Rader’s Ruminations: Let’s Settle It – Are Patents Monopolies or Not? Part I

“A patent expands, rather than contracts, the public domain; operates as a legal incentive to expand the market, far from illegal market-restrictive monopolistic conduct; and enhances instead of endangers competition.”

monopolies

The simple answer is “no”; a patent protecting a new and nonobvious invention is not an antitrust monopoly. The reason is also quite simple; an antitrust monopoly requires the unlawful capture or maintenance of market power by withdrawing products or services from the public domain, thus injuring competition in market transactions. See, e.g., Standard Oil v. U.S., 221 U.S. 1 (1910). In general terms, an antitrust monopoly requires: (1) market power (sufficient control of a market to set prices or restrain competition, but not market dominance achieved with a superior product or business acumen); (2) restricting the public domain to injure competition; and (3) illegal anticompetitive conduct to achieve these market distortions. A patent, standing alone, does not meet any of these requirements.

Patents Enhance Competition

Starting with the second element of an antitrust infraction, a patent, by definition, does not withdraw anything from the public domain. Exactly to the contrary, a patent expands the public domain by giving the public something it never had before — an entirely new invention. Moreover, that new market entrant invariably makes the market more competitive. The new invention gives consumers new options in a market and thus enhances competition. By expanding the public domain, patents without fail foster more, not less, competition. Thus, patent law and antitrust law are not “wholly at odds . . . [but] complementary” because both “encourage innovation, industry, and competition.” Atari v. Nintendo, 897 F.2d 1572, 1576 (Fed. Cir. 1990).

Actually, the answer can be even simpler: a patent is the exact opposite of illegal conduct. The U.S. Government itself grants patents under authority expressly granted in the U.S. Constitution. At birth, a patent is a legal, not an illegal, market entrant. The exclusive right in a patent is never alone a form of “unlawful” anticompetitive conduct. Indeed, lawful patent protection for invention and innovation antedate by a century the antitrust protections for competition.  And again, both patent and antitrust laws foster competition.

Finally, an antitrust monopoly requires market power. Rarely, if ever, can a single patent capture an entire existing market. Indeed, the Supreme Court ruled unanimously that a patent does not even carry a presumption of market power.  Illinois Tool Works v. Independent Ink, 547 U.S. 28 (2006). This 2006 pronouncement arose in a common antitrust scenario where a non-patented second product was tied to sale of a patented product.  Even in that familiar setting for threats to competition, the Court did not presume that the patent created any market power. After all, a single patent most likely will enhance, but is not likely to control, competition across an entire market.

Again, the tragic irony here is that the Supreme Court needed to issue the Independent Ink decision at all. But in another instance of early judicial bias against patents, a prior Supreme Court opinion, namely Jefferson Parish Hospital v. Hyde, 466 U. S. 2 (1984), stated the “the well-settled proposition” that “if the Government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power.” Id. at 16. This statement is fraught with economic and factual inaccuracy — not to mention its oversight of the Constitution’s authorization of exclusive rights to promote advances in technology. Once again, the passion to enforce antitrust laws discloses a bias against exclusive rights when the exact opposite should be the case because patents encourage competition.

Misunderstandings Around ‘Monopoly’

Nonetheless patents can, and often do, introduce inventions that vastly alter market directions and adjust competition paradigms. Patents also, as prescribed by the Constitution, operate as exclusive rights, empowering patent owners to exclude all others from making, using, selling, or importing the carefully defined inventive contribution to the market. Because a patent can abruptly and without warning emerge to alter competition patterns within established markets, antitrust practitioners often bristle at the power a patent possesses to disrupt market expectations. Also, because the patent operates as a right to exclude all other competitors, it is often loosely characterized as having “monopoly powers.” Indeed, this article contains many instances when even the Supreme Court misidentifies the limited “exclusive right” created by the Constitution as a “monopoly.”

This generalization deserves further comment: the exclusive right in a patent is strictly limited both temporally (lasting only 20 years from filing or usually about 17 years after its issuance) and definitionally (covering only the very specifically delineated, and often narrow, scope of its claims). Those legal limits on this Constitutionally-mandated incentive for innovation also operate to prevent a lawful patent from falling within the later-created statutory concept of an antitrust monopoly.

To recount, a patent expands, rather than contracts, the public domain; operates as a legal incentive to expand the market, far from illegal market-restrictive monopolistic conduct; and enhances instead of endangers competition. Thus, at every turn, a patent is simply not an antitrust monopoly. The answer to the “monopoly question” is NO.

Examining Potential Patent Abuses

In the rare instance that a patent does possess or create market power, the monopoly question demands a more nuanced analysis. In its early, productive, unifying years, the Federal Circuit addressed the rare situation when a patent “creates its own economic market or consumes a large section of an existing market.” Atari at 1576. In such cases, a patent owner “must be allowed to protect the property right given to him under the patent laws . . . [but] may not take the property right granted by a patent and use it to extend his power in the marketplace improperly, i.e. beyond the limits of what Congress intended to give in the patent laws.”  Id. [emphasis added]. In other words, the patent does not tip the scales at all in the direction of market power, illegal conduct, or anticompetitive effects. Still a patent — like any form of property — can be misused to illegally disrupt market fairness.

This observation begs the question: how could a patent be illegally extended beyond its limits to endanger competition?  Again, the Federal Circuit identified the actions involving a patent that could cause an antitrust infraction:

“Therefore, patent owners may incur antitrust liability for enforcement of a patent known to be obtained through fraud or known to be invalid, where license of a patent compels the purchase of unpatented goods, or where there is an overall scheme to use the patent to violate antitrust laws.”

Atari at 1578.  

Walker Process

The first of these three categories refers to the Walker Process problem, where a patent owner sued for infringement of a sewage treatment patent when it had put the invention into public use more than a year before filing its patent application.  Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 382 U.S. 172, 177 (1965). Of course, this prior public use would render the patent invalid. The Supreme Court explained that “enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a § 2 case are present.” Id. Of course, the “other elements” still require market power and intent to harm competition. See, e.g., Dippin’ Dots, 476 F.3d 1337 (Fed. Cir. 2007). When the Federal Circuit raised the standards for inequitable conduct, Therasense, 649 F.3d 1276, 1289 (Fed. Cir. 2011), the fraud requirement for Walker Process claims came into closer alignment with inequitable conduct. Nonetheless, Walker Process claims are very rare and even less often successful.

As an aside, Justice Harlan noted in the Walker Process case, see 382 U.S. at 179, that the defendant was not aware of the deception at the Patent Office. Thus, the antitrust claimant had not proven the other elements of a Sherman Act charge (e.g., no market power, no intentional illegal conduct). Thus, insightfully, Justice Harlan noted:

“[T]o hold, as we do not, that private antitrust suits might also reach monopolies practiced under patents that for one reason or another may turn out to be voidable under one or more of the numerous technicalities attending the issuance of a patent, might well chill the disclosure of inventions . . . because of fear of the vexations or punitive consequences of treble-damage suits. Hence, this private antitrust remedy should not . . . reach . . . a nonfraudulently procured patent.

Id. at 180 [emphasis added].

Nonetheless, this case serves as another example of a rush in the courts to assume that a patent is far more susceptible to abuse than any other form of property.

Tying

The second category of potential antitrust abuse of a patent property right involves tying, such as in the Independent Ink case, 547 U.S. 28 (2006), and more prominently, Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). In the 1942 case, the Supreme Court determined that the patent owner used its “[patent monopoly] as the effective means of restraining competition with its sale of an unpatented article.” The unpatented articles were standard salt tablets. As discussed later, this strict rule — the advent of the patent misuse doctrine — operates more reasonably under the “rule of reason” standards of modern antitrust law.

In tying cases, the rule of reason has generally ameliorated allegations that patent owners tied patent rents to unpatented products to achieve some anticompetitive advantage.  After all, as Professor, later Judge, Robert Bork discussed in his famous book:

“Every person who sells anything imposes a tying arrangement. This is true because every product or service could be broken down into smaller components capable of being sold separately, and every seller refuses at some point to break the product down any further. . . .”

Bork, The Antitrust Paradox, 378-79 (1978). As a simplistic example, hotels offer a breakfast tied into its room prices. As Professor Bork explained, tying is almost ubiquitous and must benefit consumers or it would not survive in a competitive marketplace. The efficiency, convenience, and lower transaction costs with bundled goods have altered modern antitrust analysis to show the benefits of tying.  One striking modern example is the Microsoft III case in the D.C. Circuit that showed market benefits in Microsoft’s integrated WINDOWS product outweighed any negative tying effects. U.S. v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). Moreover tying allegations still require a correct market definition and dominance (market power) in that domain.

In sum, the “rule of reason” prevents a Sherman Act monopolization claim from reaching a market position occasioned by a superior product or business astuteness. For patents, the innovative characteristics that warranted patent protection are also likely to show acquisition of market share springing from the merits of the new and better product.

‘Overall Schemes’ to Violate Antitrust Laws

Finally, the general third category — an “overall scheme . . . to violate antitrust laws” — was probably meant to suggest that patents could be included in a per se antitrust violation like a price fixing scheme. This category, however, has its most prevalent modern application in the Supreme Court’s ruling that a reverse payment in settlement of an infringement suit (the patent owner paying the accused infringer to delay generic market entry or to settle the case) is subject to antitrust scrutiny under a “rule of reason” analysis. FTC v. Actavis, 570 U.S. 136 (2013). A vigorous dissent noted that Actavis “carves out an exception to the applicability of antitrust laws” because in every other instance a patent owner is only subject to antitrust scrutiny when acting beyond the scope of its patent. See, 133 S. Ct. at 2237. The record In Actavis showed only a patent owner acting fully within its rights to both sue for patent infringement and to settle its enforcement action.

While applying this antitrust exception to actions fully within the rights granted by the patent, the Court noted that the rule-of-reason regime would not allow a reflexive rejection of pharmaceutical settlements:

“Where a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using its monopoly profits to avoid the risk of patent invalidation or a finding of non infringement.”

Id. at 156.  

Actually, this passage illustrates well the operation of the rule of reason in antitrust actions.

As might be expected, this departure from standard antitrust rules for patent suits opened a floodgate of more than 30 reverse-payment cases. In one notable case, a District Court dismissed a reverse payment case. In re Bystolic, 583 F. Supp. 455 (SD NY 2022). Similarly, the Seventh Circuit upheld a dismissal in another case. Baltimore v. AbbVie, 42 F.4th 709 (7th Cir. 2022). In both cases, the courts upheld a record showing that any exchanges in the settlement agreements represented fair value. Since 2013, three cases have proceeded all the way to a jury trial on Actavis allegations. In all three trials — Nexium, the verdict has favored the defendants. See, e.g., Am Sales v. AstraZeneca (in re Nexium) 842 F.3d 34 (1st Cir. 2016). Thus, the pharmaceutical companies presented sufficient evidence of pro-competitive benefits in the settlements. In other words, the rule of reason (excusing actions with pro-competitive effects like better products, business efficiency, or consumer benefits) produced verdicts in favor of patent owners.

A Property Right That Must Be Used Responsibly

As this discussion illustrates, even in the rare instance that a patent or portfolio does display enough market dominance to pose a threat to economic fairness, the patent owner still deserves the full protections of its patent right. Only an intentional and illegal action that projects the patent beyond its temporal or definitional limits (with market power) triggers antitrust scrutiny. Within the scope of its legal exclusive rights, a patent owner remains on safe ground, with the possible exception of the Actavis reverse payment scenario. In other words, even in these rare instances, a patent is not an antitrust monopoly, but only a property right that must be used responsibly. Actually, a patent deserves, but rarely receives, credit as a form of property that almost invariably enhances competition.

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Author: artenot
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2 comments so far. Add my comment.

  • [Avatar for Pro Say]
    Pro Say
    May 26, 2024 12:27 pm

    Are patents monopolies?

    2 letters: N.O.

    Thanks again for yet another superb post Judge.

    Were all the current CAFC and SCOTUS judges like you and Judge Michel, America wouldn’t be in the crippled-innovation mess we’re in.

    If only . . .

  • [Avatar for Charles E. Miller]
    Charles E. Miller
    May 24, 2024 12:17 pm

    A worthy companion piece to Judge Rader’s present article is Seventh Circuit Judge Frank H. Easterbrook’s piece titled “Intellectual Property is Still Property”, 13 Harvard J. Law and Public Policy 108 (1990.)

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