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PLSAs, SEPs and PAEs: The Antitrust/IP Acronyms You Should Know and Understand

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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)

Published in: Law
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PLSAs, SEPs and PAEs: The Antitrust/IP Acronyms You Should Know and Understand

  1. 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. 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
  3. 3. INTRODUCTORY COMMENTS 3
  4. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  17. 17. PATENT LITIGATION SETTLEMENTS AGREEMENTS (PLSAs) 17
  18. 18. Reverse Payment / Patent Settlements in the US 18 Barbara Sicalides, Pepper Hamilton LLP
  19. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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.”
  31. 31. PATENT ASSERTION ENTITIES (PAEs) 31
  32. 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. 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. 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. 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
  36. 36. STANDARD ESSENTIAL PATENTS (SEPs) 36
  37. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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”
  47. 47. 47 Questions?
  48. 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

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