China Law Blog

This is a guest post by Michael Carrier, professor of law at Rutgers University and author of the book, Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law

In my recent book Innovation for the 21st Century:  Harnessing the Power of Intellectual Property and Antitrust Law (Oxford), I explore the relationship between law and innovation. In particular, I show how U.S. patent, copyright, and antitrust law often stifle innovation.

Dan Harris was kind enough to invite me to write a guest post for China Law Blog. And I am pleased to accept his invitation. But I must state at the outset that it is difficult to condense a 400-page book to a blog post! I don’t have the space here to discuss many of my proposals, including those addressing pharmaceutical mergers, standard-setting organizations, peer-to-peer (P2P) software, the Digital Millennium Copyright Act, statutory damages, biotechnology research tools, and material transfer agreements (MTAs).

But I can discuss three proposals that may be of interest to China Law Blog readers: a post-grant opposition procedure, a framework for relief in patent infringement cases, and a solution to anticompetitive pharmaceutical patent settlements. To be sure, China’s patent law (not to mention antitrust, currently grappling with the recent Antimonopoly Law) is not identical to that in the U.S. Just two examples are provided by China’s broader compulsory licensing provisions and greater hostility to business method patents. Nonetheless, given the trend of stronger IP protection in China in recent years, the challenges that have arisen in the U.S. could prove instructive.

My first proposal involves a post-grant opposition system. Such a system would address difficulties with the application process at the U.S. Patent and Trademark Office (PTO). The PTO has granted numerous invalid patents, and this problem has not effectively been addressed through other means, such as litigation or patent reexamination. A post-grant opposition system would allow any party to challenge a patent after it is issued. It would provide a quicker and cheaper determination of validity than litigation, and would target the most valuable patents. And it would allow the PTO to access important information held by competitors.

In the book, I set forth numerous details of my proposed opposition system, including (1) the threshold a challenger must clear to commence an opposition, (2) the timing of the process, (3) the grounds on which a patent can be challenged, (4) the nature of the required evidentiary showing, (5) the procedure’s judges and appeals, (6) the materials that can be introduced in the proceeding, (7) the disclosure of the requester’s identity, and (8) the preclusive effect of an opposition. Although China does not currently have a post-grant opposition system, its current invalidation regime (with its expansive grounds for challenge and greater petitioner involvement) is similar to my proposed system.

Second, I offer a framework for determining relief in cases of patent infringement. To be sure, China has not confronted the incidence of nonpracticing entities (often referred to as “trolls”) that has occurred in the U.S. Nonetheless, for most of the past quarter-century in the U.S., any patentee could receive an injunction that removed the product from the market. Such relief gave commanding leverage to the patentee to obtain settlements that greatly exceeded a reasonable royalty and reflected the significant costs of switching to alternative technologies.
In 2006, in eBay v. MercExchange, the Supreme Court made clear that courts should not automatically grant injunctions in patent infringement cases. But the Court did not make clear how future courts should decide these issues. In the book, I examine the post-eBay landscape, synthesizing the cases and offering a framework that provides guidance to courts in determining appropriate relief in patent infringement cases. I conclude that courts should grant injunctive relief when (1) the patentee competes with the infringer in the marketplace, (2) the patented technology is a core component of the defendant’s product, or (3) (in most cases) a party willfully infringes the patent.

When these elements are not satisfied, courts should examine other factors, which include the effect of injunctive relief on the public. Damages will be appropriate in certain cases, such as where a manufacturer inadvertently infringes a patented component making up a small part of a product and the public would suffer substantial harm from injunctive relief. Other than these settings, courts should apply a default rule that injunctive relief is the appropriate remedy for patent infringement.

My third proposal addresses settlements by which brand-name pharmaceutical firms pay generic companies to delay entering the market. These reverse payments, which differ from typical licensing payments that flow from challengers to patentees, may even exceed what the generic could have earned by entering the market.  Further raising suspicion, many of the patents are not valid. In the 1990s, generics won nearly 75 percent of their challenges to patents on drugs such as Prozac, Zantac, Taxol, and Plantinol.  In June 2009, the FTC predicted that consumers would spend an extra $35 billion over the following 10 years because of these agreements.

Despite the concerns presented by reverse payment settlements, U.S. courts have recently blessed them. They have explained that the agreements reduce costs and increase innovation. They have referred to settlements as “natural by-products” of the Hatch-Waxman Act. And they have pointed to patents’ presumption of validity in demonstrating the agreements’ reasonableness. Although the Federal Trade Commission (which enforces the antitrust laws in the drug industry) and scholars have voiced strong arguments against courts’ leniency, these have fallen on judicial deaf ears.

In the book, I explain why settlement agreements with reverse payments should be presumptively illegal. I apply the framework that the U.S. Supreme Court articulated in Verizon Communications v. Law Offices of Curtis V. Trinko, which underscored the importance in antitrust analysis of a regulatory regime covering the challenged activity. In particular, the Hatch-Waxman Act provides Congress’s views on innovation and competition in the drug industry, freeing courts from the thorny task of reconciling the patent and antitrust laws.
By encouraging generic patent challenges but also providing for patent term extensions and marketing exclusivity periods, the Act offered a delicate balance between competition and innovation. Unfortunately, mechanisms that Congress employed to encourage patent challenges – such as an exclusivity period for the first generic to challenge validity – have been twisted into barriers preventing competition. Antitrust can play a central role in resuscitating the drafters’ intentions and promoting competition.

Reverse payments also are concerning because of the parties’ aligned incentives. By delaying generic entry, brand firms can increase their monopoly profits. They can then use a portion of these profits to pay generics more than they would have received by entering the market. From an antitrust perspective, these payments for delay threaten to divide markets, a particularly egregious offense eliminating competition between rivals.

A framework of presumptive illegality promises to resuscitate the generic competition at the heart of the Act. Given the importance of the drugs subject to reverse payments and the far-reaching effects of skyrocketing health care costs, a more justified and aggressive framework for such agreements would offer significant benefits.

In short, these three proposals are representative of the frameworks I offer to change U.S. law to foster innovation. Although China’s patent, copyright, and antitrust laws are, to varying degrees, different from those in the U.S., my proposals nonetheless may prove instructive.