On April 13, 2016, the US District Court for the District of Delaware denied InterDigital’s motion to dismiss an antitrust suit filed by Microsoft (Microsoft Mobile, Inc. v. InterDigital, Inc., Case No. 15-cv-723-RGA).  In the suit, Microsoft alleged that InterDigital engaged in an unlawful scheme to acquire and exploit monopoly power over standard essential patents (SEPs) required for 3G and 4G cellular devices.  Specifically, Microsoft asserted that InterDigital falsely promised to license its 3G and 4G SEPs on Fair, Reasonable, and Non-Discriminatory (FRAND) terms in order to ensure its SEPs were included in standards set by the European Telecommunications Standards Institute (ETSI).  According to the complaint, InterDigital failed to live up to its commitment to FRAND licensing terms, and instead acquired monopoly power in the 3G and 4G cellular technology markets and used that power to demand supra-competitive royalties, “double-dip” royalty demands, and has pursued “baseless” International Trade Commission litigation against Microsoft and others.

In its motion to dismiss, InterDigital asserted that Microsoft failed to adequately plead a Sherman Act § 2 monopolization claim, namely that Microsoft failed to show that InterDigital possessed and exercised monopoly power and failed to adequately allege injury.  The court disagreed, finding Microsoft’s allegations to be materially similar to those found to be sufficient by the Third Circuit in Broadcom Corp. v. Qualcomm Inc. (2007).  With respect to monopoly power, the court found that Microsoft’s allegations as to the necessary technology standards, market entry barriers, and InterDigital’s market share to be sufficient.  The court found that allegations of an “intentional false promise” to license technology on FRAND terms, which was relied upon in selecting the technology for inclusion in mandatory standards, and breach of such promise was “sufficient to show anticompetitive conduct.”

As to injury, InterDigital asserted that its litigation activity was protected by the Noerr-Pennington doctrine.  The court held that injury was sufficiently pled, and that the Noerr-Pennington doctrine did not immunize InterDigital as its scheme, as alleged by Microsoft, would have been “ineffective without the threat of litigation” and therefore it was properly included in Microsoft’s anticompetitive scheme allegations.

This latest ruling demonstrates that prospective licensees may be able to raise antitrust claims against SEP holders when negotiations fail and litigation ensues.

On 18 March, the European Commission (Commission) published its initial findings on geo-blocking in the framework of its ongoing antitrust sector inquiry into e-commerce.

The findings are based on responses to questionnaires sent to more than 1400 retailers and digital content providers from all 28 EU Member States in 2015.

The questionnaires focused on geo-blocking practices in the sales of goods (clothing, shoes and accessories, consumer electronics, household appliances, computer games and software, toys and childcare articles, books, media carriers, cosmetic and healthcare products, sports, outdoor, house and garden equipment), and in the provision of digital content services (films, sports, TV programmes, music).

The findings suggest that geo-blocking is a widespread practice. Where the sale of tangible goods is concerned, in most cases the decision to have geo-blocking in place is made unilaterally by the retailer.  In only 12 percent of the cases, retailers were forced by contract to put restrictions in place on cross-border sales.

On the other hand, geo-blocking in digital content is for the most part a contractual requirement imposed by suppliers (for 59 percent of the respondents).

The data on geo-blocking now published by the Commission seem to strengthen the Commission’s suspicions that geo-blocking practices are widespread and may significantly impact intra-EU cross-border trade. The Commission said that geo-blocking may be in breach of competition law, particularly when it results from agreements between businesses or if practised by a dominant market player.

However, the Commission also recognized that retailers and service providers may have valid reasons to put geo-blocking in place to restrict cross-border sales. In light of this, the Commission may decide to address the conditions under which geo-blocking is justified in further legislation or guidance to businesses first, rather than take  immediate enforcement measures on the back of the sector inquiry.

Any ensuing enforcement action would have to take place on a case-by-case basis, separately from the overall sector inquiry.

It is expected that the Commission will present its final report on the present inquiry by the middle of 2016.

McDermott has authored the Italian chapter of the 2016 edition of “Intellectual Property & Antitrust” published by Getting the Deal Through, a valuable work tool for legal practitioners dealing with intellectual property and competition law.

This chapter addresses the statutes for granting IP rights, enforcement options and remedies, as well as the interplay between Italian IP and competition legislation, jurisdiction of competition and IP agencies, cartels, price maintenance, abuse of dominance and remedies.

Read the full article here.

Introduction

In a decision written by Judge Marsha S. Berzon, a three-judge panel of the U.S. Court of Appels for the Ninth Circuit affirmed a first-of-its-kind district court judgment relating to royalty rates for standard-essential patents (SEP). As part of the standard setting process, many standards organizations require members who hold patents necessary to implement a given standard to commit to license those patents on reasonable and non-discriminatory terms (RAND). Because inclusion in a standard can increase the importance and value of a patent, parties often differ on what constitutes a reasonable royalty. In this case, district court Judge James Robarts of the U.S. District Court for the Western District of Washington established a multi-factor framework to determine the appropriate royalty rates and ranges for SEPs. Several other courts later employed similar approaches. Motorola’s appeal challenged the district court’s authority to determine the royalty rate at a bench trial. The company also contended that the district court mis-applied Federal Circuit precedent on patent damages. The Ninth Circuit rejected these arguments, finding that Motorola had consented to the bench trial and holding that Judge Robart’s “thoughtful and detailed analysis” was “consistent with the Federal Circuit’s recent approach.” Microsoft Corp. v, Motorola, Inc. et al; Case No 14-35393 (9th Cir, July 30, 2015) (Berzon, J.)

Procedural Background

The long-running patent dispute between Microsoft and Motorola spans several courts and countries. The crux of the conflict traces back to October 2010 when Microsoft sued Motorola for alleged infringement of certain smartphone patents. Thereafter, the parties explored a possible cross-licensing arrangement to resolve their dispute. Motorola sent letters proposing licenses for 802.11 and H.264 SEP portfolios, with a proposed royalty rate of 2.25 percent of the price of the end product, which Motorola represented was in keeping with its RAND commitments on the patents. Microsoft disagreed. Soon after, it filed suit in the Western District of Washington, alleging that Motorola had breached its RAND commitments to the Institute of Electrical and Electronic Engineers (IEEE) and the International Telecommunication Union (ITU), the standard-setting organizations that developed the 802.11 and H.264 standards. Motorola responded by filing suit in the U.S. District Court for the Western District of Wisconsin, seeking an injunction to prevent Microsoft from using its H.264 patents. The cases were consolidated before Judge Robart in the Western District of Washington. Motorola also brought patent-enforcement actions before the International Trade Commission and in Germany. Microsoft alleged in an amended complaint that the filing of these injunctive orders constituted a breach of contract on the grounds that a RAND commitment bars a patent holder from seeking injunctive relief.

The proceedings before Judge Robart slowly moved forward throughout 2011 and 2012. The district court held that the RAND commitment made by Motorola to the standard-setting organizations created an enforceable contract, which standard users like Microsoft are able to enforce as third-party beneficiaries. Judge Robart determined, however, that, in order for a jury to determine whether Motorola had breached its RAND commitment, it must first know what the RAND commitment meant. In November 2012, Judge Robart held a bench trial to determine a RAND rate and range for Motorola’s H.264 and 802.11 SEPs. The court subsequently issued a 207-page order setting forth its findings of fact and conclusions of law on the appropriate RAND rate and related issues. The royalty rates and ranges determined by the court (ranging from a fraction of a cent per unit up to less than 20 cents per unit) were substantially lower than those demanded by Motorola in its initial offer to Microsoft. The case then proceeded to a jury trial on the breach of contract claim. In September 2013, the jury returned a verdict for Microsoft. The court denied Motorola’s motions for judgment as a matter of law. Motorola appealed the judgment on the breach of contract claim to the U.S. Court of Appeals for the Federal Circuit, which, on Microsoft’s motion, transferred the appeal to the Ninth Circuit (concluding that under the law of the case doctrine, the appeal properly lay with the regional circuit court that had preciously heard an interlocutory appeal in this case).

The RAND Determination

On appeal, Motorola raised two substantive issues. First, Motorola contended that the district court lacked the legal authority to decide the RAND rate issue separate from the ultimate breach of contract issue tried before the jury. Second, Motorola claimed that the district court’s legal analysis was contrary to Federal Circuit precedent as it relates to patent damages.

On the matter of the district court’s authority to conduct a bench trial to determine the RAND rate, the Ninth Circuit held that Motorola affirmatively consented to the bench trial. The court rejected Motorola’s claims that its consent was taken out of context and limited to a court-crafted license rather than determination of the RAND rate and range. The court noted that Motorola never raised, at trial or on appeal, any Seventh Amendment claim regarding its right to a jury trial on the RAND rate matter. Given Motorola’s affirmative stipulation to a bench trial for the purpose of determining the RAND rate, the court did not consider whether a jury should have made a RAND determination.

Motorola also challenged the district court’s legal analysis in its determination of the RAND rate and range. Judge Robart’s decision was the first to attempt to establish an appropriate RAND rate. The district court relied upon a modified version of a multi-factor test established in Georgia-Pacific Corp. v. U.S. Plywood Corp. and used extensively to determine damages in patent infringements cases. Georgia-Pacific lays out 15 factors for a court to consider in establishing the royalty rate that the parties to the dispute might have agreed upon in a hypothetical negotiation. One of the factors requires the court to set the time of the hypothetical negotiation at the time the infringement began. Motorola claimed that the district court incorrectly applied this factor, as interpreted and applied by the Federal Circuit.

The Ninth Circuit acknowledged that the district court had applied a “partial present-day focus” but denied this constituted error. It pointed to the Federal Circuit’s recent decision in Ericsson v. D-Link, which stated it has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations,” and which recognized that some of the factors “clearly are not relevant to every case.” The court noted that the Federal Circuit had even cited Judge Robart’s decision in support of the view that many of the Georgia-Pacific factors are “contrary to RAND principles” and courts thus need to take a flexible approach to such cases. The court highlighted that Georgia-Pacific’s focus on the date of the patent infringement was inapt in a breach of contract case. It also noted the impracticality of tying the value of the patents to a particular moment in time given the evidence the parties presented. Finally the court emphasized that Motorola had neither shown, nor even argued, that it had been prejudiced by the court’s analysis. The court ultimately concluded that, given the need for flexibility in determining royalty rates for RAND-encumbered patents and given no prejudice was shown; the district court properly applied the hypothetical agreement approach.

Practice Pointers

The Ninth Circuit’s decision, coming in the wake of last year’s Federal Circuit decision in Ericsson v. D-Link, further confirms that courts will apply a flexible, fact-specific approach to determine the appropriate royalty rate in cases involving RAND-encumbered SEPs. Both the Federal Circuit and the Ninth Circuit have rejected the view that Georgia-Pacific or any other test can be rigidly applied in all circumstances. The approval of the framework employed by Judge Robarts, however, is likely to encourage its continued use as a starting point in future rate determinations.

Indeed, soon after the Western District of Washington decision by Judge Robart, Judge James F. Holderman also held bench trial (using a variation on the RAND analysis pioneered by Judge Robart) to determine RAND rates for 802.11 SEPs, as applied to manufacturers of Wi-Fi equipment in the case of In re Innovatio IP Ventures, LLC Patent Litig., Case No. 11 C 9308 (N.D. Ill. Sept. 27, 2013), another case where the parties waived a jury trial on damages,. In two other RAND cases involving the 802.11 Wi-Fi standard, Ericcson v. D-Link (ED TX, 2013) before Judge Leonard E. Davis and Realtek v. LSI (ND CA 2014) before Judge Ronald M. Whyte, the RAND determinations were made by a jury.

In light of the Ninth Circuit’s decision in Microsoft v. Motorola, practitioners should be aware that, in a breach of contract claim regarding standard-essential patents, the court may conclude that it must determine the RAND terms as a precursor to the breach of contract. By agreeing to hold a hearing on the potential RAND terms, parties must be aware that any terms devised by the court may then be used during the breach of contract proceedings. Thus, if a party does not wish for such terms to be determined and used during trial, they must clearly and un-ambiguously object to any such determination in advance of the breach of contract proceedings

Additionally, parties must be aware that the courts may not adhere strictly to the Georgia Pacific factors when determining RAND rates. Rather, courts may apply the factors flexibly and view the evidence in light of the particular circumstances of the case. If a party disagrees with the characterization of evidence or application of the Georgia Pacific factors, the party must clearly object to the application of the factors, and explain how the party would be prejudiced from deviation from the factors or consideration of the evidence.

In terms of the jurisdictional issue, it should be noted that Congress recently altered the Federal Circuit’s jurisdiction over patent-related appeals. Previously, jurisdiction was based on the nature of the well-pleaded complaint alone. However, under the America Invents Act (AIA), the Federal Circuit now has exclusive jurisdiction over appeals “in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents.” Since the AIA had not taken effect when Microsoft filed its complaint, the jurisdictional analysis was based on Microsoft’s breach of contract action alone. In any event, inasmuch as the district court held that Motorola’s patent claims were not compulsory counterclaims, even had the broadened appellate jurisdiction of the AIA applied, it would not have conferred Federal Circuit jurisdiction in this instance.

The long-awaited ruling on the seeking of injunctions in the context of standard-essential patents encumbered by fair, reasonable, and non-discriminatory (FRAND) terms has been delivered by the Court of Justice of the European Union, in Huawei v. ZTE C 170/130. Although the judgment lays down the legal test applicable to injunctions involving standard-essential patents, and significantly clarifies the landscape that had previously been shaped by the European Commission, a number of issues remain unresolved.

Huawei Technologies entered into negotiations with ZTE Corporation over the possibility of concluding a licence agreement in relation to Huawei’s patent that is essential to the long-term evolution (commonly known as 4G) standard, on FRAND terms. Given that negotiations between the companies were unsuccessful, and because Huawei contends that ZTE continued using the standard-essential patent (SEP) without paying royalties, Huawei brought an infringement action against ZTE, seeking an injunction to stop the sale of certain ZTE products.

In adjudicating the matter, the Regional Court of Düsseldorf considered that the outcome of the litigation largely depended on whether or not the action brought by Huawei constituted an abuse of dominance. Given this consideration, and the uncertainty surrounding the topic of SEP injunctions, the Court made a reference for a preliminary ruling to the CJEU. The Court asked in what circumstances a dominant SEP holder, who has committed to grant licences to third parties on FRAND terms, can seek an injunction to stop an infringement of that SEP, or to recall products manufactured using the SEP, is to be regarded as committing an abuse contrary to Article 102 of the Treaty on the Functioning of the European Union (TFEU).

The Test for SEP Injunctions

The CJEU decided that the following conditions must be satisfied before a dominant SEP licensor can validly bring an injunction against a party infringing an SEP, without acting contrary to Article 102 TFEU.

Notification From The SEP Holder

Prior to taking any action, a SEP holder that has given an irrevocable undertaking to a standardisation body to grant a licence to third parties on FRAND terms, must alert the alleged infringer to the infringement complained about. This prior notice must designate the SEP in question, and specify the way in which it has been infringed.

“Willingness” of The Alleged Infringer

After the alleged infringer has been informed about the infringement, it must (somehow) express its willingness to conclude a licensing agreement on FRAND terms. Presumably, this willingness refers to the alleged infringer agreeing to receive a FRAND offer from the SEP holder. It would seem, therefore, that an alleged infringer who is not prepared to enter into any sort of bona fide negotiations would be presumed to be unwilling.

Unfortunately, although the CJEU refers to the concept of “willingness”, it does not address the criteria for determining the alleged infringer’s willingness. The ruling therefore does not make it entirely clear what the potential licensee should do in order to be treated as willing.

FRAND Offer

The SEP holder must present to the alleged infringer a specific, written offer for a licence on FRAND terms, in accordance with the undertaking given to the relevant standardisation body. In particular, this written offer must specify the amount of the royalty, and the way in which that royalty is to be calculated.

Although the CJEU’s judgment does not elaborate on what is to be considered as FRAND, it states that the SEP holder may not discriminate between licensees, i.e., the licence terms must be comparable with the licensing arrangements the SEP holder has already concluded with other competitors. The CJEU therefore places the burden of knowing what is FRAND on the licensor. Regardless of whether or not the licensor is able to discharge this burden, the ruling does not help the licensee, who has no guidance on determining whether or not the licence it has been offered is actually FRAND-compliant, particularly as it doesn’t have access to the licensor’s existing agreements.

Response to FRAND Offer

The alleged infringer must respond to the FRAND offer, in accordance with recognised commercial practices in the field, and in good faith. The alleged infringer must not engage in any delaying tactics.

If the alleged infringer is deemed to be using delaying tactics once a FRAND offer has been presented by the SEP holder, e.g., if the alleged infringer causes any undue delays in the negotiations, this may point towards its “unwillingness” and prevent it from using Article 102 TFEU in a counterclaim against the SEP holder. The CJEU judgment also, however, states (albeit in rather loose terms) that the alleged infringer “cannot be criticised” for challenging the validity of the SEP and/or its essential nature. The combination of these two requirements might therefore lead to a problem if, for example, the alleged infringer accepts the FRAND offer, but does so on the condition that validity of all the relevant IP rights be confirmed before the courts.
The infringer’s response to the FRAND offer will usually be one of the following:

Acceptance of the FRAND offer, in which case the SEP holder cannot seek an injunction, but can claim damages for the unlicensed use of the SEP
Rejection of the FRAND offer, which presumably makes the alleged infringer an “unwilling” licensee and therefore enables the SEP holder to seek injunctive relief
Submission of a FRAND-compliant counter-offer, to which the SEP holder must respond before taking any further steps.

Counter-Offer

If the alleged infringer wishes to submit a counter-offer, it must do so promptly and in writing, and in compliance with FRAND terms.

This is an important requirement because, under most national systems, an offer presented in writing will be contractually enforceable by the SEP holder. This may imply that “willingness” is a behavioural condition, i.e., that mere statements by the alleged infringer do not amount to willingness, but a concrete step has to be taken before the alleged infringer can rely on an Article 102 TFEU defence.

This seems to place an even heavier burden on the alleged infringer, for whom it may potentially be a lot more difficult to determine what corresponds to FRAND terms, particularly in light of the inherent information asymmetry between the SEP holder and the potential licensee.

Rejection of The Counter-Offer

Security

According to the CJEU, if the alleged infringer has already been using the SEP without a licence, it must provide appropriate security e.g., though a bank guarantee or the placing of funds in a deposit account, from the point at which the counter-offer is rejected.

Third Party Determination

If the parties are unable to agree bilaterally on the details of the FRAND terms following the counter-offer by the alleged infringer, the parties “may” request that the amount of the royalty be determined by an independent third party. Although reasonable at first sight, the application of this step remains rather unclear. The wording in the judgment suggests that the parties are not obliged to seek third-party determination, but that they “may” do so. It is also not clear what consequences would follow if one of the parties rejected the proposal to have a court or an arbitrator decide on the level of royalties.

Injunction

If the alleged infringer continues to use the patent in question and has not diligently responded, either by accepting the FRAND offer or by submitting a FRAND counter-offer, the SEP holder may seek an injunction stopping the infringement or seek the recall of products made using the SEP , without risking Article 102 TFEU scrutiny.

By making it a condition that the alleged infringer must still be using the patent in question for the SEP holder to seek injunctive relief, the CJEU draws a clear distinction between an injunction based on the alleged infringement of an SEP and proceedings brought with a view to obtaining the rendering of accounts or an award of damages. This means that, notwithstanding the multiple steps and requirements that have to be followed when seeking an injunction, if the SEP holder only intends to pursue an action for damages for the unlicensed use of its SEP, Article 102 TFEU cannot be invoked by the alleged infringer.

Comment

The CJEU’s judgment sets out the final, general and legally binding test applicable to injunctions based on an infringement of a FRAND-encumbered SEP sought by a dominant market player.

To a large extent, the ruling reflects the European Commission’s earlier efforts to regulate the practices in question. That said, it is difficult to say whether or not the pro-licensee safe harbour envisaged by the European Commission has been fully embraced by the CJEU in its current decision. The number of issues that remain unresolved, e.g., in relation to the existence of dominance on the part of the SEP holder, the definition of “willingness”, or the meaning of FRAND, potentially makes the legal test less useful in practice.

Licensors and potential licensees are therefore still advised to take caution when structuring transactions involving SEPs.

Mafalda de Oliveira Dias and Michal Kocon, Trainee solicitors also contributed to this article.

The Supreme Court of the United States, in a 6-3 decision, left undisturbed the rule from its 51-year-old decision in Brulotte v. Thys Co. (1964), invoking stare decisis and rejecting arguments seeking to overturn the rule barring patent royalty agreements that obligate payment of post-patent expiration royalties. Kimble v. Marvel Entertainment, LLC, Case No. 13-720 (Supr. Ct., June 22, 2015) (Kagan, Justice) (Alito, Justice dissenting). In Kimble, the Court addressed the question of whether parties to a patent license may agree that a licensee must continue paying royalties based on sales of products after the licensed patent(s) expire, and answered the question “No,” continuing the rule that such agreements are unlawful per se.

Since Brulotte was decided 51 years ago, many courts and commentators have criticized the rule it laid down as wrongly decided as a matter of economic policy. While the Kimble decision, based essentially on stare decisis, preserves the Brulotte status quo in patent licensing, Justice Kagan has now raised the profile of this judge-made rule and related economic arguments to the branch of government that the Supreme Court concluded had the exclusive power to change it: Congress.

Brulotte

When the Supreme Court decided Brulotte, it prohibited the extension of the “patent monopoly” beyond the term of the patent. The Court held that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” In other words, once the patent expires, the invention is dedicated to the public, and the patent owner cannot continue to demand royalties for use of the patented invention after expirations of the patent term. In dicta, however, the Court distinguished impermissible payments due for use of an invention during the post-expiration period from “deferred payments for use during the pre-expiration period,” which remained permissible.

Kimble

In this case, an inventor (Kimble) licensed a patent on a novelty Spider Man web-slinging toy to Marvel Entertainment. The parties, unaware of Brulotte at the time of licensing, agreed to a license whereby Marvel would pay Kimble an upfront sum plus a 3 percent royalty for all sales going forward. The license agreement included no fixed term. However, after Marvel learned of the Brulotte rule, it filed a declaratory judgment action, seeking a ruling that it could cease paying Kimble royalties as of the expiration of Kimble’s patent term in 2010. The district court agreed with Marvel, and the U.S. Court of Appeals for the Ninth Circuit affirmed. (IP Update, Vol. 16, No. 8).

Stare Decisis

In affirming the Ninth Circuit, the Supreme Court rejected Kimble’s arguments seeking to overturn the Brulotte rule. Kimble argued that the economic rationale underlying Brulotte was no longer correct, and that prohibiting post-expiration royalties made it inefficient and difficult to allocate risks and rewards, especially for patented technology that may take a significant amount of time to commercialize (such as pharmaceuticals). Marvel responded simply that stare decisis required the Court to re‑affirm Brulotte.

The Supreme Court agreed with Marvel. Justice Kagan explained that stare decisis compelled adherence to Brulotte, and that there was no “special justification” for overturning it. Kagan observed that Congress could overrule the Court’s decision if Congress disagreed with it, and noted that Congress had actually not changed the rule despite repeated amendments of the patent laws since the Court’s Brulotte decision. In an apparent nod to the subject matter of the Marvel Spider Man product, Justice Kagan intoned that the rule of stare decisis is “super powered” and it would require “super special justification” to overturn Brulotte.

After summarizing Kimble’s economic criticisms of the rule in Brulotte—namely that the Brulotte Court was mistaken about the anticompetitive effect of post-expiration royalties and that the rule in Brulotte stifled innovation—the Supreme Court explained that even if true, such arguments provided no grounds to deviate from stare decisis. Accordingly, the Supreme Court affirmed the rule that “when the patent expires, the patentee’s prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public.” The Court added that post-expiration royalty obligations “conflict with patent law’s policy of stablishing a ‘post-expiration … public domain’ in which every person can make free use of a formerly patented product.”

The Court also re-confirmed the dicta in Burlotte distinguishing between permissible and impermissible licensing structures. For example, the Court wrote:

[P]arties can often find ways around Brulotte, enabling them to achieve those same ends. To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights.

Thus, the Court acknowledges that deferred payments, if based on activity occurring before the patent expiration, are permissible.

The Dissent

Justice Alito (joined by Chief Justice Roberts and Justice Thomas) dissented, asserting that Brulotte was not based on interpretation of the Patent Act, but based on economic theory, which has been “debunked.” The dissent further argued that Patent Act did not demand that the royalty term be compressed to fall within the patent term, and that there are often “good reasons why parties sometimes prefer post-expiration royalties over upfront fees.” For example, such arrangements may yield economic efficiencies where parties are “unsure whether a patented idea will yield significant economic value, and it often takes years to monetize an innovation.” The dissent also explained that the majority decision undermined the parties’ agreed-upon bargain and expectations. Finally, the dissent argued that stare decisis should not insulate Brulotte.

Practice Note

The Kimble decision may yield at least three consequences.

First, Kimble is a reminder to patent holders, patent licensees and patent practitioners alike of the permissible ways that they can structure royalties due for conduct during the period covered by a patent without incurring Brulotte’s—and now Kimble’s—per se rule against post-expiration royalties. As it did for Kimble, the Brulotte rule creates a trap for the unwary.

Second, having considered this matter a second time, and Justice Kagan’s invitation for legislative attention if Congress disagreed with Brulotte, the Kimble decision may motivate Congress to reconsider bills that it has previously “rebuffed” and that “would have replaced Brulotte’s per se rule with the same antitrust-style analysis Kimble now urges.” Of course, Congress itself may prefer the ease of applying the rule from Brulotte as contrasted with, in the Court’s words, the “elaborate” rule-of-reason inquiry, with its “notoriously high litigation costs and unpredictable results.”

Third, going forward, parties will likely take increased care in drafting licenses to take advantage of the Incredible-Hulk-sized exception to the Brulotte rule, i.e., that a license can be structured to provide for “deferred,” “post-expiration” royalties based on pre-expiration use of a licensed patent. The Court clarified Brulotte’s distinction between impermissible enforcement of a patent to preclude post-expiration infringement, and permissible “deferred payments” based on infringing activities occurring before patent expiration. This reinforces the ability of parties to contractually agree to alternative payment arrangements. For example, instead of paying up-front royalties, Kimble acknowledges that parties may contractually extend royalty obligations beyond the life of the patent in the form of “deferred payments,” provided the royalty obligation is premised on pre-expiration use of the patented technology.

The Antitrust Division of the U.S. Department of Justice (DOJ) recently issued a business review letter stating that it would not challenge the Institute of Electrical and Electronics Engineers, Inc.’s (IEEE’s) proposed revisions to its patent policy. These patent policy revisions seek to address the “wide divergence” in expectations between holders of patents essential to an IEEE standard and the market participants seeking to implement such standards. The DOJ’s response looked favorably on the IEEE’s proposed revisions pertaining to RAND royalties and limitations on injunctive relief for standard-essential patent holders.

Read the full article.

On January 6, 2015, the Second Circuit granted defendants’ motion for an expedited appeal but denied their motion for a stay in New York v. Actavis PLC, 14-4624 (2d Cir. Jan. 6, 2015).  Defendants are manufacturers of Namenda, a brand name pharmaceutical prescribed to patients with moderate to severe Alzheimer’s disease.  New York Attorney General Eric Schneiderman filed suit against the defendants in September 2014, alleging that the defendants’ plan to cease production of Namenda IR, a twice-daily instant release formulary whose patent expires in April 2015, was motivated by anticompetitive concerns and violated federal and state antitrust laws.  According to Schneiderman, defendants’ motive for ceasing sales of Namenda IR was to force patients to switch to Namenda XR, an extended release formulary of the drug with a longer patent life.  Converting patients to Namenda XR before the expiration of the Namenda IR patent would negate generic manufacturers’ ability to win market share through the automatic substitution of generic drugs for brand name prescriptions required under many state laws because the generic instant release formulary is not “bioequivalent” to the extended release version.

The Southern District of New York found that the “hard switch” from Namenda IR to XR would injure competition and consumers and granted the state’s motion for a preliminary injunction on December 11, 2014.  Defendants presented evidence that switching to the extended release formula would benefit patients by reducing the number of doses they would need to take each day, which can be particularly beneficial for patients with memory problems.  However, the court concluded that the purpose of defendants’ plan was to nullify state generic substitution laws and that defendants failed to establish any cognizable harm that would result from an injunction requiring them to continue selling Namenda IR.  The harm defendants sought to avoid, the court explained, was the intended effect of the federal and state regulatory regimes at play: increased competition.

The Second Circuit’s January 6 order was brief and not accompanied by an opinion.  The court held that the defendants had not met the standard for a stay of the injunction, citing In re World Trade Center Disaster Site Litigation, 503 F.3d 167, 170 (2d Cir. 2007).  The court granted their motion for an expedited appeal and ordered them to submit an expedited briefing schedule within seven days.

Addressing whether the “sham” exception to Noerr-Pennington immunity is limited to sham litigation in courts, the U.S. Court of Appeals for the Federal Circuit vacated a lower court’s summary judgment of no antitrust liability, finding that antitrust liability can attach to sham administrative petitions and that the sham litigation exception is not limited to court litigation.  Tyco Healthcare Group LP v. Mutual Pharm. Co., Inc., Case No. 13-1386 (Fed. Cir., Aug. 6, 2014) (Bryson, J.) (Newman, J., dissenting).

Tyco Healthcare acquired patents relating to temazepam, an insomnia drug marketed as Restoril.  Seeking Food and Drug Administration (FDA) approval to manufacture and sell generic temazepam, Mutual Pharmaceutical filed an Abbreviated New Drug Application (ANDA), certifying that its generic product would not infringe any patents.  Tyco disagreed and sued Mutual for infringement under the Hatch-Waxman Act.  The district court rejected this claim, reasoning that products manufactured to the ANDA’s specification could not infringe.  Tyco then filed a citizen petition with the FDA, urging new guidelines to require generic temazepam manufacturers to more extensively demonstrate bioequivalence to Restoril.  The FDA denied Tyco’s citizen’s petition “indicating that, in the FDA’s view, it was wholly without merit.”

In response to Tyco’s infringement suit, Mutual brought antitrust counterclaims, including allegations that Tyco’s suit and citizen petition were shams.  In other words, Mutual argued that Tyco used illegitimate means to keep Mutual’s product off the market.  On summary judgment, the district court rejected these counterclaims, holding that it was reasonable for Tyco to proceed with its infringement action and that antitrust liability for sham claims cannot apply to filing administrative petitions because the exception “is expressly limited to litigation.” Mutual appealed.

The Federal Circuit vacated the rulings on antitrust issues and remanded for further consideration.  With regard to Tyco’s Hatch-Waxman claim, the Federal Circuit found that it was not unreasonable for a patent owner to allege infringement under Hatch-Waxman if the patent owner has evidence that the as-marketed commercial ANDA product will infringe, even though the hypothetical product specified in the ANDA could not infringe.  The Court concluded that further inquiry was necessary to determine if Tyco’s factual theory of infringement was objectively baseless.  With regard to the administrative proceeding, the Court found that the sham exception to Noerr-Pennington is not limited to court litigation, and that it has been applied to administrative petitions, including FDA citizen petitions.  Accordingly, it remanded this counterclaim for resolution of fact issues regarding whether the citizen petition was objectively baseless and motivated by a subjective desire to directly interfere with Mutual, as well as whether Mutual suffered any anticompetitive injury.

Judge Newman dissented from the court’s conversion of routine patent litigation into antitrust violations, arguing that “[e]nforcement of a presumptively valid patent against a product that infringes by statute [Hatch-Waxman] cannot be deemed objectively baseless” and patent holders have “the right to communicate with the FDA concerning public information on matters within the agency’s authority and responsibility without incurring antitrust liability.”

On Friday, August 15, 2014, Judge Gerald McHugh of the Eastern District of Pennsylvania let stand several counterclaims that IMS Health Inc. (IMS) made against Symphony Health Solutions Corp. (Symphony) in connection with related to allegations that Symphony had poached IMS employees to steal trade secrets.

In July 2013, Symphony brought a complaint against IMS, the largest pharmaceutical data and analytics company in the world, alleging that IMS unlawfully abused its monopoly power in pharmaceutical data markets and violated the antitrust laws through various types of horizontal and vertical exclusionary conduct, including entering into exclusive long-term agreements with data suppliers, requiring data suppliers to sign most-favored-nation clauses, acquiring rivals to eliminate competition, and bundling its products.  In response to the complaint, IMS filed multiple counterclaims alleging that Symphony poached IMS employees to steal IMS’s trade secrets. Symphony then filed a motion to dismiss IMS’s counterclaims.

After reviewing Symphony’s motion to dismiss, Judge McHugh dismissed IMS’s trade secret misappropriation claims as to two former IMS employees as barred by res judicata.  Specifically, a prior consent order already addressed concerns that Symphony gained access to IMS’s trade secrets through the two former IMS employees.  Judge McHugh also dismissed IMS’s claim of tortious interference regarding a vendor because IMS’s “prediction” of future harm could not sustain its claim.

However, Judge McHugh let IMS’s poaching claims go forward and refused to dismiss IMS’s claims of improper procurement of confidential information and unfair competition.  As to improper procurement, Judge McHugh highlighted IMS’s allegation that its former employee hired by Symphony made a public presentation with IMS materials.  With respect to unfair competition, Judge McHugh ruled that IMS had stated facts sufficient to support its claim when it alleged that “Symphony targeted for hire groups of employees who worked in parts of IMS’s business that Symphony wished to duplicate, with the purpose of appropriating IMS’s trade secrets.”