possibility Kills Investment Here 70%: 0
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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

21. 9/20/2018
Answer
Firm 1: spend 100 to get .7x x x100 = 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

22. R&D, Coin Flips and Reverse Payoffs
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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

23. Answer Firm 2 Perspective Even with free coin flipping
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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

24. Answer Firm 1 Perspective Firm 1 will do the investment
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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

25. 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

26. 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

27. 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

28. Patent Litigation What happens? Do these numbers make sense?
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Patent Litigation
What happens? Do these numbers make sense?
September 20, 2018

29. Joint Interest to Preserve Patent
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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

30. 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

31. Change the Numbers New Version What happens?
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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

32. 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

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

34. 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

35. Answer
Per se illegal
September 20, 2018

36. 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

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

38. 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

39. Answer
Per se illegal
September 20, 2018

40. 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

41. Answer
Per se illegal
September 20, 2018

42. 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

43. 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

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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 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

52. 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

53. 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

54. 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

55. 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

56. 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

57. 9/20/2018
September 20, 2018