Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Wright discusses antitrust enforcement in the context of intellectual property rights, (Apr 15, 2015)

By Linda O’Brien, J.D., LL.M.

There is an emerging demand by the courts and commentators to apply a structured rule-of-reason or truncated analysis in business arrangements involving intellectual property rights (IPRs) to accommodate their unique features, said FTC Commissioner Joshua Wright in an April 14 speech before the Global Competition Review Live 2nd Annual IP & Antitrust USA conference in Washington, D.C.

Wright began his remarks—entitled “Intellectual Property Rights, Truncation, and Actavis: Who’s Afraid of the Rule of Reason?”—by noting that the default method of evaluating antitrust conduct is the rule of reason, which involves a costly, comprehensive weighing of any pro- and anti-competitive effects of the challenged conduct. In comparison, truncated antitrust analysis harnesses decision theory to develop shorthand analytical tools based upon the judicial and market experience with the restraint at issue to identify conduct that is likely to harm competition.

Truncated analysis is appropriate when it minimizes the sum of error costs and administrative costs of adjudicating antitrust claims, Wright observed. The benefit of truncation is that it economizes on existing judicial and economic knowledge to produce more efficient legal rules.

Recent developments in antitrust analysis of IPRs suggest the adoption of a truncated analysis for business arrangements involving IPRs, according to Wright. As examples, commentators have proposed truncated antitrust analyses to evaluate standard essential patent holders seeking injunctions, the breach of SSO agreements by patent holders, business activities of patent assertion entities, and reverse payment settlements in the pharmaceutical industry.

Wright noted that, after the U.S. Supreme Court decision in FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013), lower courts were called upon to apply a structured rule of reason analysis in the context of IPRs. In the Actavis decision, the Court held that the traditional rule of reason was the proper framework for determining whether a reverse payment settlement violated the antitrust laws. The Court also provided some general guidance for lower courts to structure the contours of that analysis, emphasizing the potential link between reverse payment size, patent strength, and anticompetitive effects.

Under the avoided-litigation-cost benchmark, reverse payments that are greater than avoided litigation costs after netting out the value of any goods or services provided by the claimed infringer to the patentee reflect a weak patent and are presumed to be payment for delaying entry, Wright explained. While proponents of the benchmark contend it accurately identifies anticompetitive reverse payment settlements, the argument for this standard as an efficient truncation turns on whether it provides a reliable link to the competitive effects of reverse payment settlements and minimizes the sum of relevant error costs. In Wright’s view, the avoided-litigation-cost benchmark fails on both dimensions for two reasons. First, the analytical link between payment size and competitive harm is far weaker than the economic model providing its rationale presumes. Second, the benchmark ignores the error costs associated with “forgone innovation due to the reduced incentives from erroneous invalidation of patents and the in terrorem settlements paid to avoid that outcome.”

At the heart of IP antitrust policy is the notion that efficiency requires tradeoffs between the use of IPRs and their creation, Wright noted. It is a classic tradeoff in nearly every competition policy discussion between the gains from the use of innovation and the incentive to innovate. To ignore the costs of foregone innovation is the antithesis of the purposes of both antitrust and patent laws. The FTC and Department of Justice’s IP Guidelines summarize this concept, stating that the intellectual property laws establish enforceable property rights, the absence of which would permit imitators to exploit the IP holders’ efforts, which in turn reduces the commercial value of the IPRs and the incentives to invest in innovation to obtain them, according to Wright.

Wright concluded by noting “we should be extremely wary of adopting an antitrust rule so inconsistent with competition policy and so disjointed from the competitive effects of the challenged restraint.” For reverse payment settlements and IPRs generally, the rule of reason is the most appropriate analysis unless judicial and economic experience suggest a truncated analysis minimizes the error costs associated with its application.

News: Antitrust FederalTradeCommissionNews