Antitrust counterclaims are going to be more difficult to prove in patent cases as a result of the Supreme Court’s recent ruling that all court challenges to the validity of a patent must be proved by clear and convincing evidence.

In Microsoft v. i4i Partnership, the Court held that although the Patent Act is silent on the standard of review that courts should apply to patent defenses based on invalidity, the common law standard of “clear and cogent evidence” must apply. 

The plaintiff is i4i, a software company that sued Microsoft for infringement of a software patent.  Microsoft argued that i4i should not have received a patent in the first place because the invention claimed in the patent was in use more than a year before the patent application, in another i4i software program that wasn’t disclosed to the Patent and Trademark Office (the “PTO”).  Microsoft’s evidence was disputed and uncertain because the source code for the earlier program had been lost.  The Supreme Court affirmed the long-held position of the Court of Appeals for the Federal Circuit and held that the clear and convincing evidence standard applies to all invalidity defenses.

The court also rejected Microsoft’s alternate argument that a lower (preponderance of the evidence) standard should apply when the patent plaintiff failed to disclose material information to the patent examiner.  Although the court ruled that nothing in the statute or prior cases justified a variable standard of proof, it also held that new evidence that the PTO didn’t consider should be given more weight in deciding whether to invalidate a patent.

Supporters of Microsoft argued in amicus briefs that the PTO faces a shortage of skilled patent examiners while applications have proliferated, and that internal rules favor granting a patent if an examiner is unaware of prior art or other factors that might sink an application.  They asserted that considering the limited time and information available to examiners, the presumption that an issued patent is valid is weak and should not require a heavy burden to overcome.  In that sense, the Supreme Court’s decision can be seen as a missed opportunity to align the law with the administrative reality of the patent examination process.

A likely consequence of the Court’s ruling is that antitrust claims based on enforcement of an invalid patent will become harder to bring.

A defendant in a patent suit may bring an antitrust counterclaim, alleging that the patent holder is litigating an invalid patent to gain monopoly power that is not actually justified by the patent laws.  But the defendant must overcome the Noerr-Pennington doctrine, which provides First Amendment protection to litigation unless the litigation is a sham.  In patent suits, showing that the patent is invalid is the most common way of establishing that the litigation is a sham and that the patent holder can be liable for an antitrust violation.  By establishing a universally high standard of proof for patent invalidity, the Supreme Court has also raised the hurdle for a successful antitrust counterclaim.

Patent holders seeking to settle patent infringement cases are breathing a little easier today as a result of yesterday’s decision by the Supreme Court not to review the ruling of the Second Circuit Court of Appeals in Arkansas Carpenters Health and Welfare Fund v. Bayer AG (In re Ciprofloxacin Hydrochloride Antitrust Litig.), 05-2851-cv(L) (2d Cir. 2010) (“Cipro”).

The Supreme Court thereby leaves undisturbed the Second Circuit’s rule that payments by brand name pharmaceutical companies to generics in settlement of patent infringement litigation – pursuant to which the allegedly infringing generic agrees not to market its drug product prior to patent expiration – do not violate the antitrust laws unless the patent holder procured the patent by fraud on the Patent and Trademark Office or brought a baseless patent infringement lawsuit.

Notwithstanding a three-way split on this issue among federal courts of appeals, the Supreme Court was unpersuaded by petitioners’ argument to hear the case because such settlements allegedly cost government agencies and consumers billions of dollars per year in the form of higher drug prices.

The Cipro defendants argued that the issue was one of patent law, not antitrust law, and therefore the Supreme Court should not disturb the Second Circuit’s ruling on antitrust grounds.  The Supreme Court apparently accepted the defendants’ argument, although it gave no reasons for denying review.

In January, 32 state attorneys general filed an amicus brief in the U.S. Supreme Court, urging the Court to hear and overturn Arkansas Carpenters Health and Welfare Fund v. Bayer AG (In re Ciprofloxacin Hydrochloride Antitrust Litig.), 05-2851-cv(L) (2d Cir. 2010) (“Cipro”).  In Cipro, the Second Circuit affirmed its legal standard governing so-called “reverse payments,” which are payments by a brand name drug manufacturer to a generic drug manufacturer in settlement of patent infringement litigation brought by the brand name manufacturer against the generic.  In exchange, the generic agrees not to market its allegedly infringing product.  Because the generic product has yet to be marketed, the generic does not face the risk of paying damages if its product is found to infringe.   

The Second Circuit affirmed its previous holdings that such settlements do not constitute a per se antitrust violation, and that patent settlements are presumptively lawful (unless the patent holder procured the patent by fraud on the Patent and Trademark Office or brought a baseless patent infringement lawsuit).  The state AGs argue in their brief that such settlements cost government agencies and consumers billions of dollars per year in the form of higher drug prices, and that “[m]aintaining open competition in pharmaceutical markets is critical to the States’ ability to provide drugs to their consumers at a reasonable cost, and to control escalating drug costs that threaten to swamp already strained budgets.”  Further, “the legal standard as to reverse payment agreements is subject to widely differing interpretations and results, [and] State antitrust enforcers need clear guidance.” 

The defendants opposed the plaintiffs’ petition for certiorari and the attorneys general’s brief, stating that it was principally a patent case that did not involve “any claims under federal antitrust laws,” thereby presenting “a poor vehicle for” the Supreme Court “to construe those laws.”  The defendants further argue that the “petitioners’ rhetoric about the importance of competition is out of place with respect to competition within the scope of a patent, which by definition grants an inventor freedom from competition within that limited scope for a limited time, in order to promote and reward invention.”

For a detailed discussion of the Cipro case, see this blog’s prior entries on the Second Circuit’s opinions.

The Supreme Court case docket is No. 10-762.

An article detailing the history of reverse-payment antitrust litigation is available here.

An antitrust violation involving a patent is not necessarily a defense in a patent infringement suit, the U.S. Court of Appeals for the Federal Circuit has ruled in Princo v. ITC.

In its third opinion in the long-running Princo case, the court rejected recordable CD manufacturer Princo’s argument that an agreement between two firms to market one firm’s patent and suppress the other renders the patent that was marketed unenforceable under the “patent misuse” defense – even if the agreement violates the Sherman Act.

Both Sony and Philips, key members of the consortium that developed the recordable CD (CD-R) standard, own patents on a method of encoding position information on a CD-R. Both patents are included in the bundle licensed by the consortium, but only Philips’s patent is actually used.

When Philips sued Princo for infringement of various patents, Princo raised the patent misuse defense, which can block the enforcement of a patent when the patent holder uses its patent in an anticompetitive way.

The classic examples of patent misuse are where a patent holder ties licenses to use a patented product to a promise to use unpatented supplies, or where a patent holder makes licensees promise to honor the patent beyond its expiration date.  Princo’s theory was different.  It claimed that if Sony and Philips agreed to market Philips’s patent as part of the CD-R standard and keep Sony’s patent on the shelf – an illegal agreement not to compete – Philips’s patent became unenforceable because of patent misuse.

In a review by 10 judges of the Federal Circuit, a majority of six found that Sony and Philips’s agreement, if proven, would not be patent misuse, even if it constituted a Sherman Act violation.

Judge Bryson, writing for the majority, said that misuse is limited to situations where a patent holder leverages his patent rights against licensees to gain additional benefits that the patent doesn’t guarantee – analogous to a tying claim.  An agreement between two patent holders not to compete, said the court, is not the same as leveraging a patent.  It may be the basis for an antitrust counterclaim, but it is no defense against patent infringement.

A federal judge has denied General Electric Company’s request to pull the plug on Mitsubishi Heavy Limited’s potential billion-dollar case alleging GE has tried to snuff out competition in the wind turbine market.

United States District Court Judge J. Leon Holmes in Fayetteville, Arkansas, has denied GE’s motion to dismiss an attempted monopolization case brought by Mitsubishi.  Mitsubishi alleges that GE seeks to monopolize the market for variable-speed wind turbines in the United States through a pattern of “sham” patent litigation and other methods. 

However, the Judge did grant GE’s request to stay discovery in the case until the GE patent infringement claims against Mitsubishi have been resolved.  As Judge Holmes explained, “If GE prevails in any of the infringement actions, then Mitsubishi’s claims in this action will be moot because GE will have the right to exclude Mitsubishi from the market” pursuant to GE’s patent claims. 

Mitsubishi is seeking damages that could exceed $1 billion.  Mitsubishi filed its attempted monopolization claim in this case against GE on May 10, 2010.

The case is the latest in a series of acrimonious episodes between the two heavyweights over the growing U.S. market for wind turbines.  Mitsubishi is on track to build a turbine assembly plant in Fort Smith, Arkansas.  Mitsubishi has been battling GE over patent claims since 2008.

Sonia Williams, a Mitsubishi Power Systems America spokesperson, observed that “[t]he judge did decide to stay discovery for the present.  Nevertheless, we are heartened by his suggestion that he may terminate the stay if he finds appropriate circumstances.”  GE had no comment on the ruling.