The U.S. Court of Appeals ruled that an agreement to settle a patent dispute constituted a per se violation of the Sherman Act as a horizontal restraint of trade. The parties were the patentee of a drug ("HMR") and the FDA-approved manufacturer of its generic version ("Andrx"). HMR charged Andrx with patent infringement, then agreed to pay Andrx $40 million per year if Andrx refrained from marketing its generic in the U.S. Customers brought an action for violations of the Sherman Act and state antitrust laws.
The court found that the settlement Agreement "cannot be fairly characterized as merely an attempt to enforce patent rights or an interim settlement of the patent litigation. As the plaintiffs point out, it is one thing to take advantage of a monopoly that naturally arises from a patent, but another thing altogether to bolster the patent's effectiveness(13) in inhibiting competitors by paying the only potential competitor $40 million per year to stay out of the market." In re Cardizem CD Antitrust Litigation , 332 F.3d 896 (6th Cir. 2003). (Thanks to Greenberg Traurig for the alert to this decision.)
This decision brings to mind what is sometimes called the "intellectual property defense" to an antitrust action, discussed in the continuation of this posting.
The “Intellectual Property Defense”
United States’ patent law provides for a protected property right for the exclusive use of an invention for which a patent has been granted. The patent holder may practice the patent itself while denying permission for any others to “practice” the patent, keeping any commercial benefit for its exclusive use. Or, the holder may grant patent licenses to some but not others, discriminating among them and setting prices for licenses as high (or higher) than the market will bear. The holder may sit on its patent, neither practicing it nor allowing others to do so. In each of these decisions, the holder has recourse to law to enforce its rights under the patent law, for the limited life of the patent.
Although this property right is sometimes referred to as a “monopoly,” Chief Judge Markey of the Court of Appeals for the Federal Circuit repeatedly admonished against such a characterization, for example, in Carl Schenck, A.G. v. Nortron Corp., 713 F.2d 782, 786 n. 3 (Fed. Cir. 1983), Judge Markey stated:
The interaction between intellectual property law and antitrust law has challenged courts for many years. The Sherman Act, outlaws “monopolization” as well as “contracts, combinations and conspiracies in restraint of trade.” The Federal Trade Commission (FTC) Act and regulations passed under its authority constrain "unfair competition" defined in various ways. Other federal and state laws expand on these two statutes.
The “intellectual property defense” is often cited in response to legal actions sounding in antitrust when the alleged anticompetitive behavior involves the licensing or refusal to license patented inventions. Two recent Court of Appeals decisions illustrate the scope (and limitations) of the “intellectual property defense.”
Image Service Technical Servs. v. Eastman Kodak Co. , 125 F.3d 1195 (9th Cir. 1997), involving Kodak’s refusal to sell aftermarket parts to the plaintiffs. The plaintiffs charged Kodak with monopolization, and the Court of Appeals affirmed a jury verdict against Kodak. Kodak’s defense, raised late in the litigation, was to the effect that some of the parts were protected by patent or copyright. The Court found the defense to be inadequate and just a pretext, because not all of the withheld parts were so protected.
In a more recent case, In re Independent Service Organizations Antitrust Litigation , 203 F.3d 1322 (Fed. Cir. 2000), cert. denied, 531 U.S. 1143 (2001), the Court of Appeals upheld the right of Xerox to refuse to sell aftermarket parts and license related software to certain independent service organizations (“ISOs”) that were attempting to compete with it in the servicing market. In the case of Xerox, all of the items in question (not just some) were protected by patent or copyright. The Court noted that "[i]n the absence of any indication of illegal tying, fraud in the Patent and Trademark Office, or sham litigation, the patent holder may enforce his statutory right to exclude others from making, using or selling the claimed invention free from liability under the antitrust laws."
There are several concise discussions of the Kodak and Xerox cases online, including:
The United States Department of Justice, Antitrust Division has published "Antitrust Guidelines for Licensing of Intellectual Property" in which they extensively discuss the basics of this interaction between intellectual property law and antitrust and unfair competition law:
“Market power is the ability profitably to maintain prices above, or output below, competitive levels for a significant period of time.(10) The Agencies will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner. Although the intellectual property right confers the power to exclude with respect to the specific product, process, or work in question, there will often be sufficient actual or potential close substitutes for such product, process, or work to prevent the exercise of market power.(11) If a patent or other form of intellectual property does confer market power, that market power does not by itself offend the antitrust laws. As with any other tangible or intangible asset that enables its owner to obtain significant supracompetitive profits, market power (or even a monopoly) that is solely "a consequence of a superior product, business acumen, or historic accident" does not violate the antitrust laws.(12) Nor does such market power impose on the intellectual property owner an obligation to license the use of that property to others. As in other antitrust contexts, however, market power could be illegally acquired or maintained, or, even if lawfully acquired and maintained, would be relevant to the ability of an intellectual property owner to harm competition through unreasonable conduct in connection with such property.”
The Guidelines go on to discuss (with example scenarios) situations in which a violation might be found, and those in which restrictions would not be likely to offend the antitrust laws. Certain restraints on trade are considered "per se" unlawful, and include "naked price-fixing, output restraints, and market division among horizontal competitors, as well as certain group boycotts and resale price maintenance." Guidelines, §3.4. In the Cardizem CD case decided in June 2003, HRM and Andrx were found to have fallen into the "market division among horizontal competitors" category of per se violations.
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