In this presentation from June 2015, Davit Akman and a panel of other antitrust experts provide an overview of recent regulatory and jurisprudential developments in the U.S., Europe and Canada, and their impact on antitrust counselling and risk assessment.
Key topics discussed include:
• Patent litigation settlement agreements (PLSAs)
• Standard setting and conduct involving standard essential patents (SEPs)
• Conduct involving patent assertion entities (PAEs)
The doctrine of harmonious construction under Interpretation of statute
PLSAs, SEPs and PAEs: The Antitrust/IP Acronyms You Should Know and Understand
1. Davit D. Akman John Schmidt
Gowling Lafleur Henderson LLP Shepherd and Wedderburn LLP
David Giardina Barbara Sicalides
Sidley Austin LLP Pepper Hamilton LLP
Alan Gunderson
Canadian Competition Bureau
PLSAs, SEPs and PAEs:
The Antitrust/IP Acronyms You Should Know and Understand
ABA Business Law Section Antitrust Law Committee Webinar
June 23, 2015 12:00 pm – 1:30 pm ET
2. DISCLAIMER
The views and opinions expressed in this
presentation and on the following slides, including
the answers to any questions, are entirely those
of the panellists and do not represent any policies
or positions of any firm or other organization.
2
4. Reverse Payment Litigation – United States
Barbara Sicalides, Pepper Hamilton LLP4
Emphasizes innovation as
means to incent competition
Emphasizes competition as a
means to encourage
innovation
Encourage innovation and
speed to market
Patent
Patent
Antitrust
Pharma
Regs
All intended to encourage innovation and competition?
5. Reverse Payment Litigation – United States
Barbara Sicalides, Pepper Hamilton LLP5
Reverse Payment - Even after FTC v Actavis
lower and state courts continue to struggle with
balancing the laws’ interests in speed to market,
innovation and concerns regarding abuse of
putative market power
State claims v. Patent law
6. Reverse Payment State Claims
6
May 7, 2015 California Supreme Court followed U.S.
Supreme Court’s Actavis – In Re Cipro
Bayer’s Cipro patent set to expire 2003
12 years before patent’s expiration, generic
manufacturer Barr made a paragraph IV certification
under Hatch-Waxman and Bayer filed patent
infringement suit against Barr
1997 Bayer/Barr patent settlement
Barr stipulated to validity of Bayer patent, withdrew its
paragraph IV certification, and agreed not to sell generic
until patent expiration 2003
Bayer agreed to pay Barr $398MM and to license Barr to
sell its generic 6 months prior to patent’s expiration
Barbara Sicalides, Pepper Hamilton LLP
7. Reverse Payment State Claims
7
Superior Court and Appeals Court granted or affirmed
summary judgment in defendants’ favor based on its
conclusion that patent litigation settlement was
immune from antitrust challenge if settlement did not
restrain competition for period of time longer than
patent term
California Supreme Court reversed and found reverse
payment settlements are like agreements to not
compete, which are barred by the Cartwright Act
Adopted reasoning of Actavis
Cipro court rejected the “scope of the patent” test and
notion of immunity under patent laws
Barbara Sicalides, Pepper Hamilton LLP
8. Reverse Payment State Claims
Barbara Sicalides, Pepper Hamilton LLP8
Prima Facie Case Elements
Settlement includes limit on generic’s entity
Settlement includes financial consideration from
brand to generic
Consideration exceeds value of goods and/or
services and brand manufacturer’s expected
remaining litigation costs
Burden shifts to defendants to show legitimate
justifications and procompetitive effects
Burden shifts back to plaintiff to show any proffered
procompetitive business justifications are
unsupported
9. FTC v. AbbVie
Barbara Sicalides, Pepper Hamilton LLP9
FTC alleges illegal “reverse-payment” settlement and
that patent infringement litigation was “sham”
Commissioners voted 3-2 in favor of bringing complaint,
split along party lines
Addition of sham claim new step by FTC
Eastern District of Pennsylvania – May 2015 decision
"The patentees here, unlike the patentee in Actavis, . . .
did not make any payment, reverse or otherwise, to the
claimed infringer
Court considered procompetitive effects of agreements
in weighing whether agreements were actionable under
Actavis
10. Patent Assertion Entities – “PAEs”
A PAE is a firm that doesn’t make or sell patent-practicing
products or services itself, but focuses on purchasing patents
and asserting them against others
Role of PAEs highly controversial
PAEs are viewed by some as imposing a tax on genuine innovation and
exploiting defects in the patent system and asymmetries in the cost of
litigation
To others, PAEs allow small innovators to monetize their patents and facilitate
trading of IP
Between 2006 and 2012, the percentage of all new infringement
claims brought by PAEs rose from 19% to 62%
Increasing role has spawned various responses, both in the
courts and in Congress and state legislatures
10 David Giardina, Sidley Austin LLP
11. Standard Essential Patents
& RAND Commitments
Standard essential patents or “SEPs” – patents that must be
practiced to implement an industry standard, e.g., 2G, 3G, LTE,
“WiFi”
Concerns:
“Hold-up” by SEP holders
Excessive aggregate royalties – “royalty stacking”
The response: required disclosure of patents and commitments
to license on reasonable and non-discriminatory or “RAND”
terms
The result: disputes about (1) compliance with disclosure and
RAND obligations and (2) the remedies available to
implementers for breaches of those commitments and to SEP
holders for infringement of their patents
11 David Giardina, Sidley Austin LLP
12. Canadian IP Enforcement Guidelines (IPEGs)
Initially released in September 2000
Explain Canadian Competition Bureau’s enforcement of the
Competition Act to matters involving IP
Basic principles
IP and competition policy are complementary
An IP owner (e.g., a patentee) does not necessarily have market
power
Licensing is often pro-competitive
Organizing principle: “mere” exercise of an IP right
Conduct that is “mere” exercise (e.g., unilateral refusal) – rarely a
competition issue
Conduct beyond “mere” exercise – (e.g., licensing, merger) –
general provisions
12 Alan Gunderson, Canadian Competition Bureau
13. IPEGs Update: Initial Phase
The Bureau released an update of its IPEGs September 18, 2014
Reflects amendments to the Competition Act:
E.g., in 2009 criminal conspiracy was made a per se offence and a civil
competitor collaboration provision was introduced
Consistent with other Bureau enforcement guidelines:
E.g., abuse of dominance guidelines, competitor collaboration guidelines,
merger enforcement guidelines
Reflects Bureau’s enforcement experience:
E.g., “product-switching” conduct in the pharmaceutical industry
Alcon case position statement:
http://www.competitionbureau.gc.ca/eic/site/cb-
bc.nsf/eng/03686.html
13 Alan Gunderson, Canadian Competition Bureau
14. IPEGs Update: Second Phase
The Bureau released a second update on June 9, 2015 for
public consultation
Comments due August 10, 2015
The draft includes the Bureau’s enforcement approach with
respect to:
Patent litigation settlement agreements between brand and
generic pharmaceutical companies
The conduct of patent assertion entities
The conduct of patentees with standard essential patents
14 Alan Gunderson, Canadian Competition Bureau
15. Reverse Payment Patent Settlements in Europe
A number of ongoing cases before the European Commission, the UK CMA and
the European Courts. The authorities view as problematic:
• Entry restriction + value transfer = restrictive agreement (Article 101)
• A number of such agreements = abuse of dominance (Article 102)
Sector Inquiry – 2008/9: Categorisation and annual monitoring
Category A: no restrictions on generic entry
Category B.I: restriction on generic entry but no value transfer
Category B.II: restriction on generic entry and value transfer
• And to a number of enforcement cases:
• Perindopril (Servier) – 2009 - Decision 2014 – On appeal
• Citalopram (Lundbeck) – 2010 - Decision 2013 – On appeal
• Modafinil (Cephalon) – 2011 – Ongoing before EU Commission
• Fentanyl (J&J) 2011 - Decision 2013 – No appeal
• Boeringer – 2011 – Case closed on Settlement
• National Proceedings - Paroxetine UK: ongoing before CMA
15 John Schmidt, Shepherd and Wedderburn LLP
16. Standard Essential Patents in Europe
16
• European Commission’s basic approach
• Royalties charged after patent ambush may be an abuse of dominance i.e.
Article 102 (Rambus)
• Obtaining injunctions against willing FRAND licensees = abuse of
dominance (Motorola and Samsung)
• Agreements preventing challenges to (i) validity (ii) infringement and (iii)
essentiality are anticompetitive (Motorola)
• BUT a ‘SEP’ does not automatically give you dominance (AG in Huawei v
ZTE)
• Willing licensee?
• Submit to third party determination (e.g. court or arbitration) (Motorola)
• Can have an initial bi-lateral negotiation period e.g. 12 months (Samsung)
• Not signing up to a Licensing Framework does not make a licensee
’unwilling’ (Samsung)
• AG in Huawei v ZTE sets a blue print for ‘reasonable behaviour’
John Schmidt, Shepherd and Wedderburn
18. Reverse Payment / Patent
Settlements in the US
18 Barbara Sicalides, Pepper Hamilton LLP
19. What is a “Reverse Payment” Settlement?
19
Consequence of the Hatch-Waxman regulatory
framework.
Involves some form of consideration from the
branded company (patent holder) to the generic
company (alleged infringer) to resolve the patent
litigation.
Typically, the generic company agrees to refrain
for some period of time from commercializing the
product that allegedly infringes the patent.
Barbara Sicalides, Pepper Hamilton LLP
20. Hatch-Waxman Act
20
ANDA applicant submitting Paragraph IV certification
must include basis of no infringement or patent
invalidity or unenforceability
If patent holder brings infringement suit within 45-
days, FDA approval of ANDA is delayed 30 months
while court determines merits of patent claims
First ANDA-applicant to make paragraph IV
certification is rewarded with 180-day period of
exclusivity over other generic versions if court holds
patent invalid or not infringed
Barbara Sicalides, Pepper Hamilton LLP
21. FTC v. Actavis
21
Reverse payment settlements involving “large and
otherwise unjustified” payments subject to antitrust scrutiny
under rule of reason
“[P]otential for genuine adverse effects on competition.”
“[A]nticompetitive consequences will at least sometimes
prove unjustified.”
“Where a reverse payment threatens to work unjustified
anticompetitive harm, the patentee likely possesses the
power to bring that harm about in practice.”
“An antitrust action is likely to prove more feasible
administratively than the [lower court] believed.”
“The fact that a large, unjustified reverse payment risks
antitrust liability does not prevent litigating parties from
settling their lawsuit.”
Barbara Sicalides, Pepper Hamilton LLP
22. What did the Supreme Court say?
22
Not all Hatch-Waxman settlements are subject to
antitrust review.
Parties can settle by allowing early entry without
a payment.
A payment is not large if it is equal to or less than
expected litigation costs.
A payment is not otherwise unjustified if it is fair
value for services received.
A payment may be otherwise justified.
Barbara Sicalides, Pepper Hamilton LLP
23. FTC’s Cephalon Settlement
Barbara Sicalides, Pepper Hamilton LLP23
After 7 years, FTC reached $1.2B settlement of its
lawsuit challenging reverse payment settlements
Cephalon reached with 4 generic manufacturers
Despite FTC’s efforts to speed up case and undo the
settlements, Cephalon continued as only
manufacturer of Provigil for 6 extra years based on
patent judge ruled invalid
Cephalon court held FTC permitted to seek
disgorgement
FTC settlement will be net of private settlements,
including $512M settlement reached with direct
purchaser
24. FTC’s Cephalon Settlement
Barbara Sicalides, Pepper Hamilton LLP24
FTC v. Cephalon - $1.2B settlement/disgorgement
remedy
Payment Defined – Not really
“transfer of value by the NDA Holder to the ANDA Filer
(including, but not limited to, money, goods or services),
regardless of whether the ANDA Filer purportedly
transfers value in return, where such transfer is either (i)
expressly contingent on entering a Brand/Generic
Settlement Agreement, or (ii) agreed to during the 60
day period starting 30 days before executing a
Brand/Generic Settlement Agreement and ending 30
days after executing a Brand/Generic Settlement
Agreement.”
25. What did the Supreme Court NOT say?
Barbara Sicalides, Pepper Hamilton LLP25
What constitutes a payment?
How big is too big?
Large in relation to what?
Should pleading standards vary based on type of payment
alleged?
What is “otherwise justified”?
How should procompetitive benefits from settlement be
evaluated?
What impermissibly avoids the “risk of competition?”
Will patent validity be relitigated?
“We therefore leave to the lower courts the structuring of
the present rule-of-reason antitrust litigation.”
26. What have lower courts done
following Actavis?
Barbara Sicalides, Pepper Hamilton LLP26
Only cash payments are subject to review
Lamictal (D.N.J.)
Loestrin (D.R.I.)
Any value transfer is subject to review
Aggrenox (D. Ct.)
Nexium (D. Mass.)
Niaspan and Provigil (E.D. Pa.)
Must consider significant consumer benefits flowing from
agreements
AbbVie (E.D Pa.)
Plaintiffs must plausibly plead large value transfer with specificity
to warrant review.
Lipitor and Effexor (D.N.J.)
27. Reverse Payment Patent Settlements
in Europe
European Commission (and UK CMA) view as problematic:
Entry restriction + value transfer = restrictive agreement
No Hatch-Waxman type exclusivity period for first generic entrant
Possibly even if there is immediate entry with the authorised generic
Value Transfer is very widely defined:
Lump sum
Profit guarantees
Payments conditional on absence of generic entry
Supply contract for an authorized generic
Early entry in a different geographic area with the same product
Arrangements with different products
Relevant restrictions include:
No challenge and non-compete clauses
Geographic restrictions = co-existence provisions
Unilateral options on the patent holder
Volume cap/ fixed quantities of product
27 John Schmidt, Shepherd and Wedderburn LLP
28. Reverse Payment Patent Settlements
in Europe
Potential competitor very widely defined:
Development product might be sufficient irrespective of development stage
Process patents often ignored if the molecule patent has expired
• Settlement cases are not final yet: either ongoing or on appeal before the
European General Court.
• Restrictions by object vs restrictions by effect
Commission (and CMA) runs these as object infringements
European Court judgment in Cartes Bancaires casts doubts on that approach
The court in Lundbeck is actively considering the application of CB
Where are we going?
All cases are pharma cases and patent settlement cases
BUT analysis can be applied to patent settlements in other areas and to other
IP settlements e.g. trade mark co-existence agreements
28 John Schmidt, Shepherd and Wedderburn LLP
29. Proposed Canadian Approach to Patent
Litigation Settlements
Entry-split agreements – early generic entry, no “payment”
No issue under the Competition Act
Settlements with generic entry before patent expiry and a “payment”
from the brand to the generic
In vast majority of cases reviewed under civil agreements and
arrangements provision (section 90.1) of the Act
Analysis of the magnitude of the payment to determine if likely for
delay
Where the Bureau finds evidence that the intent of the payment was to
fix prices, allocate markets or restrict output
E.g., delaying generic entry beyond the expiry date of the patent
or where parties knew that patent was invalid
Review under criminal conspiracy provision
29 Alan Gunderson, Canadian Competition Bureau
30. Beyond pharma
Barbara Sicalides, Pepper Hamilton LLP30
Actavis is not necessarily limited to the pharmaceutical world.
Roberts’ dissent takes issue with the majority’s claim that
virtually all reverse payment settlements relate to
pharmaceuticals.
Such settlements “are a well-known feature of intellectual
property litigation, and reflect an intuitive way to settle such
disputes,” and that “to the extent there are not scores and
scores of these settlements to point to, this is because such
settlements—outside the context of Hatch-Waxman—are
private agreements that for obvious reasons are generally not
appealed, nor publicly available.”
FTC has recognized “a concern that there could be other
industries where similar type of arrangements could arise.”
32. Patent Assertion Entities
Terminology
Non-practicing entity (“NPE”) – patent holder that
doesn’t “practice” its own patents through selling
products or services
Patent assertion entity (“PAE”) – an NPE focused
on purchasing and asserting patents, typically
against operating companies with products currently
on the market
“Privateering” – where an operating company (or
companies) transfers patents to a PAE in order to
allow them to asserted against rivals without facing
direct counter-suit
32 David Giardina, Sidley Austin LLP
33. Antitrust Responses to
The Rise of PAEs
FTC workshop and on-going industry study
Theories discussed, but not yet tested
Potential § 2 claim based on a “raising rivals costs”
theory identified with respect to unilateral “privateering”
Potential § 1 claim identified with respect to certain
cooperative arrangements by rival firms to form PAEs
Target counterclaims alleging unlawful acquisition and
enforcement of patents in violation of the antitrust laws
Intellectual Ventures I LLC v. Capital One Fin. Corp.,
Case No. PWG-14-111 (D. Md. Mar. 2, 2015)
33 David Giardina, Sidley Austin LLP
34. Proposed Canadian Approach to Patent
Assertion Entities
Hypothetical example: A PAE sends out thousands of notices to
other businesses asserting that it has proof that the recipient
was infringing one or more of its patents and demands a
licensing fee to avoid litigation
Bureau would review such conduct under the provisions of the
Act prohibiting false and misleading claims
The Act prohibits making a representation to the public that
is false or misleading in a material respect, where the
representation is made to promote a product or business
interest (paragraph 74.01(1)(a))
If the false or misleading representation is made knowingly
or recklessly, the matter can be examined criminally
(subsection 52(1))
34 Alan Gunderson, Canadian Competition Bureau
35. US Legislative Responses to The Rise of PAEs
Proposed federal legislation – “The Innovation Act”
Heighted pleadings standards for patent claims
Fee shifting
Limits on discovery prior to claim construction
Disclosure of all parties with financial interest in outcome
Proposed and enacted state legislation prohibiting “bad
faith” patent assertion
Varied criteria for defining “bad faith” from making
demands without identifying specific patents or providing
detailed factual infringement contentions to making false
threats of litigation
35 David Giardina, Sidley Austin LLP
37. Standard Essential Patents
Principles & Issues
RAND commitments are binding & enforceable
Research In Motion Ltd. v. Motorola, Inc., 644 F.Supp.2d 788 (N.D. Tex. 2008)
Microsoft v. Motorola, 864 F. Supp. 2d 1023 (W.D. Wash. 2012)
No per se rule, but emerging consensus that there
should be limits on the availability of injunctive relief
Apple v. Motorola, 869 F. Supp. 2d 901 (N.D. Ill. 2012) (J. Posner), aff’d in rel. part,
rev’d on other grounds, 757 F.3d. 1286 (Fed. Cir. 2014)
In re Motorola Mobility & Google, FTC Decision & Order (January 3, 2013)
RAND royalties royalty should be based upon “the
incremental value that the patented invention adds to
the product, not any value added by standardization
of that technology”
Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014)
Microsoft v. Motorola, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013)
37 David Giardina, Sidley Austin LLP
38. Standard Essential Patents
The Role of Antitrust
Intentional failure to disclose SEPs in accordance with SSO IPR
policies may violate § 5 of the FTC Act, but standing alone,
perhaps not § 2 of the Sherman Act
Union Oil Co. of Cal., 2005 FTC LEXIS 116 (F.T.C. July 27, 2005)
Rambus v. FTC , 522 F.3d 456 (D.C. Cir. 2008)
False promise to license SEPs on RAND terms relied upon by
SSO coupled with subsequent breach may be actionable
anticompetitive conduct
Broadcom v. Qualcomm, 501 F.3d 297 (3d Cir. 2007)
More recently, soft efforts by regulators to get SSOs to clarify
meaning of RAND
February 2015 DOJ Business Review Letter approving IEEE policy
changes limiting the availability to injunctions and setting forth
presumptions about RAND royalties
38 David Giardina, Sidley Austin LLP
39. John Schmidt, Shepherd and Wedderburn LLP39
Standard Essential Patents in Europe
AG in Huawei v ZTE:
Is this the end?
• What is FRAND in any given circumstances?
• ETSI and other standard bodies have a role in setting
parameters
Infringer’s Obligations
• Respond diligently and in a serious manner
• If offer rejected, make a reasonable counteroffer
• Not purely ‘tactical’, ‘dilatory’ or ‘not serious’
SEP Holder Obligations
• Make an offer in writing of FRAND terms capable of acceptance
40. Proposed Canadian Approach to Standard
Essential Patents
Standard Development Organizations with IP polices that allow firms
to make unilateral declarations of their most restrictive licensing terms
and conditions, including maximum royalty rates, will not pose a
competition issue
The Bureau will review joint activity among firms to set a standard
under the civil agreements and arrangements provision of the Act
(section 90.1)
Unilateral conduct of a patentee will be reviewed under abuse of
dominance (section 79)
Patent ambush
Reneging on a clear licensing commitment
Seeking an injunction after making a licensing commitment
40 Alan Gunderson, Canadian Competition Bureau
41. FRAND
Barbara Sicalides, Pepper Hamilton LLP41
Remains unclear, but some consensus around
FRAND royalties must provide patent holder with
reasonable compensation;
FRAND royalties should limit patent holder to
reasonable royalty on economic value of patented
technology itself, apart from value associated with
the patent’s incorporation into standard; and
Courts should consider comparable licenses.
42. FRAND – Georgia-Pacific
Barbara Sicalides, Pepper Hamilton LLP42
Modified factors:
1. Royalties received by patentee comparable to those
received in non-FRAND circumstances
2. Rates paid by licensee comparable to those paid in non-
FRAND circumstances
3. Nature and scope of license
4. Inapplicable in FRAND case
5. Inapplicable in FRAND case
6. Effect of invention in promoting sales of licensee’s and
licensor’s other products, taking into account only vale of
patented technology and not value associated with
incorporating patented technology into standard
7. Duration of patent and term of license. Simplified analysis
because term of license co-extensive with duration of patent
43. FRAND – Georgia-Pacific
Barbara Sicalides, Pepper Hamilton LLP43
8. Profitability of product made using patent, commercial success
and popularity, taking into account only value of patented
technology, not value associated withy incorporating
technology into standard
9. Advantages of patent over alternatives that could have been
written into standard instead of patented technology in period
before standard adopted
10-11. Patent’s contribution to capabilities of standard and
contribution of technical capabilities to licensee and licensee’s
products, taking into account only value of patented
technology, not value associated with incorporating technology
into standard
44. FRAND – Georgia-Pacific
Barbara Sicalides, Pepper Hamilton LLP44
12. Portion of profit or selling price customary in relevant or
comparable businesses to allow for use of invention or similar
inventions with FRAND committed patents
13. Portion of profit that should be credited to invention as
distinguished from non-patented elements, manufacturing
process, business risks, significant features or improvements
added by infringer, or value of patent’s incorporation in
standard
14. Qualified expert testimony
15. Amount licensor and licensee would have agreed on if both
were considering FRAND commitment and its purpose and had
been reasonably and voluntarily trying to reach agreement
45. FRAND – Hypothetical Negotiations
Barbara Sicalides, Pepper Hamilton LLP45
Reconstruct negotiation that would have taken place
prior to date on which patented invention was adopted
in industry standard
1. Importance of patent portfolio to standard, considering
both proportion of all patents essential to standard that
are in portfolio, and technical contribution of patent
portfolio to the standard.
2. Importance of patent portfolio to alleged infringer's
accused products.
3. Other licenses for comparable patents to determine
FRAND rate to license patent portfolio, taking into
consideration Items 1 and 2 above to determine
whether a license or set of licenses is comparable
46. FRAND – Ex Ante Benchmarking
Barbara Sicalides, Pepper Hamilton LLP46
Rejects Georgia Pacific factors
Cost to licensee just before the patented invention
was declared essential to compliance with standard, a
license for the function performed by the patent.
“[C]ost would be a measure of the value of the patent
qua patent. ... The purpose of the FRAND
requirements ... is to confine the patentee’s royalty
demand to the value conferred by the patent itself as
distinct from the additional value — the hold-up value
— conferred by the patent’s being designated”
48. Thank you.
Davit D. Akman John Schmidt
davit.akman@gowlings.com john.schmidt@shpwedd.co.uk
416-369-4611 44(0)20-7429-4967
David Giardina Barbara Sicalides
dgiardina@sidley.com sicalidb@pepperlaw.com
312-853-4155 215-981-4783
Alan Gunderson
alan.gunderson@bc-cb.gc.ca
819-934-8572
48