As a general rule, judges and scholars believe settlement is a good thing. But for nearly a century, the Supreme Court has said that patent litigation is categorically different, since it offers the chance to increase competition by freeing the public from the burdens of a monopoly. Based on this theory, and in the hopes of seeing more patent litigation fought to completion, the Court has overturned long-standing common-law doctrines, declined to enforce otherwise-valid contracts, and—in the recent case of Federal Trade Commission v Actavis, Inc—subjected patent settlements to scrutiny under the antitrust laws. Similar reasoning has resulted in legislative initiatives to encourage patent challenges, including the regulatory bounty for challenging pharmaceutical patents included in the 1984 Hatch-Waxman Act and the administrative review procedures created by the 2011 America Invents Act. Moreover, scholars continue to call for reforms to provoke additional patent challenges, again asserting their supposed procompetitive benefits.

This Article is the first to seriously scrutinize the claim that patent challenges lead to increased competition. It identifies a number of conditions that must hold for a patent challenge to provide this particular benefit, and evaluates the reasonableness of assuming that the procompetitive benefits of patent challenges are generally available. As it turns out, there are a number of ways these conditions can and regularly do fail. This Article synthesizes legal doctrine, recent empirical scholarship, and several novel case studies to identify categories of challenges in which the potential benefits for competition are smaller than previously thought or, in some cases, completely unavailable.

This analysis has a number of implications for patent law and policy. First, it provides guidance for how the Patent Office should administer its new review authority under the America Invents Act. Second, it exposes weaknesses in judicially created policies intended to encourage more patent challenges. Third, it vindicates the present scope of the regulatory bounties provided under the Hatch-Waxman Act and cautions against recently proposed expansions of these incentives to other technology areas. Fourth, it sheds new light on the competitive consequences of patent settlements, and thus informs how the Court’s recent Actavis decision should be applied in future cases.

Introduction

"If there be an issue more troublesome, or more apt for litigation than this, we are not aware of it." Judge Learned Hand1

As a general rule, courts and commentators agree that settlement is a good thing. As the Advisory Committee on Rules of Civil Procedure has observed, settlement “eases crowded court dockets and results in savings to the litigants and the judicial system,” and so “should be facilitated at as early a stage of the litigation as possible.”2 While some have argued otherwise,3 the prevailing view today is that the costs of litigation typically outweigh its advantages, and that litigants should be allowed—encouraged, even—to resolve their differences as swiftly as possible.4

But patent litigation is different. Alone among the many civil causes one might think produce public benefits—such as environmental litigation, First Amendment challenges, RICO suits, and so on—patent disputes are the class of civil litigation singled out by courts as requiring a departure from the ordinary principle of encouraging settlement.5 Why? Because, as the Supreme Court explained in 1945, “a patent is an exception to the general rule against monopolies and to the right to access to a free and open market.”6 As such, patent litigation implicates the public’s “paramount interest” in ensuring that patents are “free from fraud or other inequitable conduct and that such monopolies are kept within their legitimate scope.”7

In other words, patent litigation is special because it has the potential to scuttle monopolies and open markets, benefitting not just the prevailing party in a given suit, but consumers and competitors throughout the economy. This view is deeply intuitive and has been the basis for a number of judicial and legislative enactments to increase the number of patent challenges brought to fruition. By 1971, the Court had consciously recognized a line of decisions aimed at “encourag[ing] authoritative testing of patent validity,”8 and, in more recent years, has continued to root decisions in the “strong public interest” found in the adjudication of patent rights.9 Following this doctrine, a number of courts have refused to enforce—and declared federally preempted—otherwise-valid contracts that might impair a party’s incentives or ability to bring a patent challenge.10 And, in the 2013 case Federal Trade Commission v Actavis, Inc,11 the Supreme Court declared that settlement itself can sometimes run afoul of the antitrust laws, again citing the potential for patent litigation to benefit the public through increased competition.12

Congress, too, has taken steps to encourage parties to contest the validity and scope of patent rights. For example, a central feature of the Drug Price Competition and Patent Term Restoration Act of 198413 (the Hatch-Waxman Act) was a regulatory bounty system designed to incentivize generics to challenge more pharmaceutical patents.14 More recently, the 2011 Leahy-Smith America Invents Act15 (AIA) created new administrative procedures designed to encourage the testing of patent validity by enabling earlier, faster, and cheaper patent challenges.16 And Congress continues to consider other substantive and procedural mechanisms designed with the specific goal of stimulating more patent litigation.17

Prior scholarly work in the area has largely taken these benefits as given, and has instead focused on the question whether private actors will have the incentives to bring patent challenges in sufficient numbers.18 Overwhelmingly, commentators have concluded that the answer is “no,” and have in turn proposed a variety of interventions to encourage additional patent challenges—such as bounties,19 expanded standing rules,20 fee-shifting,21 and other reforms.22 Like Congress and the courts, scholars have focused almost exclusively on the question of how to incentivize more patent challenges, without exploring the conditions necessary for these challenges to bestow their supposed benefits on the public.

This Article tests the long-held premise that patent challenges lead to increased competition. A careful examination of the theory reveals multiple unstated assumptions that have not been previously identified or scrutinized. To increase competition, a challenge must be directed at a patent that is a but-for cause of market power. The challenge must be timely. And it must be successful. When any of these conditions fails, the commonly presumed conclusion that challenges increase competition no longer holds. And, problematically, there are a number of ways these conditions can and regularly do fail. This Article draws on a combination of legal doctrine, recent empirical work, and several case studies to illustrate the difficulties with assuming that the possibility of increasing competition is consistently available in every patent challenge. As it turns out, there are entire categories of cases in which the possibility of increasing competition is small, and even some cases in which it cannot happen at all.

At the same time, this analysis also reveals categories of cases in which the conditions necessary for a challenge to increase competition are usually present. The most conspicuous example is challenges to pharmaceutical patents under the Hatch-Waxman Act.23 Various features of prescription drug markets and the attendant regulatory regime ensure that the conditions necessary for a challenge to increase competition will often be present in these cases. This may partially explain why these conditions have been so frequently assumed: much of the recent case law and scholarship addressing the competitive effects of patent challenges was crafted with Hatch-Waxman litigation squarely in the foreground.24 But, in a number of ways that matter for competition, these cases are not typical of patent litigation in general. Many assumptions that are reasonable in the Hatch-Waxman context are doubtful in other contexts, though courts and commentators are not always mindful of this distinction.25

To be clear, this Article does not conclude that Hatch-Waxman challenges always increase competition or that other challenges never do. Determining whether a challenge is likely to increase competition requires a detailed, case-specific inquiry, and there is no simple, bright-line rule that can substitute for this analysis. This Article also does not develop a position as to whether there is too much or too little patent litigation in general—there are, after all, other benefits that could potentially come from patent litigation.26 But it does argue that the existence of identifiable circumstances in which patent challenges are unlikely to have a significant effect on competition presents both complication and opportunity. If increasing competition by scrutinizing patent rights is indeed a desirable goal—and there is no reason to think it isn’t—that goal may be better served by focusing resources on those challenges in which the conditions necessary to increase competition are in fact present.

To these ends, this Article presents a number of policy implications spanning the judicial, administrative, and legislative domains. For example, this analysis yields important guidance for how the Patent Office should implement its new authority to review issued patents under the AIA.27 It also exposes flaws in judicially created policies intended to encourage more patent challenges.28 It sheds new light on the competitive consequences of patent settlements and thus informs how the 2013 Supreme Court decision Actavis should be applied in future cases.29 And it provides a framework for evaluating the various reforms scholars have proposed to incentivize patent litigation.30

This Article proceeds in four parts. Part I introduces several plausible reasons why patent litigation might be more valuable than other forms of litigation and contextualizes the particular theory that is the focus of this Article—that patent challenges increase competition. Part II explores this theory in more detail, identifying and evaluating several previously unstated assumptions implicit in that theory. Part III presents a number of implications of the prior analysis. The final Part concludes.

  • 1. Harries v Air King Products Co, 183 F2d 158, 162 (2d Cir 1950).
  • 2. FRCP 16(c), Advisory Committee Note to the 1983 Amendments.
  • 3. See, for example, Owen M. Fiss, Against Settlement, 93 Yale L J 1073, 1075 (1984); Leandra Lederman, Precedent Lost: Why Encourage Settlement, and Why Permit Non-party Involvement in Settlements?, 75 Notre Dame L Rev 221, 222–23 (1999).
  • 4. See Wygant v Jackson Board of Education, 476 US 267, 305 (1986) (Marshall dissenting) (“[C]ivil rights litigation is no exception to the general policy in favor of settlements.”); United States v Davis, 261 F3d 1, 27 (1st Cir 2001), quoting United States v Comunidades Unidas contra la Contaminacion, 204 F3d 275, 280 (1st Cir 2000) (observing a “strong public policy in favor of settlements, particularly in very complex and technical regulatory contexts”); Doe v Delie, 257 F3d 309, 322 (3d Cir 2001) (“The law favors settlement, particularly in class actions and other complex cases, to conserve judicial resources and reduce parties’ costs.”); Flex–Foot, Inc v CRP, Inc, 238 F3d 1362, 1369 (Fed Cir 2001), quoting Hemstreet v Spiegel, Inc, 851 F2d 348, 350 (Fed Cir 1988) (“[T]here is a compelling public interest and policy in upholding and enforcing settlement agreements voluntarily entered into because enforcement of settlement agreements encourages parties to enter into them—thus fostering judicial economy.”) (quotation marks omitted); Lederman, 75 Notre Dame L Rev at 222 (cited in note 3) (summarizing reasons for preferring settlement).
  • 5. See Federal Trade Commission v Actavis, Inc, 133 S Ct 2223, 2239 (2013) (Roberts dissenting) (“[The parties’ patent settlement] put an end to litigation that had been dragging on for three years. Ordinarily, we would think this a good thing.”). For discussion of the public interest in patent litigation, see Pope Manufacturing Co v Gormully, 144 US 224, 233–36 (1892); Standard Water Systems Co v Griscom–Russell Co, 278 F 703, 705 (3d Cir 1922); Kellogg Co v National Biscuit Co, 305 US 111, 122 (1938); Aero Spark Plug Co v B.G. Corp, 130 F2d 290, 293 (2d Cir 1942) (Frank concurring); Mercoid Corp v Mid-continent Investment Co, 320 US 661, 666 (1944); United States v United States Gypsum Co, 333 US 364, 387–88 (1948); Hieger v Ford Motor Co, 516 F2d 1324, 1327 (6th Cir 1975); Schlegel Manufacturing Co v USM Corp, 525 F2d 775, 781 (6th Cir 1975); Cardinal Chemical Co v Morton International, Inc, 508 US 83, 100 (1993); Benitec Australia, Ltd v Nucleonics, Inc, 495 F3d 1340, 1350 (Fed Cir 2007) (Dyk dissenting); Medtronic, Inc v Mirowski Family Ventures, LLC, 134 S Ct 843, 851–52 (2014).
  • 6. Precision Instrument Manufacturing Co v Automotive Maintenance Machinery Co, 324 US 806, 816 (1945). For an earlier statement to similar effect, see Pope Manufacturing, 144 US at 234 (“It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.”).
  • 7. Precision Instrument Manufacturing, 324 US at 816.
  • 8. Blonder-Tongue Laboratories, Inc v University of Illinois Foundation, 402 US 313, 344 (1971).
  • 9. See, for example, Cardinal Chemical, 508 US at 100; Medtronic, 134 S Ct at 851–52.
  • 10. See, for example, Lear, Inc v Adkins, 395 US 653, 674–75 (1969); Warner–Jenkinson Co v Allied Chemical Corp, 567 F2d 184, 188 (2d Cir 1977); Atlas Chemical Industries, Inc v Moraine Products, 509 F2d 1, 6 (6th Cir 1974); Panther Pumps & Equipment Co v Hydrocraft, Inc, 468 F2d 225, 230–32 (7th Cir 1972); Massillon–Cleveland–Akron Sign Co v Golden State Advertising Co, 444 F2d 425, 427 (9th Cir 1971). See also Edward Katzinger Co v Chicago Metallic Manufacturing Co, 329 US 394, 401–02 (1947) (holding that a party is not estopped from challenging a patent’s validity despite a contractual covenant to refrain from doing so); Beckman Instruments, Inc v Technical Development Corp, 433 F2d 55, 62 (7th Cir 1970), abrogated by Act of Aug 27, 1982 § 17, Pub L No 97-247, 96 Stat 317, 322 (refusing to enforce an arbitration provision for a patent validity claim).
  • 11. 133 S Ct 2223 (2013).
  • 12. Id at 2234–36. Similar judicial reasoning has shaped the law in other ways as well. See, for example, Cardinal Chemical, 508 US at 99–101 (requiring the Federal Circuit to reach questions of validity even when a case could be disposed of on other grounds); Sinclair & Carroll Co v Interchemical Corp, 325 US 327, 330 (1945) (giving similar guidance to district courts); Bulldog Electric Products Co v Westinghouse Electric Corp, 162 F2d 994, 997 (2d Cir 1947) (reaching the validity question despite the plaintiff’s unclean hands); Crane Co v Aeroquip Corp, 356 F Supp 733, 739 (ND Ill 1973); Business Forms Finishing Service, Inc v Carson, 452 F2d 70, 74 (7th Cir 1971); Broadview Chemical Corp v Loctite Corp, 474 F2d 1391, 1395 (2d Cir 1973).
  • 13. Pub L No 98-417, 98 Stat 1585.
  • 14. See Joseph Scott Miller, Building a Better Bounty: Litigation-Stage Rewards for Defeating Patents, 19 Berkeley Tech L J 667, 724–25 (2004) (explaining the operation of this provision); Generic Drug Entry prior to Patent Expiration: An FTC Study *4–5 (FTC, July 2002), archived at http://perma.cc/RBP7-RZD4 (“FTC Generic Drug Study”).
  • 15. Pub L No 112-29, 125 Stat 284 (2011), codified at 35 USC § 100 et seq.
  • 16. See Gregory Dolin, Dubious Patent Reform, 56 BC L Rev 881, 909–20 (2015) (describing these new procedures); HR Rep No 112-98, 112th Cong, 1st Sess 78 (2011) (“America Invents Act Report”); Joe Matal, A Guide to the Legislative History of the America Invents Act: Part II of II, 21 Fed Cir Bar J 539, 599–604 (2012) (summarizing the legislative history); Cuozzo Speed Technologies, LLC v Lee, No 15-446, slip op at 16–17 (US June 20, 2016) (discussing the purposes of the AIA amendments).
  • 17. See, for example, Innovation Act, HR 3309, 113th Cong, 1st Sess 6 (Dec 9, 2013) (including an attorney’s fee–shifting provision); HR Rep No 113-279, 113th Cong, 1st Sess 21 (2013) (“Innovation Act Report”) (explaining that attorney’s fee–shifting would encourage patent challenges). See also generally Demand Letters and Consumer Protection: Examining Deceptive Practices by Patent Assertion Entities, Hearing before the Subcommittee on Consumer Protection, Product Safety, and Insurance of the Committee on Commerce, Science, and Transportation, United States Senate, 113th Cong, 1st Sess (2013) (evaluating mechanisms to encourage more patent challenges).
  • 18. See, for example, John R. Thomas, Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties, 2001 U Ill L Rev 305, 333; Roger D. Blair and Thomas F. Cotter, Are Settlements of Patent Disputes Illegal Per Se?, 47 Antitrust Bull 491, 526 (2002); Maureen A. O’Rourke and Joseph F. Brodley, An Incentives Approach to Patent Settlements: A Commentary on Hovenkamp, Janis & Lemley, 87 Minn L Rev 1767, 1777–78 (2003); Miller, 19 Berkeley Tech L J at 674 & n 24 (cited in note 14); Joseph Farrell and Robert P. Merges, Incentives to Challenge and Defend Patents: Why Litigation Won’t Reliably Fix Patent Office Errors and Why Administrative Patent Review Might Help, 19 Berkeley Tech L J 943, 946 (2004); Mark A. Lemley and Carl Shapiro, Probabilistic Patents, 19 J Econ Persp 75, 88–89 (Spring 2005); Brian J. Love, The Misuse of Reasonable Royalty Damages as a Patent Infringement Deterrent, 74 Mo L Rev 909, 941–43 (2009); Michael Risch, Patent Challenges and Royalty Inflation, 85 Ind L J 1003, 1022 (2010); Megan M. La Belle, Patent Law as Public Law, 20 Geo Mason L Rev 41, 65–66 (2012); Gideon Parchomovsky and Alex Stein, Intellectual Property Defenses, 113 Colum L Rev 1483, 1518 (2013); Anup Malani and Jonathan S. Masur, Raising the Stakes in Patent Cases, 101 Georgetown L J 637, 656–57 (2013); Roger Allan Ford, Patent Invalidity versus Noninfringement, 99 Cornell L Rev 71, 113 (2013); Michael J. Burstein, Rethinking Standing in Patent Challenges, 83 Geo Wash L Rev 498, 500, 543 (2015); Alan D. Miller and Michal S. Gal, Licensee Patent Challenges, 32 Yale J Reg 121, 135–37, 143–45 (2015); Timothy R. Holbrook, The Supreme Court’s Quiet Revolution in Induced Patent Infringement, 91 Notre Dame L Rev 1007, 1033–39 (2016) (suggesting that recent developments in the law of indirect liability do not adequately encourage patent challenges).
  • 19. See Miller, 19 Berkeley Tech L J at 705 (cited in note 14); Malani and Masur, 101 Georgetown L J at 672 (cited in note 18).
  • 20. Burstein, 83 Geo Wash L Rev at 544–46 (cited in note 18); Robert C. Dorr, Note, Patent Law—Patent Validity: The Public Is the Third Party, 51 Denver L J 95, 98 (1974).
  • 21. Jay P. Kesan, Carrots and Sticks to Create a Better Patent System, 17 Berkeley Tech L J 763, 795–97 (2002).
  • 22. Ford, 99 Cornell L Rev at 118–26 (cited in note 18); Farrell and Merges, 19 Berkeley Tech L J at 967 (cited in note 18).
  • 23. Several other examples are discussed throughout this Article.
  • 24. Within the last decade, the antitrust treatment of reverse-payment settlements in Hatch-Waxman litigation generated a circuit split, hundreds of law review articles (easily found through a search for “reverse /s settlement /s payment & Hatch-Waxman” in Westlaw’s JLR database), and, ultimately, a Supreme Court opinion. See Parts III.C–D. Still, this is at best a partial explanation, since the presumption that patent challenges increase competition predates the 1984 Hatch-Waxman Act by decades. See notes 5–6 and accompanying text.
  • 25. See Part III.D (discussing Actavis and commentary).
  • 26. See Part I.C.
  • 27. See Part III.A.
  • 28. See Part III.B.
  • 29. See Part III.D.
  • 30. See Part III.C.