Nobelpharma: The Federal Circuit Examines Antitrust Claims in the Patent Litigation Context
Intellectual Property Practice Group Newsletter - Volume 2, Issue 2, Summer 1998
August 1, 1998James L. Ewing, IV, Steven Gardner
In a case decided March 20, 1998, the U.S. Court of Appeals for the Federal Circuit, the court charged with reviewing patent cases from throughout the country, provided both clarity and confusion to antitrust law as it relates to patent litigation and enforcement. The court clarified that patent holders that knowingly seek to enforce fraudulently procured patents can face liability under the Sherman Antitrust Act, regardless of whether the enforcement attempt occurs through sham litigation or not. The court paved the way to an increase in Sherman Act claims of doubtful merit, however, by issuing an opinion that can be read to implicitly indicate that the holding of a patent, alone, is substantial evidence of monopoly power and/or a dangerous probability of actual monopolization in the relevant market (a required element of a Sherman Act violation). Such a reading is contrary to the understanding of most other courts and antitrust scholars, but, since such a reading is available, expect many patent-infringement defendants to make such a reading.
This article discusses the March 20 case, Nobelpharma AB v. Implant Innovations, Inc.[i] Part I provides the background of the case. Part II discusses a departure from precedent by the court. Part III discusses the court's antitrust analysis, including the court's clarification of Walker Process claims and sham litigation (Noerr-PRE) claims. Finally, Part IV discusses the court's failure to discuss relevant market and market power, and a possible interpretation and repercussion.
I. Background of the Case
The plaintiffs (called "NP") sued the defendant ("3I") for patent infringement. 3I alleged various defenses, including that the specification of NP's patent did not disclose the best mode of carrying out the invention claimed in the patent. In addition, 3I filed a counterclaim against NP alleging that NP obtained the patent by fraud, that NP knew that the patent was obtained by fraud when NP sued 3I, and that NP sued 3I knowing that the patent was either invalid or unenforceable, and with the intent of interfering directly with 3I's ability to compete in the relevant market.
At the close of NP's case-in-chief, the district court granted 3I's motion for judgment as a matter of law (JMOL) of invalidity and non-infringement. 3I's antitrust counterclaim was submitted to the jury. The jury found for 3I, awarding it $3.3 million, which the court trebled pursuant to the Clayton Act. Afterwards, NP made a motion for JMOL and/or a new trial on 3I's counterclaim, which was denied. NP appealed to the Federal Circuit.
II. An Unusual Departure From Precedent
As an initial matter, the Federal Circuit decided that it would apply its own law, rather than regional circuit law, to all antitrust claims premised on the bringing of a patent infringement suit. The court explained that this includes the question whether a patent infringement suit is based upon a fraudulently procured patent.
The Federal Circuit's decision to apply its own law to such claims was a departure from prior Federal Circuit precedent. A panel of the court cannot alter precedent of the court; only an in banc court can alter the court's own precedent. However, in a very unusual move, the Nobelpharma court noted in a footnote that this issue in the case had been considered and unanimously approved by an in banc court. The court noted that it would continue to apply the law of the regional circuit which involves other elements of antitrust law, such as relevant market, market power, and damages, because those issues are not unique to patent law.
III. The Court's Antitrust Analysis
The Federal Circuit set forth two instances in which a patent-infringement plaintiff may be subject to antitrust liability for the anti-competitive effects of the suit: (1) "the asserted patent was obtained through knowing and willful fraud within the meaning of Walker Process," a 1965 Supreme Court case; and (2) "the infringement suit was 'a mere sham to cover what is actually nothing more than an attempt to interfere directly with the business relationships of a competitor'" (quoting Noerr, a 1961 Supreme Court case, and citing Professional Real Estate Investors, a 1993 Supreme Court case). Each of these instances are discussed below.
A. The First Instance: Walker Process Claim (fraudulent procurement plus knowing enforcement)
In Walker Process, the Supreme Court held that a claimant may hold a party liable under the antitrust laws for attempting to enforce the party's patent by showing (1) the patentee "obtained the patent by knowingly and willfully misrepresenting facts to the [PTO]" and (2) the plaintiff was aware of the fraud when bringing suit.[ii] As to the first element, the Court indicated that this element is essentially "common law fraud." The Court cited examples of "knowing and willful misrepresentations" to the PTO: misrepresenting that the inventor had conceived, disclosed, and reduced to practice the invention on certain dates, misrepresenting that a widely-known expert had authored an article praising the invention, and an agreement to suppress evidence in litigation.
In examining Walker Process claims generally, the Nobelpharma court addressed the similarities between "inequitable conduct" and a Walker Process claim. "Inequitable conduct" is a defense in patent litigation. Basically, the inequitable conduct defense provides that a court can declare a patent unenforceable if the patentee made material misrepresentations (by commission or omission) to the Patent Office during prosecution of the patent. The Nobelpharma court explained that inequitable conduct is a "broader, more inclusive concept than the common law fraud needed to support a Walker Process counterclaim. Inequitable conduct in fact is a lesser offense than common law fraud, and includes types of conduct less serious than 'knowing and willful' fraud."
Essentially, the court found, there are two levels of "bad" conduct in which a patentee may be found to have engaged, a lesser level - inequitable conduct only - or a greater level - Walker Process fraud. A finding of the lesser level can result in a "lesser" punishment - unenforceability of the patent and possibly the award of attorneys fees. A finding of the greater level can result in greater punishment - exposure to antitrust liability, which includes possible trebling of damages.
The court noted further differences between a Walker Process claim and inequitable conduct. The court pointed out that in order to support a Walker Process claim, the fraudulent activity "must evidence a clear intent to deceive the examiner and thereby cause the PTO to grant an invalid patent," while "a conclusion of inequitable conduct may be based on evidence of a lesser misrepresentation or omission." The court provided an example of a "lesser omission": "omission of a reference that would merely have been considered important to the patentability of a claim by a reasonable examiner." The court also pointed out that the inequitable conduct inquiry involves balancing materiality and intent, but the Walker Process inquiry involves no balancing.
In sum, the Nobelpharma court held that a patent-infringement plaintiff can be held liable under the Sherman Act if the evidence shows that (1) the asserted patent was acquired by means of either (a) a fraudulent misrepresentation or (b) a fraudulent omission, (2) the party asserting the patent was aware of the fraud when bringing suit, and (3) "the necessary additional elements of a violation of the antitrust laws."
B. The Second Instance: Noerr-PRE Claim (sham litigation)
In 1993, the Supreme Court issued its decision in Professional Real Estate Investors ("PRE"), which indicated that an antitrust claim can be based on an allegation that a lawsuit previously filed by the antitrust-claim defendant is baseless. Under PRE and Noerr, an antitrust plaintiff must prove that the suit was "both objectively baseless and subjectively motivated by a desire to impose collateral, anti-competitive injury rather than to obtain a justifiable legal remedy."
The Nobelpharma court was careful to explain that it is not necessary to make a sham-litigation inquiry when evaluating a Walker Process claim, and that a PRE-Noerr claim is separate and distinct from a Walker Process claim. The court explained that "[i]n contrast with a Walker Process claim, a patentee's activities in procuring the patent are not necessarily at issue [in a PRE-Noerr claim]. It is the bringing of the lawsuit that is subjectively and objectively baseless that must be proved [in a PRE-Noerr claim]."
Accordingly, the court explained, in the patent context, an antitrust claimant proceeding under a sham litigation theory must show (1) the patentee's suit was based on a theory of infringement or validity that is "objectively baseless," (2) the patentee's suit was "subjectively brought in bad faith," and (3) other elements of an antitrust violation. The PRE Court explained that a suit is "objectively baseless" when "no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, . . . an antitrust claim premised on the sham exception must fall.'" The subjective element of the action focuses "on whether the baseless lawsuit conceals 'an attempt to interfere directly with the business relationships of a competitor,' through the 'use [of] the governmental process-as opposed to the outcome of that process-as an anticompetitive weapon.'"
IV. An Omission -- Relevant Market and Market Power -- And Possible Interpretation and Misinterpretation
As mentioned above, the Nobelpharma court stated that liability under either a Walker Process theory or a Noerr-PRE theory requires a showing of "the necessary additional elements of a violation of the antitrust laws" in addition to the explicitly set out elements. Noticeably, the Nobelpharma court did not set forth or discuss any of these "additional elements."
It is generally recognized that Sherman Act liability requires a showing of "a realistic probability" that the antitrust defendant "could achieve monopoly power" in the "relevant market" or "dangerous probability of actual monopolization" thereof. There is some debate over whether the holding of a patent alone is prima facie evidence of monopoly power and/or dangerous probability of actual monopolization in the relevant market. Language in some Supreme Court cases, e.g., Jefferson Parish, Loew's, and International Salt, can be read to hold that patent rights alone give rise to a presumption of the necessary market power in the relevant market to prove Sherman Act liability.[iii] For example, Jefferson Parish states in dicta that "if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power." Most modem courts and antitrust scholars conclude, however, that patent rights alone do not provide any such presumption. Most of these courts and scholars base their conclusion at least in part on a statement made by Justice O'Connor in her concurrence in Jefferson Parish: "[A] patent holder has no market power in any relevant sense if there are close substitutes for the patented product."'[iv]
In Nobelpharma, the jury found for the antitrust plaintiff on its Walker Process claim under the Sherman Act. In reviewing the evidence to determine if sufficient evidence was submitted by the antitrust plaintiff to support the jury's verdict, the Nobelpharma court made no mention of relevant markets or market power. Moreover, the court did not include any sort of monopoly power/dangerous probability element in its annunciation of elements required to make out a Walker Process claim or Noerr-PRE claim (although it did say that "other elements" are needed).
This raises an important question: Does Nobelpharma indicate that the Federal Circuit feels that the holding of a patent alone is substantial evidence of monopoly power and/or dangerous probability of actual monopolization in the relevant market? The court's failure to evaluate facts showing relevant markets and market power can be read to indicate that it does, even though such a holding would be contrary to modem antitrust thought.
The court's failure to address market power is probably attributable to other things. Perhaps the court's goal was to carefully address the differences between a Walker Process claim and a sham-litigation claim, and market power was simply not very important in comparison with that goal. Indeed, the court mentioned several times that it was concentrating on whether a patent holder can be "stripped" of its "immunity" in this context. It is possible that the parties failed to raise the issue-indeed, in the trial court's opinion, the trial court indicated that the plaintiff did not strongly contest the market definition, although the plaintiff apparently did contest the finding of "could achieve monopoly power"/"dangerous probability of actual monopolization."[v] It is doubtful, however, that the court would find that substantial evidence supports a jury's verdict when an element has not been proven. Relevant market and market power are touchstones of antitrust analysis, and it is doubtful that the court just "missed" the issue-the court even briefly mentioned the relevant market inquiry in its opinion. This touchstone status, though, tends to medicate that the court would not diverge from the general understanding of modem courts and legal scholars without addressing the issue.
On the other hand, the Federal Circuit is generally loathe to diverge from Supreme Court precedent even if later Supreme Court cases undermine the prior cases. Perhaps the Federal Circuit is mindful of the language noted above of Jefferson Parish, Loew's, and similar cases, and will continue to follow that language unitl explicitly overruled by the Supreme Court.
The bottom line is that Nobelpharma raises some important questions by its silence and one possible answer goes against modem antitrust understanding. It may take some time for the Federal Circuit to answer the question of whether such a presumption exists. It will be especially interesting to see if the court will take the Nobelpharma decision one step further and elect to follow its "own law" on this question or if the court will continue to follow regional circuit law. In the meantime, though, given this possible reading of Nobelpharma, patent litigants should expect to see an increase in Walker Process counterclaims under the Sherman Act.[vi] Responding to such claims by asserting that the relevant market and the requisite impact on the market be proven is well supported in antitrust law, but such support will probably not deter the raising of the claim.
*Jim Ewing and Steve Gardner are a partner and associate, respectively, with Kilpatrick Stockton LLP.
[i] _ F.3d _ , 46 USPQ2d 1097, 1998 WL 122399 (Fed. Cir. March 20, 1998).
[ii] Id. at *9 (quoting Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 &n.6 (1965)).
[iii] Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984) ("if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power" (citing United States v. Loew's Inc., 371 U.S. 38, 45-47, 83 S. Ct. 97, 102- 03, 9 L.Ed.2d 11 (1962) ("The requisite economic power is presumed when the tying product is patented.... Since one of the objectives of the patent laws is to reward uniqueness, the principle of these cases was carried over into antitrust law on the theory that the existence of a valid patent on the tying product, without more, establishes a distinctiveness sufficient to conclude that any tying arrangement involving the patented product would have anticompetitive consequences.")); International Salt Co. V. United States, 332 U.S. 392 (1947).
[iv] Jefferson Parish, 466 U.S. at 37 n.7 (O'Connor, J., concurring).
[v] Nobelpharma AB v. Implant Innovations, Inc., 930 F. Supp. 1241 (N.D. 111. 1996).
[vi] Attribute any opinions or statements in this article to the authors only. We would like to thank George Little, Rod Enns, and Mitch Stockwell for providing us with their insightful comments on the Nobelpharma case.