A R T I C L E S A N D F E A T U R E S costs for Butch would be rather high, to say the least. But if Hatch-Waxman Harriman had paid Butch to leave his trains alone, he would have been shocked to learn that he faced exposure under the Patent Settlements recently-enacted Sherman Antitrust Law. After all, some apparently would argue, Butch could sell what he took on the black market at greatly reduced prices, and consumers would and Antitrust: benefit. Wait a minute, Mr. Harriman would sputter, it’s my train. No sir, would come the confident reply, you mean it’s probably your train. On “Probabilistic” * * * * * * * The ongoing debate concerning the application of antitrust law to intellectual property has been hobbled by certain fal- Patent Rights and lacies. These fallacies have a common source: the perceived need of some who seek to attack patent settlements to devel- False Positives op a theory of liability that does not depend on the validity of the patent. In other words, certain commentators and members of the plaintiffs’ class action bar wish to argue that settlements of patent litigation are presumptively, if not B Y K E V I N D . M C D O N A L D per se, unlawful even if the patent in question is perfectly valid and thus would have precluded all competition for the patented good. The desire for such a theory is understand- “[F]alse positives are much more harmful than false negatives. able; proving that a patent is invalid is hard work. Making a Market processes undercut monopolies wrongfully permitted, verdict against a patent stick in the Federal Circuit is often but no similar processes undercut judicial decisions that wrong- harder work. Hence, the quest for an antitrust theory that can ly condemn efficient conduct.” condemn a patent settlement while declaring the validity of the patent irrelevant. —Frank H. Easterbrook, Judge, United States I have previously addressed one attempt at such a theory: Court of Appeals for the Seventh Circuit 1 the notion that settlement payments from a patent holder to the patent challenger flow the “wrong way” and thus are pre- sumptively anticompetitive. 2 In the “traditional” settlement, W H E N A N A L Y Z I N G T H E intersection of antitrust and patent law, goes the argument, the patentee grants a license to the alleged I find it useful to consult the great eco- infringer, who then pays a royalty flowing to the patentee. nomic thinkers, such as Judge Easterbrook Payments going the other way (i.e., from the patentee) are (quoted above) and Butch Cassidy. The therefore “reverse” payments. This argument has fared poor- latter is, of course, the eponymous hero played by Paul ly, in my view, because it evades the fundamental question: Newman in the classic film, Butch Cassidy and the Sundance No matter who paid what to whom, what lawful competition Kid . Recall the scene in which Butch and Sundance return has been reduced by the settlement? That was the question from their long and harrowing escape after a failed train rob- from which the FTC’s administrative law judge could not be bery. Butch is shown a news article reporting that the Union deflected in his recent decision in favor of Schering-Plough. 3 Pacific’s owner, E.H. Harriman, has hired and equipped a There, the FTC staff learned to its chagrin that declaring the collection of famous lawmen to hunt Butch and Sundance patent’s validity irrelevant was inconsistent with the mini- down. Butch’s look of puzzlement turns to disgust as he leans mum requirement of showing consumer harm, that is, show- forward, jabs his finger into the table top, and delivers an eco- ing that the alleged infringer had a right to be in the market nomic analysis worthy of Jevons and Walras: at all: That’s bad business . . . . If he’d just pay me what he’s spend- Schering had the legal right to exclude Upsher-Smith from the market until Upsher-Smith either proved that the ’743 ing to make me stop robbing him, I’d stop robbing him . patent was invalid or that its product . . . did not infringe It is unlikely, to be sure, that Mr. Harriman would ever have Schering’s patent. . . . [Thus,] Complaint Counsel has not proved that Upsher-Smith . . . could have even been on the the opportunity to make such a payment. The transaction market prior to the expiration of the ’743 patent. 4 (If Mr. Harriman pays Butch, you can’t complain until you Kevin D. McDonald is a partner at Jones Day in Washington, D.C., and rep- show that Butch had a right to be on the train in the first resents certain defendants in private antitrust litigation arising from place.) In another thorough (and, in my view, unanswer- the settlement of pharmaceutical patent litigation. No other person or able) analysis, Daniel Crane has shown that reverse payments entity is to blame for these views. provide no useful evidence that a patent settlement is anti- 6 8 · A N T I T R U S T
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