EU Advocate General Opines That Seeking Injunctions On FRAND-Encumbered SEPs May Constitute an Abuse of Dominance

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1 NOVEMBER 17-22, 2014 WRITTEN BY KENNETH H. MERBER EDITED BY KOREN W. WONG-ERVIN The views expressed in this e-bulletin are the views of the author alone. In this Issue: EU Advocate General Opines That Seeking Injunctions on FRAND-Encumbered SEPs May Constitute an Abuse of Dominance IEEE Seeks DOJ Approval of Patent Policy Changes Court Holds Non-Cash Settlement Provisions May Constitute Payments Under Actavis FTC Commissioner Wright Says Avoided Litigation Costs Are An Inappropriate Benchmark for Evaluating Reverse-Payment Settlements ipad Cover Antitrust Claims Dismissed STANDARD-ESSENTIAL PATENTS EU Advocate General Opines That Seeking Injunctions On FRAND-Encumbered SEPs May Constitute an Abuse of Dominance On November 20, 2014, EU Advocate General Melchior Wathelet issued an opinion advising the Court of Justice of the European Union to find that seeking an injunction for infringement of a FRAND-encumbered standard-essential patent (SEP) without first making an offer on FRAND terms constitutes an abuse of dominance in violation of Article 102 of the Treaty on the Functioning of the European Union. The Court of Justice has been asked to clarify the ability of an SEP-holder to seek an injunction under EU competition law by a German court presiding over a dispute between Huawei and ZTE. The Advocate General s opinion is not binding on the Court, but is typically followed.

2 The Opinion concludes that the actions of both parties to the negotiation of a FRAND royalty are relevant in determining whether seeking an injunction is an abuse of dominance. In particular, before seeking an injunction an SEP-holder must provide a written offer for a licence on FRAND terms that contains all the terms normally included in a licence in the sector in question, in particular the precise amount of the royalty and the way in which that amount is calculated. (Opinion 85.) Upon receiving that offer, the potential licenses must respond in a diligent and serious manner to the offer made by the SEP-holder, including by promptly submit[ting] to the SEP-holder, in writing, a reasonable counter-offer relating to the clauses with which it disagrees. (Id. 88.) Seeking a judicial determination of the royalty would be consistent with the potential licensee s obligations, but the SEP-holder could legitimately request assurance of payment during such proceeding, such as a bank guarantee or escrow account. (Id. 93.) In addition, the licensee can challenge both validity and infringement of the patent even after concluding a license. (Id. at ) If an SEP-holder seeks an injunction despite the willingness of the potential licensee to negotiate a FRAND royalty, that would amount to an abuse of dominance. (Id. at Conclusion 1.) Opinion of Advocate General Wathelet, Case C 170/13, Huawei Technologies Co., Ltd. v. ZTE Corp., (Nov. 20, 2014), available at Ryan Davis, EU Court Adviser Sets Plan For Essential Patent Injunctions, LAW360 (Nov. 20, 2014), available at IEEE Seeks DOJ Approval of Patent Policy Changes According to reports from MLex, the Institute of Electrical and Electronics Engineers Standards Association (IEEE) has asked the Antitrust Division of the U.S. Department of Justice (DOJ) to review proposed changes to its patent policy. IEEE develops the ubiquitous Wi-Fi (802.11) standard, among others. In August, it preliminarily approved changes to its patent policy that would clarify the terms of the licensing commitments required from standard-setting participants. The changes provide that essential patent owners cannot seek injunctions, must license all interested parties regardless of their position in the distribution chain, and must calculate reasonable royalties on the smallest salable unit containing the patented technology rather than the full end product. The changes will only take effect upon receipt of the DOJ s business review letter, and subsequent adoption by the organization s Board of Governors. Source: Leah Nylen, IEEE Seeks Review By DOJ On Changes To Intellectual Property Rights Policy, MLEX (Nov. 21, 2014), available at

3 PAY-FOR-DELAY SETTLEMENTS Court Holds Non-Cash Settlement Provisions May Constitute Payments Under Actavis On November 17, 2014, a federal district court in California refused to dismiss antitrust claims brought against pharmaceutical companies that make Lidoderm. According to the allegations, the generic drug manufacturer Watson Pharmaceuticals was paid to delay entry by Endo Pharmaceuticals (a distributor of Lidoderm) and Teikoku Seiyaku (a manufacturer of Lidoderm). Under the terms of the settlement, Watson received free Lidoderm to sell, and was permitted to begin sales of its generic product prior to the expiration of the patent, with 7.5 months of sales before any other authorized generic could enter. The plaintiffs alleged that under these provisions Endo and Teikoku Seiyaku had paid Watson over $200 million to delay entry $96 million in the form of free product and $170 million through the 7.5 month no authorized generic provision. (Order at 1.) Defendants argued that Actavis only applied to cash payments, and that antitrust liability could not attach because the agreement allowed Watson to enter prior to the expiration of the patent. (Id. at 13.) The court rejected both arguments. First, it held that Actavis applies to non-cash payments when courts are able to calculate [the payments ] value. (Id. at 18.) Provision of free product was straightforward to value, and the plaintiffs proposed valuation of the no authorized generic provision based on an FDA study and sales records was not overly complicated, and plausible. (Id. at ) Second, the court held that Watson s entry prior to the expiration of the patent did not preclude a finding that the agreement was anticompetitive. (Id. at 15.) The court explained that Watson s early sales of Lidoderm were required to be at the same prices charged by Endo, and therefore did not increase competition, while its subsequent generic sales were also made at supracompetitive prices due to the agreement to delay introduction of an authorized generic. (Id. at ) Accordingly, the court refused to dismiss the antitrust claims. However, the court held that the no authorized generic provision should be evaluated under the rule of reason, and dismissed plaintiffs per se claim. (Id. at 27.) Order, United Food and Commercial Workers Local 1776 v. Teikoku Pharm USA, No. 14- md (N.D. Cal. Nov. 17, 2014) available at assets.law360news.com/ /597118//mnt/rails_cache/https-ecf-cand-uscourts-govdoc pdf Kurt Orzeck, Pharmas Can t Nix Lidoderm MDL Over $170M Pay-For-Delay Deals, LAW360 (Nov. 18, 2014) available at -3-

4 FTC Commissioner Wright Says Avoided Litigation Costs Are An Inappropriate Benchmark for Evaluating Reverse- Payment Settlements Speaking at the ABA Section of Antitrust Law s Intellectual Property Committee s Annual Fall Networking Event, FTC Commissioner Joshua Wright, in response to a question about pay-for-delay settlements, explained his view that litigation costs are an inappropriate benchmark for evaluating reverse payments under the rule of reason. Referring to a paper that he wrote with Bruce Kobayashi, Judge Douglas Ginsburg, and Joanna Tsai, Wright explained that the recent economic analysis of reverse-payment settlements is based upon a monopoly-to-duopoly model that assumes a single generic entrant, which is incomplete and ignores critical institutional details. Instead, according to Wright et al, in realty, entry by multiple firms can follow the invalidation of a patent. Instead of obtaining duopoly profits for the duration of the life of the patent, as assumed in the monopoly-toduopoly model, the generic entrant that successfully challenges the validity of the brand s patent obtains duopoly profits only for a period limited to a 180-day period of exclusivity. After this period, both the brand and the generic entrant that successfully invalidated the patent in litigation obtain only the lower profits associated with free entry. Accounting for this critical institutional detail results in a broader settlement range than under the monopoly-to-duopoly model that yields robust incentives for the brand and generic entrant to settle cases. In short, taking into account the institutional reality that a successful patent challenge results in free entry rather than duopoly implies consumer welfare-increasing settlements can occur with very large payments, including payments several times greater than avoided litigation costs. Moreover, incorporating multiple serial entrants also decouples the litigation-adjusted expected value of the patent and the consumer welfare standard and weakens the relationship between patent strength and the size of the settlement. FTC Commissioner says non-cash payments will fall within Actavis ABA IP Committee meeting PaRR (Nov. 20, 2014), available at Bruce H. Kobayashi, Joshua D. Wright, Douglas H. Ginsburg, and Joanna Tsai, Actavis and Multiple ANDA Entrants: Beyond the Temporary Duopoly (Oct. 8, 2014), available at LITIGATION ipad Cover Antitrust Claims Dismissed On November 17, 2014, a federal court in Seattle dismissed claims by Hard 2 Find Accessories (H2F) that Apple had conspired with Amazon to exclude low-priced competitors. H2F sold ipad covers through Amazon s marketplace, but its listings were removed after Apple complained that the -4-

5 covers were counterfeit. Amazon subsequently terminated H2F s seller privileges altogether, which drove H2F out of business. According to H2F, this constituted a conspiracy to shutter Apple s lowcost competitors. The court rejected all claims against Apple because Apple was alleged to have excluded H2F solely by complaining of potential trademark infringement to Amazon, which is protected petitioning activity under the Noerr-Pennington doctrine. (Order at 3.) The court also noted that allegations of this single interaction were insufficient to support a conspiracy claim even if Apple s conduct had not been immune from suit, as it had already found with respect to the antitrust claims against Amazon in a prior order. (Id. at 5-6.) Order, Hard 2 Find Accessories, Inc. v. Amazon.com, Inc., No. 14-cv-950 (W.D. Wash. Nov. 17, 2014). Brandon Lowrey, Apple, Amazon Quickly Core Suit Over ipad Cover Sales, LAW360 (Nov. 17, 2014) available at -5-