The importance of patents in fostering innovation varies between industries. The pharmaceutical industry, in which it is difficult and expensive to reach the market, is one in which patents are crucial. The industry also is marked by complex regulatory regimes that promote not just innovation but also competition. The Hatch-Waxman Act in the US provides 180 days of exclusivity to the first generic to challenge a brand firm’s patents. And substitution laws in the US and EU allow or require pharmacists to substitute a generic when a doctor prescribes the brand version of a drug.
The pharmaceutical industry also is characterized by a pivotal moment: the time when generics enter the market, dramatically lowering price. It is no surprise, then, that brand firms have engaged in an array of conduct to delay this moment as long as possible. Across the world, they have used a variety of strategies to do this: “pay for delay” settlements involving payments to generics to settle patent litigation; “product hopping”, consisting of switches from one version of a drug to another; citizen petitions filed with regulatory agencies; and denials of samples that generics need to enter the market.
Just to pick one example, pay-for-delay settlements involve brand firms colluding with generics to delay entry. In 2013, the US Supreme Court in FTC v. Actavis held that these agreements could have significant anticompetitive effects and violate antitrust law. The Supreme Court held that antitrust law (and not just patent law) plays an important role in determining a settlement’s competitive effects. The Court also held that a policy favoring settlements was not dispositive and instructed courts to determine patent strength by analyzing not the patent but whether the brand made a large and unjustified payment to the generic.
Europe also has targeted settlements. One example is the EC’s 2014 € 427 million fine levied on Servier and generic rivals for settlements that delayed generic entry. The Commission concluded that “Servier sought protection against generic entry by concluding five patent settlement agreements with the (most) advanced generic contenders” that “consisted of significant payments, or other inducements, to the generic companies, and the obligation for them not to challenge Servier’s patents and not to enter the market (directly or indirectly) for a number of years.” The Commission also revealed factors for determining whether a settlement falls under the category of restriction by object (which punishes conduct without analyzing its economic effects): (1) whether the brand and generic “were at least potential competitors”; (2) whether the generic “committed itself in the agreement to limit, for the duration of the agreement, its independent efforts to enter one or more EU markets with a generic product”; and (3) whether there was a “transfer of value . . . as a significant inducement which substantially reduced the incentives of the generic undertaking to independently pursue its efforts to enter one or more EU markets with the generic product.”
In short, pay-for-delay settlements reveal how competition law can play an important role even where the brand company has an issued patent.
A second setting involving patents and competition is presented by standards, which are common platforms that allow products to work together. Standards provide the certainty for consumers to know that their plugs will fit into outlets and their phones will connect to wireless networks. But some companies owning patents needed to use a standard, after promising to license the patent on reasonable terms, seek to block the product or charge an exorbitant price.
In such a case, the users of the standard are stuck. They have invested in technologies based on the standard. And they may be forced to pay a price reflecting not the added value of the technology but the costs of switching to a new technology. In other words, they are subject to “patent holdup.”
For years, the concerns threatened by patent holdup were consistently acknowledged by US officials. A unanimously adopted 2007 report of the antitrust agencies (at 35-36) explained the difference between a patentee’s power ex ante (when “multiple technologies may compete to be incorporated into the standard”) and ex post (when “the chosen technology may lack effective substitutes,” which lets patentees “extract higher royalties”). Similarly, the Federal Trade Commission (FTC) unanimously endorsed a 2011 report that highlighted (at 234) how “an entire industry” could be “susceptible” to the “particularly acute” concern of holdup, which can result in “higher prices” and “discourage standard setting activities and collaboration, which can delay innovation.”
That all changed, however, during the Trump Administration, as the head of the Antitrust Division, Makan Delrahim, staked out an aggressively pro-patent position. Delrahim asserted that patents present a type of absolute property for which owners are entitled to a right to exclude and automatic injunction. And he claimed that patent holdup is not an antitrust problem. These positions were far outside the antitrust mainstream and should be reversed.
The EU has offered a more nuanced position. In Huawei v. ZTE, the European Court of Justice (at ¶¶ 61-71) set forth a framework by which the parties had shifting responsibilities, with the patentee notifying the defendant of infringement, the defendant showing its willingness to license, the patentee making a written offer including the royalty, and the defendant (who is able to challenge patent validity or essentiality) accepting the offer or making a counteroffer.
In addition, a 2017 EC Communication (at 6) made clear that licensing terms must have “a clear relationship to the economic value of the patented technology” that “focus[es] on the technology itself” and does not “include any element resulting from the decision to include the technology in the standard.” The Communication also (at 7) sought to “avoid royalty stacking” as the parties “need to take into account a reasonable aggregate rate for the standard.”
In short, competition plays a crucial role in analyzing how patents are used in the standards context, as recognized by Europe and (other than during the Trump Administration) United States.
As the pharmaceutical and standards examples show, the intersection of patents and competition presents crucial issues.