Are Patent Rights Poised for a Resurgence?

The National Law Journal | September.19.2016

Key court rulings and enforcement activity in recent years have made it riskier and costlier for patent owners to bring — and settle — patent infringement cases.

Foreign governments, particularly China, have embraced controversial antitrust doctrines, such as "excessive pricing," to spur domestic economic activity by minimizing royalties paid to non-Chinese companies. Federal courts and U.S. agencies also have increased the burden on patent owners to seek meaningful relief against potential infringers in the name of promoting competition. In short, the past several years have not been kind to patent owners. Nonetheless, a few recent developments could signal a shift back to more robust protection.

First, the maturing patent law landscape in China and similar emerging economies could relieve the pressure on patent owners. China has come under scrutiny for asserting novel and controversial antitrust theories, particularly against foreign companies' intellectual property.

Many nations are aggressive about advancing industrial policy or ­national interests through enforcement of the laws. For example, in the early years of the republic, our leaders encouraged citizens to "borrow" as much European technology as possible and then patent it here in order to advance this country along the path to economic ­independence.

As our economy matured, so did our appreciation of patent protection. So, too, should China's evolution into a more mature, innovative economy bring with it a resurgence in more meaningful patent protection. The recent lawsuits by Chinese companies for patent infringement may be the first sign of this ­transition.

TRENDS SINCE EBAY

Second, U.S. federal courts appear to be strengthening patent holders' ­ability to negotiate for injunctive relief and are offering greater certainty in ­ambiguous areas like reverse-payment settlements. Importantly, a recent study shows that lower court decisions since the U.S. Supreme Court's 2006 decision in eBay v. MercExchange have granted injunctions to operating companies in approximately 80 percent of cases, while generally denying injunctive relief to nonpracticing entities.

The eBay case was decidedly anti-patent and could have posed a threat to incentives to invest. It increased the burden on patent holders by lifting the old "general rule" granting injunctive relief upon a finding of infringement and replacing it with a traditional four-­factor test. This test obligates the holder to prove (1) irreparable harm, (2) the inadequacy of monetary remedies, (3) the balance of hardships favor an injunction, and (4) that public interest would not be disserved.

The fact that lower courts appear to be limiting the effect of eBay is a good thing for patent owners. These courts must have followed the advice of Chief Justice John Roberts, who had noted in his concurring opinion that monetary remedies may not be enough to protect a patent owner's rights and urged district courts to continue to grant injunctive relief.

Lower courts are also working to lend definition to more recent Supreme Court decisions impacting patent rights, such as Federal Trade Commission v. Actavis, the 2013 decision that applied a contextual "rule of reason" test to reverse-payment settlements of patent infringement cases. This was better than what the government had asked of the court — a presumption of unlawfulness.

The courts are now determining the types of consideration or side agreements that may fall within the "rule of reason" test, lending greater certainty to branded drug patent owners in structuring settlements with generic companies.

GIVING TEETH TO TREBLE DAMAGES

The Supreme Court, too, has enhanced the power of patent owners to protect their intellectual property. The court's decision in Halo Electronics v. Pulse Electronics (consolidated with Stryker v. Zimmer) gives real teeth to the treble damages provision under Section 284 of the Patent Act and makes it easier for patent holders to win enhanced damages from the worst infringers.

Halo rejected the more burdensome U.S. Court of Appeals for the Federal Circuit test for treble damages adopted in In re Seagate Technology. Under the Federal Circuit's two-part test, a patent owner first had to show by clear and convincing evidence that the infringer had "acted despite an objectively high likelihood that its actions constituted infringement." Second, the patent owner had to demonstrate, also by clear and convincing evidence, that the risk of infringement "was either known or so obvious that it should have been known to the accused infringer."

Application of this test led to the absurd result that a willful infringer could avoid enhanced damages if the test could raise some doubt about validity or non­infringement at trial — even if the infringer was not aware of the defense at the time of infringement. The Halo court shifted power back to patent owners by significantly reducing uncertainty and litigation risk when pursuing willful infringers.

"A MORE BALANCED APPROACH"

Turning from the courts to the federal antitrust agencies, we see signs of a more balanced approach to patent rights. A few years ago, the U.S. antitrust agencies, including the Federal Trade Commission and the U.S. Department of Justice Antitrust Division, were the epicenter of activity against "patent hold-up" and similarly problematic potential conduct by patent owners.

The agencies focused on "standard-essential" patents — those that had been submitted to a standard-setting body for inclusion in an industry standard — and patent assertion by nonpracticing entities. Both agencies investigated and settled claims against major technology companies and the FTC sued and settled with a patent-assertion entity, MPHJ Holdings.

However, the agencies have been less active lately. In fact, they made no explicit mention of these issues in their recent revisions to the Antitrust Guidelines for the Licensing of Intellectual Property. Instead, they offered modest changes that continue to support the notion of patent licensing as a generally pro-competitive and efficiency-enhancing enterprise.

Where agency officials have spoken recently on key issues impacting patent owners, it has been to offer certainty around concepts like patent hold-up or to reject suggestions by foreign ­agencies that would expand antitrust liability to refusals to license de facto industry standards or for "excessive pricing" on a ­patent license.

While it is too soon to tell what the outcome of these developments will be — and there are still mixed signals out there — they could at least portend that the worst turbulence may be over and balance could be restored at the tense intersection of the patent, antitrust, and public interest policy realms.

Alex Okuliar and James Tierney are partners in the antitrust practice group of Orrick, Herrington & Sutcliffe, based in Washington. Okuliar is a former advisor to FTC Com­missioner Maureen Ohlhausen and Tierney is former networks and technology section chief of the DOJ Antitrust Division.

Reprinted with permission from the September 19, 2016 issue of The National Law Journal. © 2016 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.