With the advent of new digital items and applications that did not exist even five years ago, it is not surprising that the FTC and DOJ are eyeing the handful of large companies that dominate the marketplace for them with a watchful eye (anybody else picturing Sauron right now?)  It is even less surprising that Apple, Inc. has been pinched by the Justice Department with claims that it violated the Sherman Act with its anticompetitive behavior.  This is not to say that Apple actually did anything illegal – but something about having more cash than your government makes such a suit inevitable.  (Ask Google how its $500 million settlement for online advertising felt.)  This leads us to today’s topic: the DOJ’s antitrust suit against Apple and six other book publishers alleging e-book price-fixing. 

As mentioned in previous Antitrust articles, American Antitrust law is a sprawling and complex body of law.  Naturally, then, any article addressing an antitrust issue must stick to a very narrowly defined set of issues.  For this article’s purposes, it will suffice to simply define price fixing and examine why the government frowns on it.  To begin with a bit of background, American antitrust law (more appropriately called “competition law”) starts with the Sherman Act of 1890, which prohibits agreements or practices that restrict free trading and competition between businesses.

Recently Costco Wholesale prevailed, once again, in its ongoing copyright litigation with Omega.  After the United States Supreme Court deadlocked on whether the first sale doctrine authorized the reselling of lawfully purchased products abroad by Costco the case returned to the Eastern District of California for further proceedings.  On November 9, 2011, Costco again prevailed, again on summary judgment, but this time thanks to the copyright misuse defense.  With copyright misuse being successfully used as a defense I thought it would be worthwhile to explore misuse defenses in general, which I believe are an under utilized defense and one of the places courts should be looking to stomp out the abuses that we all know are prevalent in the intellectual property litigation arena.  it is worth taking a moment to revisit the basics of patent misuse.  With misuse defenses historically being closely associated with Antitrust theory yesterday we published Antitrust Law Basics, promising to follow up and with discussion of patent misuse.

The term “patent misuse” refers to specific types of prohibited behavior engaged in by the owner of the patent rights. Patent misuse is an affirmative defense that recognizes that it is possible for a patent owner to abuse the exclusive right enjoyed as a result of the issuance of a patent. As an affirmative defense, patent misuse cannot be used as a sword, but can only be used by an alleged infringer if and when the patent owner seeks to enforce the exclusive right of the patent in a patent infringement suit.

Earlier this month the United States District Court for the Eastern District of California extended the copyright misuse doctrine to the benefit of Costco, finding that an overzealous manufacturer of watches was attempting to use a copyright on a small logo stamped onto its watches to prohibit the resale of lawfully purchased watches by Costco.  See Costco Prevails in First Sale Case Thanks to Copyright Misuse. Misuse defenses, such as copyright misuse and patent misuse, have historically be applied sporadically at best.  This may be because misuse has been frequently found only when there is an underlying Antitrust violation.  That is, however, not a prerequisite.  A misuse defense is really about the unjustified extension of either a copyright or patent beyond the legitimate boundaries of the property right.

With copyright misuse having recently been successful in a rather high profile case I thought it would be worthwhile to revisit patent misuse and misuse concepts generally. To do that in a way that allows the casually interested reader to follow along probably requires first taking a step back away from the intellectual property centric theories to discuss some basic antitrust law concepts. This seems particularly appropriate since many of the misuse cases have a distinct antitrust flavor.

On Monday, December 13, 2010, the United States Supreme Court issued a non-decision in the matter of Costco Wholesale Corporation v. Omega, S.A. The Per Curiam decision simply read: “The judgment is affirmed by an equally divided Court. Justice Kagan took no part in the consideration or decision of this case.”  That meant that the 2008 decision of the United States Court of Appeals for the Ninth Circuit remained unchanged.  But this was not the last to be heard of this controversial case.

On November 9, 2011, the United States District Court for the Eastern District of California, per Senior Judge Terry J. Hatter, Jr., granted Costco a summary judgment victory due to the fact that Omega engaged in copyright misuse.  Yes, the plot thickened.  The district court originally granted summary judgment to Costco on the basis of the first sale doctrine, which was overturned by the Ninth Circuit and then affirmed by the Supreme Court in the tie decision, or non-decision of December 2010.  That meant that the case would proceed because the first sale doctrine summary judgment victory was erased.  But not so fast!  Judge Hatter had other ideas!

In its recent report entitled “The Evolving IP Marketplace,” the Federal Trade Commission (FTC) advances a far-reaching regulatory approach (Proposal) whose likely effect would be to distort the operation of the intellectual property (IP) marketplace in ways that will hamper the innovation and commercialization of new technologies. The gist of the FTC Proposal is to rely on highly non-standard and misguided definitions of economic terms of art such as “ex ante” and “hold-up,” while urging new inefficient rules for calculating damages for patent infringement.

To be sure, the FTC Proposal does not seek to confer upon the agency any direct power to set the price of licenses. But if implemented, the FTC Proposal would achieve that end through a long process that runs as follows. At the first step, the FTC Rules all suggest that the currently observed prices in licensing arrangements are too high, and should instead be set in accordance with the FTC’s own untested—but evidently unwise approach to “reasonable royalties” and “incremental damages,” which are nowhere observed in the extensive practice within the industry. So long as such new approaches are made available to potential licensees as of right, they will have a strong incentive to abandon the voluntary market in order to obtain the benefit of such judicial pricing rules that are systematically more favorable to their interests.

Earlier this month Dechert LLP, representing an undisclosed number of companies (“stakeholders”),  sent a letter to IMG College (“IMG”) and its licensing division, the Collegiate Licensing Company (“CLC”), and demanded that IMG and CLC cease and desist any efforts to restrict the number of licensees permitted to supply merchandise bearing the brands of various NCAA colleges and universities.  It looks likes trademark and antitrust issues are back on the menu in sports, which makes intellectual property nerds like me very happy.  We all knew American Needle Inc. v. National Football League (“Needle”) would embolden private antitrust suits; it was just a question of when.   But a pivotal question is should Needle be extended to permit private antitrust suits in collegiate athletics?  If the answer to those questions is yes, what would be the purpose at this point?

Take a knee, sports fans, we have some issues to discuss. The National Football League (“NFL”) team owners and the players’ union have been squabbling over how to divvy up the dough (a paltry $9 billion a year).  They couldn’t come to an agreement (because $185 million is really hard to split) so on Friday, they broke off labor negotiations, decertified the union, and 10 players sued the owners in federal court in Minneapolis.  See NFLPA decertifies.  Normally, I really couldn’t care less about a bunch of billionaires arguing with a bunch of millionaires.  But this case has major antitrust and intellectual property issues and that makes me very happy.  So now I’m paying attention.  It all stems back to a teeny little case called American Needle and a unanimous United States Supreme Court (“USSC”) decision that appeared to all but greenlight antitrust suits against the NFL.  Finally!  A sports related intellectual property issue that has some staying power.  Let’s just jump right in, shall we?

U.S. Supreme Court, picture taken by Gene Quinn 11/9/2009

One of the most debated issues in patent and antitrust law today involves pharmaceutical patent settlements.  Brand-name drug manufacturers pay generic firms to settle patent litigation and delay entering the market.  How should the antitrust laws respond?

Recent appellate courts have upheld the settlements with an analysis bordering on per se legality.  The Second Circuit recently offered such analysis in upholding Bayer’s $398 million payment to Barr to delay entering the market with a generic version of antibiotic ciprofloxacin hydrochloride (Cipro).  I (along with David Balto) recently filed an amicus brief on behalf of several consumer organizations recommending that the Supreme Court grant certiorari.  I made three arguments for why the Court should take the case.