It is so often said that a patent is a grant of a monopoly power that one cannot be blamed for repeating or even believing this maxim.1 Both for historical and rhetorical reasons it is easy to call patents monopolies,2 but as Professor Stephen Yelderman points out in his paper, they are not always so, and in fact nearly always are not so. Yet, the moniker has stuck. And while inaccurate terminology is ubiquitous, the loose use of terminology can (and in the case of patents does) lead to legal conclusions that are flawed if not outright specious.
It is a basic tenet of economics that monopolies are often detrimental to consumers because they allow monopolists to extract excess rents from the consumer.3 In other words, in a competitive world, a consumer would pay less for a product than in a monopolistic world, because in the former one, different firms would compete with each other for the consumers’ business and attract consumers by cutting prices, while in the latter one, the consumer will pay whatever price the monopolist sets.4 It therefore follows that if patents are indeed monopolies, then the abolition of patents would permit a (more) competitive market and therefore would lead to lower consumer prices.5 The logic is unassailable, but only if the premise is correct. If, on the other hand, patents are not monopolies, then removing patents from the equation may not necessarily lead to any consumer benefit.
To an untrained eye patents do indeed look like monopolies. A patentee receives an exclusive right to “make[ ], use[ ], offer[ ] to sell, or sell[ ] . . . or import[ ] into the United States” the invention covered by the patent grant.6 By definition then, the grant of a patent forbids others from selling the same product as the patentee,7 thus supposedly making a monopolist out of the patentee. However, as any student of antitrust law knows, monopolies are not a function of whether a single entity is the only one on the market selling a product, but whether that single entity has market power.8 As the saying goes, a patent is a reward for having built a “better mousetrap.”9 However, just because one has built a better mousetrap, it does not follow that he can charge whatever price he wishes, for if the price for that new mousetrap is exorbitant, a consumer may simply revert back to the old mousetrap, or just get a cat.10 The availability of such alternatives means that the patentee does not in fact have market power and therefore is not a monopolist.11 This basic argument is not novel, and yet, it is often overlooked by courts and commentators alike when they discuss patents as a barrier (though perhaps a necessary one) to competition.12
In his article, Yelderman masterfully shows that the received wisdom that patent invalidation leads to more competition is simply false in a vast variety of cases because in a vast variety of cases patents simply do not confer monopoly power on the patentee.13 As Yelderman explains, his article “scrutinize[s] 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.”14 Among the conditions that Yelderman identifies are the following: (1) the challenged patent confers market power—that is, few alternatives to the patented product are available;15 (2) the challenge will reduce that power—that is, no other patents or other barriers such as trade secrets would continue to exist;16 (3) the patent challenge is timely—that is, the dispute arises and is resolved some significant period of time before the patent would have expired anyway;17 and (4) the challenge is successful.18
In short, according to Yelderman, absent multiple conditions a patent challenge or even invalidation may have no effect on the market and no benefit for consumers. Consequently, settling patent cases in a way that preserves the patents (and potentially insulates them from further challenges) is not detrimental to consumers unless the specified conditions are met.
There is little to disagree with in Yelderman’s basic argument, except perhaps to note that it in fact understates the issue, for litigation over patents doesn’t usually invalidate patents as a whole, but rather addresses itself to specific patent claims.19 Thus, even in situations in which a challenger manages to prevail in litigation, absent complete victory over all relevant claims, the effect on the market would be negligible at best.20 Ultimately though, while I don’t disagree with Yelderman’s argument on its own terms, I wish to challenge some of the implied assumptions of his article. Yelderman’s argument proceeds from the premise that patents are a barrier (albeit often a justified one) to competition. Having accepted that assumption, Yelderman argues that patent challenges can provide an appreciable benefit to consumers if the patent in question is the sole barrier to market entry. Conversely, patent challenges are of no consequence when other barriers continue to exist. In this Response, I intend to show that the initial premise—that patents are a barrier to competition—is not to be easily assumed, and that therefore the conclusion that patent challenges provide a benefit to consumers is not necessarily true even in the absence of other, nonpatent barriers to entry.
In Part I of this Response, I discuss the general theories of patent and antitrust laws and how the two regimes interact. I begin with the discussion of the “traditional” view of patents as an “exception” to antitrust’s strictures, and will then move to explain how that approach fails to take into account market dynamism. Part II applies the generalized discussion of Part I to the specific case of pharmaceutical markets and the settlements between brand-name and generic drug manufacturers. For Yelderman, this specific case of patent challenges offers perhaps the best example of how concluded patent litigation increases competition and increases consumer welfare. I, on the other hand, endeavor to show that the landscape is far more complex and that settlements that do not result in conclusive adjudication of patent rights may well be just as, or perhaps more, beneficial to the consumers.
- 1. See, for example, Bowman v Monsanto Co, 133 S Ct 1761, 1766 (2013); Dawson Chemical Co v Rohm & Haas Co, 448 US 176, 215 (1980); Morton Salt Co v G.S. Suppiger Co, 314 US 488, 492 (1942), revd Illinois Tool Works Inc v Independent Ink, Inc, 547 US 28 (2006).
- 2. See Adam Mossoff, Rethinking the Development of Patents: An Intellectual History, 1550–1800, 52 Hastings L J 1255, 1255 (2001) (“The history of patents does not begin with inventions, but rather with royal grants by Queen Elizabeth (1558-1603) for monopoly privileges that advanced her economic and industrial policies.”).
- 3. See Edmund H. Mantell, Conglomerate Mergers, Allocative Efficiency, and Section 7 of the Clayton Act, 56 Tex L Rev 207, 227 (1978).
- 4. Id.
- 5. See Stephen Yelderman, Do Patent Challenges Increase Competition?, 83 U Chi L Rev 1943, 1951–52 (2016).
- 6. 35 USC § 271(a).
- 7. 35 USC § 271(a).
- 8. See, for example, US Anchor Manufacturing, Inc v Rule Industries, Inc, 7 F3d 986, 994–95 (11th Cir 1993); State Oil Co v Khan, 522 US 3, 18 (1997).
- 9. Timothy R. Holbrook, The More Things Change, the More They Stay the Same: Implications of Pfaff v Wells Electronics, Inc and the Quest for Predictability in the On-Sale Bar, 15 Berkeley Tech L J 933, 935 (2000).
- 10. See Donald S. Chisum, et al, Principles of Patent Law 61 (3d ed 2004).
- 11. Id. In addition, measures of market power rely on the degree of substitution feasible.
- 12. See, for example, Bilski v Kappos, 561 US 593, 656 (2010) (Stevens concurring) (“Of course, patents always serve as a barrier to competition for the type of subject matter that is patented.”).
- 13. See Yelderman, 83 U Chi L Rev at 1963 (cited in note 5). Yelderman’s article focuses on patent challenges rather than invalidations, but, of course, a failed challenge, while useful in some respects, only reconfirms (and possibly increases) whatever power the patentee already had. See, for example, Gregory Dolin, Dubious Patent Reform, 56 BC L Rev 881, 908–09 (2015); Doug Lichtman and Mark A. Lemley, Rethinking Patent Law’s Presumption of Validity, 60 Stan L Rev 45, 72 n 59 (2007) (noting that “fact-finders might find themselves inclined to defer to the decisions of other fact-finders”). Thus, this response focuses on whether litigation that culminates in the finding of invalidity or non–infringement enhances competition more than settlements that preserve (in whole or in part) the patentee’s exclusive rights.
- 14. Yelderman, 83 U Chi L Rev at 1943 (cited in note 5).
- 15. Id at 1959–72.
- 16. Id at 1972–79.
- 17. Id at 1979–93.
- 18. Yelderman, 83 U Chi L Rev at 1993–95 (cited in note 5).
- 19. See John R. Allison and Starling D. Hunter, On the Feasibility of Improving Patent Quality One Technology at a Time: The Case of Business Methods, 21 Berkeley Tech L J 729, 748 (2006).
- 20. See id.