The Anticompetitive Effects of Underenforced Invalid Patents

By Christopher R. Leslie. Full text here.

Courts and scholars have long debated the proper balance between antitrust law and intellectual property rights. Proponents of strong intellectual property rights and those of vigilant antitrust enforcement often find themselves at opposite ends of the debate. Some scholars and intellectual property owners resist the encroachment of antitrust law into the intellectual property arena. Antitrust advocates view with suspicion the potential exercise of market power by intellectual property owners in a manner that expands the legitimate power of a patent in an illegitimate way. While the vast majority of patents do not confer monopoly power, antitrust principles are implicated in those markets where monopolists do in fact maintain their dominant position through patents.

Amidst the discord, relative consensus prevails in one area. Even supporters of strong patent protection have generally not quarreled with antitrust law’s treatment of patents procured through fraud. The Sherman Antitrust Act (Sherman Act) proscribes the use of invalid patents to secure a monopoly, and the patent system has little interest in protecting the ability of firms to acquire and enforce invalid patents.

But antitrust law’s current treatment of invalid patents remains inadequate. While antitrust law recognizes that enforcing invalid patents can constitute illegal monopolization or attempted monopolization, courts have refused to consider the anticompetitive effects of simply having an invalid patent. This Article argues that, under certain circumstances, a monopolist’s possession of a patent that it knows to be invalid, which it holds out to the world as valid, should violate the Sherman Act’s prohibition on monopolization.

Part One lays out the current state of the law regarding when the use of an invalid patent violates the Sherman Act. Invalid patents can give rise to antitrust liability when a monopolist commits fraud against the Patent Office or brings an infringement lawsuit based on a fraudulently procured patent. These are, respectively, the Walker Process and the Handgards theories of recovery. Under either cause of action, the antitrust plaintiff must show that the defendant actually enforced its invalid patent.

Part Two argues that this current doctrine, by limiting liability to instances of actual enforcement of an invalid patent, is too constricted. Mere possession of an invalid patent can help maintain an illegitimate monopoly even if the monopolist patent-holder takes no affirmative steps to enforce its patent. The fear of infringement litigation can deter entry into the monopolist’s market, even if the potential competitor strongly believes that the patent at issue is invalid. Invalid patents can also increase entry costs by compelling rivals to research the patent’s validity, to attempt to design around the patent, or to pay (unnecessary) licensing fees. Even a monopolist’s suspect patents can deter its competitors’ customers, business partners, and venture capitalists from doing business with them. In some cases, firms may avoid entire fields of research out of fear of infringement litigation, a phenomenon that can distort innovation and reduce long term competition even further. Part Two concludes by showing that all of these anticompetitive consequences occur even if competitors are aware of the critical patent’s suspect validity.

Part Three demonstrates that currently neither patent law nor antitrust law can adequately cleanse the marketplace of those invalid patents that injure competition and reduce social welfare. Within patent law, none of the mechanisms designed to eliminate invalid patents—public use proceedings, reexaminations, and declaratory judgment actions—functions as intended. Unrealistic standing thresholds, insufficient penalties, and collective action problems prevent each mechanism from being a truly effective method to detect and deter patent fraud. Current antitrust law also fails to solve the problem of anticompetitive invalid patents. Antitrust liability is contingent on the patentee actually enforcing its invalid patent, but enforcement is narrowly defined. This condition allows some monopolists to exercise the exclusionary power of an invalid patent without inviting antitrust litigation.

Part Four explains why and when a monopolist’s knowing maintenance of an invalid patent should constitute exclusionary conduct sufficient to violate Section Two of the Sherman Act. Antitrust law does not condemn firms for having monopoly power—the power to raise prices and exclude competitors. It only proscribes the maintenance or acquisition of monopoly power through anticompetitive conduct, as opposed to through business acumen or the development of a superior product. If a monopolist secures its market power by keeping competitors at bay through the maintenance of an invalid patent, it engages in quintessential exclusionary conduct without any redeeming value. Part Four argues that if the defendant has monopoly power in a relevant market, then a prima facie Section Two case is established if an antitrust plaintiff can show three elements: (1) the monopolist’s patent is invalid, (2) the monopolist knew that its patent was invalid, and (3) the monopolist did not sufficiently disavow its invalid patent. Taken together, these three elements satisfy the conduct requirement for illegal monopolization. Of course, any private plaintiff would also have to establish that it suffered causal antitrust injury in order to succeed in its suit. Liability is contingent on the excluded competitor proving that it was aware of the monopolist’s patent and that but for the fear of infringement the competitor would have entered the market. Finally, Part Four explains the increased efficiency of addressing the problem of invalid patents through antitrust jurisprudence rather than relying exclusively on patent law.

Part Five addresses arguments against treating the knowing possession of invalid patents by a monopolist as the basis for Section Two liability. After rebutting the objection that an expanded cause of action is unnecessary, Part Five argues that expanded antitrust liability will not lead to false positives or nuisance suits. While recognizing that any new cause of action creates the risk of mistakes and abuse, Part Five notes that a number of factors should serve to filter out false positives and nuisance suits, including heightened pleading and evidentiary standards. In sum, treating possession of invalid patents as exclusionary conduct would not unreasonably interfere with the patent system or the innovation it is intended to encourage.

Ultimately, this Article does not argue that greater antitrust liability will eliminate all invalid patents. But, expanding the contours of the current Walker Process doctrine will expose at least some invalid patents and reduce the incentives to acquire or maintain others. It will also focus attention on those invalid patents that are most likely to injure competition, without deterring the acquisition of legitimate patents or allowing the harassment of innocent patentees. However, expanded antitrust liability does provide a meaningful opportunity to deter both fraud upon the Patent Office and the maintenance of powerful patents that are later discovered by the patentee to be invalid.