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Patent Misuse and Antitrust: Rebirth Or False Dawn? Daryl Lim John Marshall Law School

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Patent Misuse and Antitrust: Rebirth Or False Dawn? Daryl Lim John Marshall Law School Michigan Telecommunications and Technology Law Review Volume 20 | Issue 2 2014 Patent Misuse and Antitrust: Rebirth or False Dawn? Daryl Lim John Marshall Law School Follow this and additional works at: http://repository.law.umich.edu/mttlr Part of the Antitrust and Trade Regulation Commons, and the Intellectual Property Law Commons Recommended Citation Daryl Lim, Patent Misuse and Antitrust: Rebirth or False Dawn?, 20 Mich. Telecomm. & Tech. L. Rev. 299 (2014). Available at: http://repository.law.umich.edu/mttlr/vol20/iss2/2 This Article is brought to you for free and open access by the Journals at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Michigan Telecommunications and Technology Law Review by an authorized editor of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. PATENT MISUSE AND ANTITRUST: REBIRTH OR FALSE DAWN? Daryl Lim† Cite as: Daryl Lim, Patent Misuse and Antitrust: Rebirth or False Dawn? 20 MICH. TELECOMM. & TECH. L. REV. 299 (2014). This manuscript may be accessed online at repository.law.umich.edu. This Article examines how two recent cases, F.T.C. v. Actavis and Kimble v. Marvel Enterprises Inc. could affect both the equitable de- fense of patent misuse and the patent-antitrust interface more gener- ally. It begins by tracing the history of patent misuse and its reformulation into an “antitrust-lite” doctrine by the Federal Circuit. This Article presents new empirical data confirming this reformulation, and unveils the surprising influence of the Seventh Circuit and the Chi- cago School on that reformulation. The Article then explores Actavis and Kimble. It explains why Actavis will catalyze more antitrust chal- lenges when patent rights are exercised, and why it also challenges the Federal Circuit’s formulation of patent misuse. The Article proceeds to observe Kimble’s misunderstanding of the patent policy underpinning the Supreme Court’s prohibition against post-expiration royalties. This Article confronts three key objections to a revival of misuse—its vague- ness, lax standing requirements and punitive effects on patentees—and explains why these objections are misplaced. The Article concludes by recommending that judges and attorneys use the opportunity provided by Actavis to develop a more thoughtful framework for patent misuse that draws upon the strengths of its roots in patent policy and its inter- face with antitrust policy. TABLE OF CONTENTS I. INTRODUCTION .......................................... 300 II. EMPIRICAL METHODOLOGY ............................... 303 A. Case Content Analysis ............................... 303 B. Interviews ........................................... 307 III. ORIGIN AND EVOLUTION.................................. 308 A. A Supreme Court Original ........................... 314 † Assistant Professor, The John Marshall Law School. I am grateful to Bill McGrath, Josh Sarnoff, Dave Schwartz and Spencer Weber Waller for their valuable comments, to Chris Berry for permission to use graphs from the PricewaterhouseCoopers Patent Litigation Study 2013, and to Raizel Liebler for footnote assistance. I also thank Sarah Cork and her Board for their outstanding editorial contributions in bringing the article to print. All errors and omissions are my own. 299 300 Michigan Telecommunications and Technology Law Review [Vol. 20:299 B. Patent Misuse under the Federal Circuit: Windsurfing and its Progeny ..................................... 322 C. Grafting Antitrust: Seventh Circuit Genesis ............ 330 IV. REFORMULATING THE PATENT-ANTITRUST DOUBLE HELIX . 337 A. The Patent-Antitrust Interface after Actavis ........... 338 B. Kimble: What if Brulotte Was Right? ................. 350 C. A Pause for Thought................................. 360 V. ANSWERING THE CRITICS ................................. 363 A. “An Open-Ended Pitfall for Commerce” .............. 363 1. The Surprising Benefits of Vagueness ............. 364 2. Is Antitrust Really Less Vague? .................. 370 3. An Identity Crisis ............................... 372 B. Disarming “Private Attorney Generals” ............... 373 1. Empirical Observations .......................... 374 2. Protecting the Public Interest ..................... 377 C. Punitive Disproportionality ........................... 380 1. Patent Misuse is about Deterrence ................ 381 2. Judicial Sensitivity............................... 382 VI. WHAT JUDGES AND ATTORNEYS CAN DO .................. 385 VII. CONCLUSION ............................................ 388 I. INTRODUCTION In F.T.C. v. Actavis, the U.S. Supreme Court recently revitalized the debate on how the law should operationalize policy dichotomies underlying the patent-antitrust interface.1 The Court held that “pay-for-delay” settle- ments between patent-owning drug companies and their generic competitors could be anticompetitive even if these settlements were within the scope of the owners’ patent rights.2 The Actavis decision has been hailed as poten- tially “one of the most important patent/antitrust rulings of all time,”3 recog- 1. F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013). See also generally Herbert Hovenkamp, IP and Antitrust Policy: A Brief Historical Overview (Univ. of Iowa Legal Stud- ies, Working Paper No. 05-31, 2005), http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 869417 (describing the early twentieth century as “an era of IP expansion and antitrust accom- modation,” to “antitrust aggressiveness” “beginning during the New Deal and extending through the Warren era [where] the Supreme Court was more inclined to view patents as inherently anticompetitive and to interpret the antitrust laws expansively,” to the 1960s and 1970s, when antitrust was scaled back to focus “on identifying serious threats to competition that were not justified by explicit provisions of the IP laws,” to the present when “we once again live in an era of IP expansionism.”). 2. Actavis, 133 S. Ct. at 2226, 2230. 3. Michael Carrier, The U.S. Supreme Court Issues First Ruling on Antitrust Legality of Reverse-payment Drug Patent Settlements (Actavis), E-COMPETITIONS BULLETIN (July 2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2293867; see also Supreme Court Issues Significant Patent Antitrust Decision Rejecting the “Scope of the Patent” Rule, PERKINS COIE (June 18, 2013), http://www.perkinscoie.com/news/pubs_Detail.aspx?publication= 869018d4-0267-49b4-8c26-991255646b19 (describing Actavis as “the most significant patent antitrust decision in decades. .”). Spring 2014] Patent Misuse and Antitrust 301 nition that its impact exceeds the narrow regulatory confines of the Hatch- Waxman Act.4 Shortly after in Kimble v. Marvel Enterprises Inc., the U.S. Court of Appeals for the Ninth Circuit declared that an agreement requiring Marvel to pay royalties for patent license covering a Spider-Man “Web Shooter” be- yond the patent’s term was unenforceable.5 The Ninth Circuit did so “reluc- tantly,” expressing that it was bound by the Supreme Court’s controversial decision in Brulotte v. Thys Co.6 Commentary on Actavis has focused overwhelmingly on the Court’s ap- plication of antitrust law’s rule of reason to “pay-for-delay” settlements, the resulting need to assess patent validity and infringement, and whether anti- trust incursion into a properly obtained patent monopoly was orthodox.7 In contrast to the heated debate generated by Actavis, Kimble has attracted little 4. Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98- 417, 98 Stat. 1585; see also Herbert Hovenkamp, Anticompetitive Patent Settlements and the Supreme Court’s Actavis Decision, 15 MINN. J.L. SCI. & TECH. 3, 22 (2014) (“A striking part of Justice Breyer’s discussion of Supreme Court precedent was its showing that restraints involving patents whose validity or coverage was not in dispute could nevertheless run afoul of the Sherman Act, and outside of the Hatch-Waxman context.”); Mark Botti & Jessica Hoke, Redefining the Border between Intellectual Property and Antitrust: Implications of FTC v. Actavis, BLOOMBERG LAW (2013), http://about.bloomberglaw.com/practitioner-contributions/ redefining-the-border-between-intellectual-property-and-antitrust/ (“For intellectual property and antitrust counselors in the U.S., the implications from Actavis will need to be carefully considered. Even more care needs to be exercised in settling patent disputes between competi- tors or potential competitors. The activities of PAEs or patent trolls warrant closer antitrust scrutiny. And terms and conditions in licensing agreements, even where unilaterally negotiated by a single patent holder, may no longer be protected from challenge under the antitrust laws. Licensing agreements embodying terms or arising in circumstances that might raise significant antitrust issues if employed outside of the patent licensing context now clearly warrant some careful consideration in the patent licensing context, even if they fall within the scope of the patent.”). 5. Kimble v. Marvel Enters. Inc., 727 F.3d 856 (9th Cir. 2013). 6. Id. at 857 (citing Brulotte v. Thys Co., 379 U.S. 29 (1964)); see e.g., Petition for a Writ of Certiorari at 2, Kimble v. Marvel Enters., Inc., 727 F.3d 856 (2013) ( No. 13-720) (“Petitioners respectfully ask this Court to overrule Brulotte v. Thys Co., 379 U.S. 29 (1964), App. 73-85, and to reject its per se prohibition on licensing arrangements involving post- expiration patent
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