Patent Settlements, Risk, and Competition Mark R. Patterson Fordham University School of Law Patent Settlements: The Issues Beyond the “Reverse Payment” Cases 59 th Annual Antitrust Spring Meeting March 30, 2011

Two Main Points Patent settlements are different Different from patent litigation, because private agreement Different from many other settlements (e.g., contract), because public implications Risk of litigation is not always bad, if bad means anticompetitive Competition inherently involves risk Whether risk is bad (inefficient?) depends on what parties do in response to risk

Patent Litigation Is Competition Guidelines and courts treat patent protection as a question to be resolved before the nature of underlying product competition is determined An alternative view: patent litigation is another form of competition Patent protection is the right to sue others for infringement Patent protection is patent litigation

Settlement is the Elimination of Competition in Patent Litigation If we treat patent litigation as a competitive process, settlement is an elimination of competition (U.S. v. Singer Mfg. Co.) Even if litigation is protected by Noerr- Pennington doctrine, settlement is not Private agreement, not government act Question is not whether litigation is sham

When Do Patent Settlements Produce Procompetitive Effects? If patent settlements eliminate competition, when is that loss balanced by a gain? Generally, those who advocate little scrutiny of settlements point to the elimination of risk as a gain But risk is always present with competition, and need not be anticompetitive

Allocation of Risk and Competition Assume two competitors in a (non-IP) market where only one will prevail, and we know, or think we know, which it will be Analogous to patent context An allocation of the market would allocate the risk of success But an allocation of the market would also (presumably) be per se illegal

Only Some Risk Creates Inefficiencies In previous network/scale economy example, firms (presumably) respond to the risk by seeking to better serve consumers In contrast, in exclusive-dealing agreements, courts often say reduction of risk is efficient But dealing with risk in that context involves precautions (hedging, contractual protections) that do not benefit consumers One way to consider competitive effect of risk: How do firms respond to the risk?

Are Costs of Addressing Risk in Infringement Context Inefficient? Patentee’s responses to patent litigation risk: Using first-mover advantage and effort to establish brand loyalty: procompetitive Bringing infringement suit: litigation costs may be inefficient, but are part of patent law, and attorney’s fees can be recovered If concern is expenditure to prevent incorrect jury verdict, we don’t generally allow private parties to preempt even incorrect decisions Cf. Professional Engineers, IFD

Are Costs of Addressing Risk in Infringement Context Inefficient? Alleged infringer’s response to patent litigation risk: Seeking invalidation of patent, which is procompetitive, or at least encouraged by Supreme Court If concern is rent-seeking, possibility of settlement seems likely to encourage rather than discourage

Why Ever Allow Patent Settlements? We don’t require firms to take on risk in new markets So we shouldn’t require firm that has been infringing unknowingly to litigate infringement suit (i.e., effectively enter another market) Same for firms that haven’t entered market But firm alleged to have infringed with knowledge of patent has shown willingness to litigate Unless new evidence, grant of injunction, etc. Tolerance for settlement should reflect not risk, but unanticipated risk Does seeking patent show willingness to litigate?

Why Is Hatch-Waxman Different? As courts and commentators note, Hatch- Waxman changed the risk calculus for generics But this cannot have been a surprise to Congress There is no reason to think that any deviation from the “normal” allocation of risk/cost/reward is the correct one In Hatch-Waxman context, generic manufacturer elects to enter litigation “market” by filing Paragraph IV certification Similar to declaratory judgment action Was Congress anticipating litigation?