The Charlie Series: Reverse Payment Settlements in Patent Litigation, Competition law and Consumers (Part I)

What about Charlie?

Part I

(Basic concepts)

  5306-vintage-wall-pattern-1366x768-abstract-wallpaper There are few who haven’t heard of Roald Dahl’s characters Willy Wonka and Charlie Bucket. Charlie Bucket is the young boy born to a penniless family while Willy Wonka is a famous chocolatier known for his unique chocolate inventions. People in Charlie’s town are fascinated by Wonka’s creations and would prefer his chocolates if they could afford to purchase them. Let us say, Wonka invents a type of dark chocolate gold bar unlike any other found in the market and obtains a patent for it. Soon, his dark chocolate bar is the most sought after bar among the other dark chocolate options available in the market. One year down the line, Wonka realises that Wilbur Chocolates the second greatest chocolate confectionery in town is about to release a similar product at a much cheaper rate making such chocolates more easily available to kids like Charlie. He files a suit for patent infringement. Wilbur Co. in turn decides to file a counterclaim challenging the validity of the patent. The mounting litigation costs force both Wonka and Wilbur to enter into a settlement wherein (1) Wilbur agrees to not enter the market till the patent term expires and (2) Wonka agrees to pay Wilbur millions of dollars. The two competitors may be happy, but the true question is: what about Charlie?

Replace the dark chocolate with a pioneer medical invention and we are looking at the new age problem faced by most IPR and Antitrust regimes. This agreement entered into by Wonka and Wilbur is in legal parlance termed as a “reverse payment settlement”. It is a settlement where a patent holder has supposedly paid money or “net consideration” to a potential infringer in order to settle a patent infringement dispute. Such settlements are mostly seen in the pharmaceutical industry between patentee brand pharmaceutical companies and generic manufacturers.Whether such settlements are pro-competitive or anti-competitive is determined by the effect that such settlements will have on people like Charlie(the common consumer).

Intellectual property rights are treated as assets to a Company because they have come to play a critical role in giving it an edge over its competitors in the market. A patent is one such asset to a Company. ‘Patent’ is a grant made by a government to an inventor; conveying and securing to him the exclusive right to make, use and sell his invention for a term of 20 years. It is granted for an invention which is new and useful. However, a patent is never an absolute right. Its validity can always be litigated upon in a court of law. Ayres and Klemperer deemed patent as a “probabilistic property”. Carl Shapiro stated that a patent holder’s right can be calibrated according to the likelihood of him winning the patent litigation . Therefore, the author concluded that the right not being ironclad, should be subject to antitrust limitations.

Prior to looking at antitrust effects of a reverse payment settlement or any other patent settlement, the relevant market that is being affected must be  identified. In the Indian context, S. 2(r) of the Competition Act, 2002(hereinafter referred to as the Act) states that a relevant market may be a relevant product market or a relevant geographical market or both. S.2(s) states that a relevant geographical market means a market comprising of an area where conditions of competition for supply or demand of goods or services is homogenous in nature and can be distinguished from the conditions prevailing in the neighbouring areas.

S. 2(t) states that a relevant product market means a market comprising of all those products which are regarded as interchangeable or substitutable by the consumer, by reasons of characteristics of the product or services, their price or intended use. S.19 (6) and S.19 (7) state factors determining the “relevant geographical market” and the “relevant product market” respectively. In the above example, the relevant geographical market is the town where Charlie resides determined by “consumer preferences”.

The relevant product market is the dark chocolate market determined by the “physical characteristic” of the goods. Therefore, the relevant market of competition is the dark chocolate market in Charlie’s town. S.3 (1) of the Act states that any agreement which is likely to cause an appreciable adverse effect on competition within India will be termed anti-competitive. An exception to this is given under sub-section 5 of the same, wherein it has been stated that nothing in the section would restrict the right of any person conferred upon him under the Patents Act, 1970. In other words an agreement which would have otherwise been termed as anticompetitive, will be termed valid if the restrictions imposed are well within the scope of the patent rights exercised by the patentee.

S. 48(a) of the Patents Act, 1970 which defines the scope of a patent right allows a holder of a product patent the exclusive right to prevent third parties who do not have his consent from the act of making, using, offering for sale, selling or importing the product in India. So Wonka and Wilbur Co.’s agreement will not come under anti-competitive scrutiny if it was concluded in a valid exercise of Wonka’s rights as a patent holder under S.48 of the Patents Act, 1970. Therefore, the main policy problem is this: Is a patentee’s action of entering into a reverse payment settlement a valid exercise of his patent rights, despite the adverse effects that such a settlement may have on the market and its consumers?

To exclude reverse payment settlements from antitrust scrutiny by terming it as a valid exercise of patent rights may encourage anti-competitive behaviour in the market by patent holders. Therefore allowing the same may have  adverse effects on short term interests of  consumers as it limits competition in the market. On the other hand, to put a blanket ban on all such settlements would be to undercut the importance of a patent as an incentive for innovation. The incentive provided by the patent secures the long term interests of the consumers as it is crucial for encouraging innovation in the future. Striking a balance between these two interests is at the very heart of this problem.

Although the Competition Commission of India in 2014 did review the patent settlement between Hoffman La Roche and Cipla, there is not much clarity on the issue in India. However, the issue has been discussed in great detail in Federal Trade Commission v. Actavis (570 U.S 756(2013)), a judgement by the United States Supreme Court. The said judgement will be analysed in Part II of this series.

By Medha Rao III BSL LLB, ILS Law College Pune

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