June 22, 1998
Federal Circuit Holds Its Law Applies to Misuse
The National Law Journal
LAST NOVEMBER, the U.S. Court of Appeals for the Federal Circuit, which has exclusive appellate jurisdiction over patent cases, effectively immunized patent-infringement plaintiffs from antitrust liability predicated on fraud-based theories of patent misuse1. A few months later, the same panel reversed itself.
Its ultimate decision in Nobelpharma AB v. Implant Innovations, or Nobelpharma II2, established for the first time that Federal Circuit law, rather than the law of the circuit in which the trial court sits, henceforth will determine whether a patent-infringement plaintiff should be stripped of immunity under the antitrust laws.
Applying a 33-year old U.S. Supreme Court precedent3, the Federal Circuit held that this immunity is lost when it is demonstrated that the patent was procured by knowing and willful fraud; the patent would not have issued but for that fraud; the plaintiff was aware of that fraud at the time suit was filed; and the other elements of an antitrust violation can be established under the law of the regional circuit. Ruling that these elements had been proved by the patent-infringement defendant in the case before it, the Federal Circuit upheld the jury's verdict finding the patent owner liable under the antitrust counterclaim.
In the past, a patent owner's vulnerability to antitrust counterclaims has been more theoretical than real. With patent litigation on a meteoric rise4, however, Nobelpharma II may open the door to a resurgence of antitrust counterclaims predicated on fraud-based theories of patent misuse. If that occurs, the stakes in patent litigation - already among the highest of any complex commercial litigation in the federal courts - will rise even higher.
Patent law, in effect, grants the patentee a "monopoly" over its invention for a period of years5. The statute grants the patentee "the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States." 6
The patentee's exercise of that monopoly power is not without its limits. Those limits first were defined by the equitable doctrine of "patent misuse" in a series of Supreme Court cases earlier this century involving "tying" arrangements requiring patent licensees to purchase unpatented products as a condition of the licenses.7 The court acknowledged that "equity does not demand that its suitors shall have led blameless lives," but emphasized that equity circumscribed the patentee's exercise of its lawful monopoly:"Where the patent is used as a means of restraining competition with the patentee's sale of an unpatented product, the successful prosecution of an infringement suit even against one who is not a competitor in such sale is a powerful aid to the maintenance of the attempted monopoly of the unpatented article, and is thus a contributing factor in thwarting the public policy underlying the grant of the patent."8
Patent Misuse And Antitrust
The doctrine of patent misuse was developed by the courts in the context of its being asserted as an affirmative defense in patent litigation. If successful, the defense renders the patent unenforceable unless and until the conduct constituting the misuse ceases or is purged.9
It is not necessary for the party asserting patent misuse as an affirmative defense to establish the elements of an antitrust claim. Thus, to prevail on a patent misuse defense to an infringement claim, the defendant need not prove that Sec. 1 or Sec. 2 of the Sherman Act has been violated.10
The tension between patent and antitrust law, however, is inherent in the patent misuse doctrine. On the one hand, the patent itself grants the owner a limited statutory monopoly over its invention. On the other, this monopoly is limited by both the patent statute and the antitrust laws.
Reflecting this tension, the patent misuse doctrine gradually became the focal point for establishing, on a case-by-case basis, the limits of the patentee's statutory monopoly power, in light of the antitrust policy of encouraging competition. Where the patentee uses its rights "not only as a shield to protect his invention, but as a sword to eviscerate competition unfairly…that owner… may become liable for antitrust violations when sufficient power in the relevant market is present."11
The seminal decision in this area was the Supreme Court's 1965 ruling in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.12 The court held that a patent infringement plaintiff that obtained its patent through "knowing and willful fraud" on the U.S. Patent and Trademark Office and that knew of the fraud at the time it filed suit, may be subject to antitrust liability if the other elements of an antitrust claim - such as relevant market, market power and antitrust injury - are present.13 Walker Process fraud, as it became known, often was asserted in the wake of the Supreme Court's decision, but seldom was successful.
Similarly, the filing of a patent-infringement suit in bad faith and with knowledge of the invalidity of the asserted patent - even if the patent was not procured by fraud, as in Walker Process - also may give rise to an antitrust violation. Bad-faith enforcement of a patent became known as a "Handgards-type" antitrust claim, for the 9th Circuit cases in which it first was recognized.15
'Nobelpharma' - Take One
In its first Nobelpharma decision, the Federal Circuit reversed a jury's finding that the patentee had committed Walker Process fraud and a violation of the antitrust laws by withholding a material prior art reference from the PTO during the patent prosecution. The panel, consisting of Judges Alan D. Lourie (who wrote the majority opinion), Giles S. Rich and S. Jay Plager (who dissented on this point), emphasized the absence of any affirmative misrepresentation to the PTO, as opposed to a "mere" failure to cite a prior art reference material to the question whether the invention was patentable.16
The facts that led to the jury verdict of antitrust liability, however, seemed rather egregious. The verdict was supported by evidence that the inventors knowingly deleted all references in their patent application to an earlier work by one of them that specifically addressed the invention described in the patent.17
Furthermore, the jury found that Nobelpharma "maintained and enforced the patent with knowledge of the patent's fraudulent derivation, and with the intent of interfering directly with [the defendant's] ability to compete in the relevant market."18 It awarded damages of $3.3 million on the antitrust counterclaim, which the trial court trebled, as provided under 15 U.S.C. 15, known as the Clayton Act.
What seemed of most concern to the Nobelpharma I panel was the prospect of turning all patent-infringement cases, which routinely involve "inequitable conduct" defenses based on the patentee's failure to disclose material prior art to the PTO, into antitrust cases:
"Were we to hold that failure to cite prior art provides a basis for Walker Process antitrust liability, most patent-infringement actions would be converted into antitrust cases, the shield of inequitable conduct into the sword of antitrust liability…. Failure to cite prior art is not Walker Process fraud."19
The dissent - soon to be the majority - saw it differently. Judge Plager decried the panel's "effort to immunize patent law from the standards for antitrust liability established by the Supreme Court."20 That immunity did not last long.
'Nobelpharma' - Take Two
In the second Nobelpharma decision, rendered four months after the first, the Nobelpharma I dissent became the unanimous view of the same panel. First, the Federal Circuit held that whether a patentee should be stripped of antitrust immunity based on an antitrust counterclaim asserted in patent litigation henceforth will be decided as a matter of Federal Circuit law, rather than the law of the regional circuits.
This rule will apply to all antitrust claims based on the filing of a patent-infringement suit, including Walker Process fraud claims and Handgards-type bad-faith enforcement claims. Regional circuit law, however, will continue to apply to other elements of the antitrust claim "not unique to patent law."21
Second, Nobelpharma II holds that Walker Process fraud antitrust claims can be premised either on affirmative fraudulent misrepresentations to the PTO or on fraudulent omissions of material prior art. It remains necessary to prove also that the plaintiff was aware of the fraud when it filed suit, and that the other elements of an antitrust claim are present.22
Third, the Federal Circuit has reaffirmed that proving Walker Process fraud as an antitrust claim requires higher thresholds of intent and materiality than are required to hold a patent unenforceable for "inequitable conduct" before the PTO. There must be "independent and clear evidence of deceptive intent," and it must be shown that "the patent would not have issued but for the misrepresentation or omission."23
Finally, Nobelpharma II makes clear that antitrust liability based on Walker Process fraud can be imposed without the "sham" inquiry mandated by the Supreme Court's PRE decision.24 Once an antitrust plaintiff proves that the patent was procured by knowing and willful fraud and the patentee knew this when he or she filed the infringement suit, there is no need to establish also that the suit was "objectively baseless" and was motivated by an anti-competitive intent.25
Nobelpharma II likely will encourage the filing of antitrust counterclaims by defendants in patent litigation. Although the Federal Circuit emphasized that the threshold of proof is higher for Walker Process claims than for inequitable conduct, it will be difficult in practice to draw a bright line between the two.
Where a patent-infringement defendant acquires evidence that the plaintiff knew of the fraud on the PTO (Walker Process fraud) or knew that the patent was not valid for other reasons (Handgards-type fraud) or even knew that the patent was not infringed at the time suit was filed, antitrust claims will likely be asserted both to raise the stakes for the plaintiff and to improve the defendant's litigation position. The focus, then, will shift to whether the other elements of an antitrust claim can be established, a second hurdle antitrust claimants ultimately must overcome to be successful.
Now that Federal Circuit precedent will control the development of the law governing antitrust counterclaims predicated on patent misuse filed in infringement suits, a more consistent and coherent body of law relating to patent misuse may be expected to emerge. As the Federal Circuit's abrupt reversal in Nobelpharma I-II illustrates, however, the path ahead likely will take unexpected turns as antitrust counterclaims become more common and, perhaps, more often successful-posing significant consequences in terms of expense, complexity and liability for both plaintiffs and defendants.
NOTES
1. Nobelpharma A.B. v. Implant Innovations Inc., 129 F.3d 1463 (Fed. Cir. 1997), subseq. decision, 1998 WL122399 (Fed. Cir. March 20, 1998), pet. for reh'g denied (April 29, 1998).
2. 1998 WL 122399 (Fed. Cir. March 20, 1998).
3. Walker Process Equipment Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965).
4. For example, one increasingly popular forum for patent infringement cases, the famed "rocket docket" of the Eastern District of Va., has seen its patent case workload triple in the last few years.
5. See Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 491 (1942). The patent term runs from the date of issuance to 20 years from the date the patent application was filed. 35 U.S.C. 154(a)(1).
6. 35 U.S.C. § 154(a)(1).
7. See Cabice Corp. v. American Patents Dev. Corp. 283 U.S. 7 (1931); Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942); Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661 (1944).
8. Morton Salt, 314 U.S., at 493.
9. See United States Gypsum Co. v. Nat'l Gypsum Co., 352 U.S. 457 (1957), reh'g denied, 353 U.S. 932 (1957).
10 See Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 140 (1969), on remand, 418 F.2d 21 (7th Cir. 1969), rev'd, 401 U.S. 321 (1971), reh'g denied, 401 U.S. 1015 (1971).
11. Atari Games Corp. v. Nintendo of America Inc., 897 F.2d 1572, 1576-77 (Fed. Cir. 1990).
12. 382 U.S. 172 (1965).
13. Id. at 177.
14. See, Argus Chemical Corp. v. Fibre Glass-Evercoat Co., 812 F.2d 1381 (Fed. Cir. 1987).
15. Handgards Inc. v. Ethicon Inc., 601 F.2d 986 (9th Cir. 1979); Handgards Inc. v. Ethicon Inc., 743 F.2d 1282 (9th Cir. 1984).
16. 129 F.3d at 1472-73.
17. The patent described a dental implant that functioned as a tooth root substitute. 129 F.3d at 1465.
18. Id. at 1469.
19. Id. at 1473-74. The Federal Circuit further held that the "sham" litigation inquiry called for by the Supreme Court's decision in Professional Real Estate Investors Inc. v. Columbia Pictures Indus. Inc., 508 U.S. 49 (1993), or PRE, is an alternative basis for depriving a patent-infringement plaintiff of antitrust immunity.
20. Id. at 1475. 21. 1998 WL 122399, at *8. 22. Id. at *11. 23. Id. at *12. 24. See n.19 supra. 25. 1998 WL 122399, at *13.
Its ultimate decision in Nobelpharma AB v. Implant Innovations, or Nobelpharma II2, established for the first time that Federal Circuit law, rather than the law of the circuit in which the trial court sits, henceforth will determine whether a patent-infringement plaintiff should be stripped of immunity under the antitrust laws.
Applying a 33-year old U.S. Supreme Court precedent3, the Federal Circuit held that this immunity is lost when it is demonstrated that the patent was procured by knowing and willful fraud; the patent would not have issued but for that fraud; the plaintiff was aware of that fraud at the time suit was filed; and the other elements of an antitrust violation can be established under the law of the regional circuit. Ruling that these elements had been proved by the patent-infringement defendant in the case before it, the Federal Circuit upheld the jury's verdict finding the patent owner liable under the antitrust counterclaim.
In the past, a patent owner's vulnerability to antitrust counterclaims has been more theoretical than real. With patent litigation on a meteoric rise4, however, Nobelpharma II may open the door to a resurgence of antitrust counterclaims predicated on fraud-based theories of patent misuse. If that occurs, the stakes in patent litigation - already among the highest of any complex commercial litigation in the federal courts - will rise even higher.
Patent law, in effect, grants the patentee a "monopoly" over its invention for a period of years5. The statute grants the patentee "the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States." 6
The patentee's exercise of that monopoly power is not without its limits. Those limits first were defined by the equitable doctrine of "patent misuse" in a series of Supreme Court cases earlier this century involving "tying" arrangements requiring patent licensees to purchase unpatented products as a condition of the licenses.7 The court acknowledged that "equity does not demand that its suitors shall have led blameless lives," but emphasized that equity circumscribed the patentee's exercise of its lawful monopoly:"Where the patent is used as a means of restraining competition with the patentee's sale of an unpatented product, the successful prosecution of an infringement suit even against one who is not a competitor in such sale is a powerful aid to the maintenance of the attempted monopoly of the unpatented article, and is thus a contributing factor in thwarting the public policy underlying the grant of the patent."8
Patent Misuse And Antitrust
The doctrine of patent misuse was developed by the courts in the context of its being asserted as an affirmative defense in patent litigation. If successful, the defense renders the patent unenforceable unless and until the conduct constituting the misuse ceases or is purged.9
It is not necessary for the party asserting patent misuse as an affirmative defense to establish the elements of an antitrust claim. Thus, to prevail on a patent misuse defense to an infringement claim, the defendant need not prove that Sec. 1 or Sec. 2 of the Sherman Act has been violated.10
The tension between patent and antitrust law, however, is inherent in the patent misuse doctrine. On the one hand, the patent itself grants the owner a limited statutory monopoly over its invention. On the other, this monopoly is limited by both the patent statute and the antitrust laws.
Reflecting this tension, the patent misuse doctrine gradually became the focal point for establishing, on a case-by-case basis, the limits of the patentee's statutory monopoly power, in light of the antitrust policy of encouraging competition. Where the patentee uses its rights "not only as a shield to protect his invention, but as a sword to eviscerate competition unfairly…that owner… may become liable for antitrust violations when sufficient power in the relevant market is present."11
The seminal decision in this area was the Supreme Court's 1965 ruling in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp.12 The court held that a patent infringement plaintiff that obtained its patent through "knowing and willful fraud" on the U.S. Patent and Trademark Office and that knew of the fraud at the time it filed suit, may be subject to antitrust liability if the other elements of an antitrust claim - such as relevant market, market power and antitrust injury - are present.13 Walker Process fraud, as it became known, often was asserted in the wake of the Supreme Court's decision, but seldom was successful.
Similarly, the filing of a patent-infringement suit in bad faith and with knowledge of the invalidity of the asserted patent - even if the patent was not procured by fraud, as in Walker Process - also may give rise to an antitrust violation. Bad-faith enforcement of a patent became known as a "Handgards-type" antitrust claim, for the 9th Circuit cases in which it first was recognized.15
'Nobelpharma' - Take One
In its first Nobelpharma decision, the Federal Circuit reversed a jury's finding that the patentee had committed Walker Process fraud and a violation of the antitrust laws by withholding a material prior art reference from the PTO during the patent prosecution. The panel, consisting of Judges Alan D. Lourie (who wrote the majority opinion), Giles S. Rich and S. Jay Plager (who dissented on this point), emphasized the absence of any affirmative misrepresentation to the PTO, as opposed to a "mere" failure to cite a prior art reference material to the question whether the invention was patentable.16
The facts that led to the jury verdict of antitrust liability, however, seemed rather egregious. The verdict was supported by evidence that the inventors knowingly deleted all references in their patent application to an earlier work by one of them that specifically addressed the invention described in the patent.17
Furthermore, the jury found that Nobelpharma "maintained and enforced the patent with knowledge of the patent's fraudulent derivation, and with the intent of interfering directly with [the defendant's] ability to compete in the relevant market."18 It awarded damages of $3.3 million on the antitrust counterclaim, which the trial court trebled, as provided under 15 U.S.C. 15, known as the Clayton Act.
What seemed of most concern to the Nobelpharma I panel was the prospect of turning all patent-infringement cases, which routinely involve "inequitable conduct" defenses based on the patentee's failure to disclose material prior art to the PTO, into antitrust cases:
"Were we to hold that failure to cite prior art provides a basis for Walker Process antitrust liability, most patent-infringement actions would be converted into antitrust cases, the shield of inequitable conduct into the sword of antitrust liability…. Failure to cite prior art is not Walker Process fraud."19
The dissent - soon to be the majority - saw it differently. Judge Plager decried the panel's "effort to immunize patent law from the standards for antitrust liability established by the Supreme Court."20 That immunity did not last long.
'Nobelpharma' - Take Two
In the second Nobelpharma decision, rendered four months after the first, the Nobelpharma I dissent became the unanimous view of the same panel. First, the Federal Circuit held that whether a patentee should be stripped of antitrust immunity based on an antitrust counterclaim asserted in patent litigation henceforth will be decided as a matter of Federal Circuit law, rather than the law of the regional circuits.
This rule will apply to all antitrust claims based on the filing of a patent-infringement suit, including Walker Process fraud claims and Handgards-type bad-faith enforcement claims. Regional circuit law, however, will continue to apply to other elements of the antitrust claim "not unique to patent law."21
Second, Nobelpharma II holds that Walker Process fraud antitrust claims can be premised either on affirmative fraudulent misrepresentations to the PTO or on fraudulent omissions of material prior art. It remains necessary to prove also that the plaintiff was aware of the fraud when it filed suit, and that the other elements of an antitrust claim are present.22
Third, the Federal Circuit has reaffirmed that proving Walker Process fraud as an antitrust claim requires higher thresholds of intent and materiality than are required to hold a patent unenforceable for "inequitable conduct" before the PTO. There must be "independent and clear evidence of deceptive intent," and it must be shown that "the patent would not have issued but for the misrepresentation or omission."23
Finally, Nobelpharma II makes clear that antitrust liability based on Walker Process fraud can be imposed without the "sham" inquiry mandated by the Supreme Court's PRE decision.24 Once an antitrust plaintiff proves that the patent was procured by knowing and willful fraud and the patentee knew this when he or she filed the infringement suit, there is no need to establish also that the suit was "objectively baseless" and was motivated by an anti-competitive intent.25
Nobelpharma II likely will encourage the filing of antitrust counterclaims by defendants in patent litigation. Although the Federal Circuit emphasized that the threshold of proof is higher for Walker Process claims than for inequitable conduct, it will be difficult in practice to draw a bright line between the two.
Where a patent-infringement defendant acquires evidence that the plaintiff knew of the fraud on the PTO (Walker Process fraud) or knew that the patent was not valid for other reasons (Handgards-type fraud) or even knew that the patent was not infringed at the time suit was filed, antitrust claims will likely be asserted both to raise the stakes for the plaintiff and to improve the defendant's litigation position. The focus, then, will shift to whether the other elements of an antitrust claim can be established, a second hurdle antitrust claimants ultimately must overcome to be successful.
Now that Federal Circuit precedent will control the development of the law governing antitrust counterclaims predicated on patent misuse filed in infringement suits, a more consistent and coherent body of law relating to patent misuse may be expected to emerge. As the Federal Circuit's abrupt reversal in Nobelpharma I-II illustrates, however, the path ahead likely will take unexpected turns as antitrust counterclaims become more common and, perhaps, more often successful-posing significant consequences in terms of expense, complexity and liability for both plaintiffs and defendants.
NOTES
1. Nobelpharma A.B. v. Implant Innovations Inc., 129 F.3d 1463 (Fed. Cir. 1997), subseq. decision, 1998 WL122399 (Fed. Cir. March 20, 1998), pet. for reh'g denied (April 29, 1998).
2. 1998 WL 122399 (Fed. Cir. March 20, 1998).
3. Walker Process Equipment Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965).
4. For example, one increasingly popular forum for patent infringement cases, the famed "rocket docket" of the Eastern District of Va., has seen its patent case workload triple in the last few years.
5. See Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 491 (1942). The patent term runs from the date of issuance to 20 years from the date the patent application was filed. 35 U.S.C. 154(a)(1).
6. 35 U.S.C. § 154(a)(1).
7. See Cabice Corp. v. American Patents Dev. Corp. 283 U.S. 7 (1931); Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942); Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661 (1944).
8. Morton Salt, 314 U.S., at 493.
9. See United States Gypsum Co. v. Nat'l Gypsum Co., 352 U.S. 457 (1957), reh'g denied, 353 U.S. 932 (1957).
10 See Zenith Radio Corp. v. Hazeltine Research Inc., 395 U.S. 100, 140 (1969), on remand, 418 F.2d 21 (7th Cir. 1969), rev'd, 401 U.S. 321 (1971), reh'g denied, 401 U.S. 1015 (1971).
11. Atari Games Corp. v. Nintendo of America Inc., 897 F.2d 1572, 1576-77 (Fed. Cir. 1990).
12. 382 U.S. 172 (1965).
13. Id. at 177.
14. See, Argus Chemical Corp. v. Fibre Glass-Evercoat Co., 812 F.2d 1381 (Fed. Cir. 1987).
15. Handgards Inc. v. Ethicon Inc., 601 F.2d 986 (9th Cir. 1979); Handgards Inc. v. Ethicon Inc., 743 F.2d 1282 (9th Cir. 1984).
16. 129 F.3d at 1472-73.
17. The patent described a dental implant that functioned as a tooth root substitute. 129 F.3d at 1465.
18. Id. at 1469.
19. Id. at 1473-74. The Federal Circuit further held that the "sham" litigation inquiry called for by the Supreme Court's decision in Professional Real Estate Investors Inc. v. Columbia Pictures Indus. Inc., 508 U.S. 49 (1993), or PRE, is an alternative basis for depriving a patent-infringement plaintiff of antitrust immunity.
20. Id. at 1475. 21. 1998 WL 122399, at *8. 22. Id. at *11. 23. Id. at *12. 24. See n.19 supra. 25. 1998 WL 122399, at *13.
