The Rule of Reason and the Scope of the Patent
40 Pages Posted: 3 Sep 2014 Last revised: 3 Nov 2015
Date Written: November 2, 2015
For a century and a half the Supreme Court has described perceived patent abuses as conduct that reaches "beyond the scope of the patent." That phrase, which evokes an image of boundary lines in real property, has been applied to both government and private activity and has many different meanings. It has been used offensively to conclude that certain patent uses are unlawful because they extend beyond the scope of the patent. It is also used defensively to characterize activities as lawful if they do not extend beyond the patent's scope. In the first half of the twentieth century the phrase was imported from patent law into antitrust law, where it continues to be used to assess license agreements or other arrangements involving patents, as well as settlements of patent infringement cases.
While the "scope of the patent" metaphor might remain useful for assessing conduct thought to be inconsistent with patent law, it is generally not a helpful antitrust tool. Offensive antitrust use of the scope of the patent test often identified practices as anticompetitive when they were in fact competitively harmless. By contrast, defensive antitrust use of the scope of the patent formulation creates a patent silo that protects collusion or anticompetitive exclusion from antitrust scrutiny. The result limits adversity between a patentee and potential licensee or infringer, producing a socially costly collusive equilibrium that benefits the parties but harms consumers.
A pervasive problem of the scope of the patent test is that it confuses patent value with product value. For example, both product price fixing and product market division agreements contained in patent licenses have been found to fall within the scope of the patent. If the price fix or market division lasts no longer than the duration of the patent, then it is no more harmful to customers than a patentee's simple solo production under its patent.
Recognizing this, several courts have concluded that product price fixes should be unlawful under the antitrust laws only if the patents involved are likely to be invalid, making the patent license nothing more than a cover for collusion. The important question is not patent validity, however, but rather patent value. Many perfectly valid patents have little value because they add little to a licensee's technology, or alternative patents or technological routes exist that serve the same purpose. Further, this phenomenon is ubiquitous. Cartel markups in industries prone to collusion run in the range of 20% to 50% over the pre-cartel price. By contrast, average royalty rates on licensed patents average around 3%, and this value is much larger than the value of the great majority of patents that are never licensed. The real problem of product restraints in patent licenses is that they are attempts to attribute the full product cartel markup to the patents being licensed. Only a tiny percentage of patents do anything like that.
A better rule for identifying the boundaries of antitrust liability than the scope of the patent formulation permits antitrust intervention in the case of post-issuance patent conduct that is not explicitly authorized by the Patent Act. Of course, only a relatively small proportion of such conduct will actually violate the antitrust laws. With immunity off the table, however, assessing the competitive and innovation effects of challenged practices involves questions of antitrust law, not of patent law. Seen this way, certain questions such as a pioneer patentee's agreement to refrain from entering the market with an authorized generic become fairly easy. Such agreements are nothing more than cartel arrangements under which a firm agrees to make another firm's production more profitable by restraining its own output. Under the scope of the patent test as the Actavis dissenters would have applied it the equilibrium period of delay is up to the expiration date of the patent. In that case, however, the agreement never involves a license at all. During the life of the patent the generic firm produces nothing, and once the patent expires it no longer needs a license.
Outside of damages measurement, patent law has no tool kit for assessing either the market or even the innovation effects of a particular practice. While that criticism may seem harsh, the reality is that patent law has developed in relative isolation from any significant inquiry into how patents function in the marketplace. The result gives antitrust policy a comparative advantage, not only for assessing competition effects but ironically, even for assessing innovation effects.
Keywords: antitrust, patents, actavis, settlements, licenses, price-fixing, market division, authorized generics
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