Pay-for-delay - the story continues. How to end it ?

EUROPA - PRESS RELEASES - Press Release - Antitrust: Commission enforcement action in pharmaceutical sector following sector inquiry: EUROPA - PRESS RELEASES - Press Release - Antitrust: Commission enforcement action in pharmaceutical sector following sector inquiry.

The Commission is right in being tough on deals such as those concluded between branded and generic drugs producers.  These have EU-wide (in fact, worldwide) impact, keeping health spending at higher levels than necessary.  For the drugs manufacturers these are "win-win" situations but on the expense of health assistance budgets and of the consumers.

The irony is that the interaction between patent holders and generic manufacturers arises when the later prepare to start producing the patented drug before the expiration of the patent.  Over time, the patent holders found a way to decrease or even deflect the pressure to open up their monopoly on the product with a soft cushion of monetary compensation paid to the generic manufacturer !

On the other hand, I am skeptical on the efficiency of the public antitrust enforcement alone to put an end to such practices.  On the other hand, I am skeptical on the efficiency of the public antitrust enforcement alone to put an end to such practices.  In terms of pay-for-delay agreements in the pharma industry, there seem to be "too many rabbits in the field" and this will stretch the European Commission resources to the maximum. Private enforcement could lend a hand to this effort as the losses to consumers are large and the damages rather easy to assess.  

Legislative measures could also be put in place in the sense of streamlining the patent protection system.  An additional legal provision - which I consider even more efficient - is to subject such agreements to a presumed illegality, which the parties might, eventually overturn in courts.  Such measures are already contemplated on the other side of the Atlantic - see http://www.nytimes.com/2010/07/07/opinion/07wed2.html?_r=0.  In the EU legislation, overcoming the presumption of illegality would require the issuance of block exemptions regulations, as the exemptions conditions set forth in paragraph (2) of article 101 are too strict and would be difficult to apply.  The interdiction should cover the monetary compensations paid to a generic manufacturer in the context of its challenge to the branded product, not the entire settlement or other payments between the patent holder and the generic manufacturer (although it should be clear that these have no connection whatsoever with the settlement – a difficult endeavor!).

Attention should be paid to the extent of the interdiction because, as noticed in the recent report on pay-for-delay settlements issued by the Federal Trade Commission in January 2013 – see here http://www.ftc.gov/os/2013/01/130117mmareport.pdf - a rather small proportion of settlements (40 out of 140 in the FTC study) involved a compensation.  The number is on the rise and the damages to consumers may be significant, so that the FTC the report was sufficient to renew the initiatives to put an end to the harmful practices – see here http://www.rawstory.com/rs/2013/01/18/senate-considers-ending-pharma-pay-for-delay-deals/. 

In the end, here there is a delicate (market) balance and anyone should pay attention to both the losses of the consumers but also to the potential chilling effects on branded manufacturers.  It should be borne in mind that the pay-for-delay settlements are just the end of the road (or the tip of the iceberg) in a process which is almost always started by the generic manufacturers, perhaps even with a vexatious litigation.  

Intellectual property vs.competition - the debate is heating on

UPDATE
According to a study made by Professor Coleen Chien of Santa Clara University, the majority of the patent infringement lawusits brought in 2012 (up to December 1) were initiated by Patent Assertion Entities (vehicles which do not manufacture goods but only license the patents) - http://news.cnet.com/8301-1023_3-57558384-93/patent-trolls-now-behind-most-patent-infringement-lawsuits/.  
The percentage is worrisome  - 62% - up from just 45% in 2011 ! At this pace, the patent trolls will fully occupy the ground of patent litigation by 2014, at the latest. 
An equally worrisome finding of the study is that the preferred target of the lawsuits are the startups, weaker in terms of the capacity to whitstand costly legal battles on patents.  History shows us that startups were often very innovative and produced that kind of ”disruptive innovation” that the business needs - were where Facebook, Twitter or even Google not so many years ago ?
The solutions for preventing the side effects of such perinicious litigation may not go as far as limiting the IP rights (although reforms may be useful, in US and elswhere) but taking into account proposals such as those put forward by Professor Herbert Hovenkamp - http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154203. Professor Hovenkamp argues, basically, that 1. As long as a patent is included in  a standard - by an SSO - injunction should not be allowed and 2. The patents which are part of the standards and are, later on, assigned to a non-practising entity are encumbered by the obligation to be licensed on a FRAND basis (except if the assignee was not informed and properly consulted in respect of the inclusion in the standard). 
The solutions seems reasonable and with no prejudice to both the patent owners and other entities in the market.


Richard Posner and Garry Becker re-opened recently, on their (common) blog the debate around the likely effects on competition of the rights conferred by the intellectual property protection laws http://www.becker-posner-blog.com/2012/09/do-patent-and-copyright-law-restrict-competition-and-creativity-excessively-posner.html# and http://www.becker-posner-blog.com/2012/09/reforming-the-patent-system-toward-a-minimalist-system-becker.html.

What is obvious is that the current patent and copyright regulations show little adaptation to the modern 

business - characterised by speed and continnuous innovation.  

There are positions even more extreme than those of R.Posner and G.Becker - see, for instance M.Boldrin, D.K.Levine, ”The case against patents” at http://research.stlouisfed.org/wp/2012/2012-035.pdf. 

Jared Diamond (teaching ....geography and evolutionary biology, not antitrust) noticed, in his Pulitzer-awarded book "Guns, Germs and Steel: The Fates of Human Societies" - that most scientific progress resulted from accumulation on preexisting discoveries and not from isolated acts of genius. When these met a market demand, they started to be called "great inventions" (this statement is also quoted by Herbert Hovenkamp in "The Antitrust Enterprise: Principle and Execution").  

A good argument in favour of the IP rights is that provided by Michael Phelps, Vice-President for IP at Microsoft, in the book he co-authored with David Kline - "Burning the ships. Intellectual Property and the Transfomation of Microsoft".   He also starts from the reality that IP rights have a negative usage - "the right to either prevent someone from using your technology and competing in your market, or to tax them in the form of licensing fees for the right to do so".  But Phelps emphasizes that IP rights may be used more efficiently as "a bridge to collaboration with other firms that would enable companies to acquire technologies and competencies they need to compete successfully.[.....] Without IP rights, firms would resist sharing their ideas for fear that others would misappropriate their innovations.[....] Just as good fences made good neighbors, strong IP rights would make for strong and successfull collaborations."  This philosophy was at the foundation of the "Open for Business" program run by Microsoft since 2003 and it visible in the multitude of cross-licensing which exist today. 

Cross-licensing has its own downsizes, such as the risk of collusion among the competitors which share their patents and the risk of exclusion of firms which have little or nothing to offer in return in a cross-licensing agreement (new firms would more often find in this situation).  Therefore, the cross-licensing does not solve the (alleged) excess of market power of the rights holders but it rather allows alliances among the "titans", which would exclude even more the "pygmies".

With the increased complexity and speedy evolutions in industries such as the telecommunications (where no single company owns all the patents considered to be "standards-essential"), the right balance is a non-achieved goal.  

The numerous "patent wars" raging through the world of technology in the recent years (Apple vs.Samsung, Samsung vs.Apple, Apple vs.Motorola, Microsoft vs.Google and so on) are mostly a symptom of the mentioned situation, in the context of an out-of-date legislative framework. The question is not whether these wars are bad or good for the competition - or, perhaps, just "growing pains" - but which are the likely effects on innovation in the technology markets (is this slowed down by the legal disputes ?) and on consumer welfare, eventually.  

Using the public enforcement of the antitrust rules in the attempt to cool down the rising temperatures in the patent wars should be made with a great deal of care.  Investigations and analysis of the antitrust agencies may be very useful in claryfing the attitude that patent holders should have in order not to deter competition and innovation. On the other hand, too much peace and harmony in such industries would be equally alarming.  If the antitrust agencies decide to enter into the game and serve as referees, they should make sure that they will preserve the beauty and the dynamics of the game.