The National Law Forum

The Blog of the The National Law Review

Is the SCOTUS Rule of Reason Unreasonable?

“Not too hard, not too soft,” says the Supreme Court in FTC v. Actavis, 133 S. Ct. 2223 (2013).  The majority tries to reach middle ground by rejecting both the FTC’s argument that any reverse payment in settlement of a patent claim is presumptively unlawful and Actavis’ argument that any settlement within the scope of the patent is permissible, but is the court’s new “rule of reason” approach really “just right?” Let’s see how this plays out in a simple scenario using a product whose success everyone loves to hate—the Snuggie.

Meet Peter.  He has a pug with whom he likes to spend his evenings, wrapped up in a Snuggie, watching movies and sharing popcorn.  Peter was quite dismayed, though, to see his poor little pug shivering and cold without a Snuggie of his own.  So, Peter invented the Puggie.  He used special fibers formulated specifically to maintain heat while resisting odors because no one likes a smelly dog blanket.  Peter even obtained a patent on his Puggie and began producing more to sell around his neighborhood, the Franklin Terrace Community.  Once word spread of Peter’s success, however, several of Peter’s neighbors began producing competing products—the Pug Pelt, the Schnauzzie, and so on–which boasted the same odor-resistant properties as Peter’s Puggie.

Outraged, Peter publicly accused his competitors of patent infringement and demanded that they stop producing their “piddly dog pelts.” But they refused, claiming their fibers were different.  Knowing how costly an extensive fiber dispute could be, Peter offered his competitors $1,000 to stop producing their competing pelts for a period of two years.  The other pelt producers agreed, took the money, and stopped production immediately.  The Franklin Terrace Community, however, was not pleased.  Peter had not only run off the competition, but he had also bumped the Puggie price up afterward, making a killing during the chilly winter as the sole pelt producer.  Community members petitioned the homeowners’ board for some guidance on whether Peter’s payment constituted an unfair trade practice.  Peter opposed the petition and claimed that he had the right to pay whatever amount he deemed fit to protect his patent.

The board found the community’s argument that any “reverse settlement” payment by a patent holder is presumptively unlawful to be too harsh.  Peter’s assertion, however, that any payment is immune from attack so long as it remains within the scope of the patent was believed to be too soft.  Peter complained that the money and time he would have to commit to an extensive patent lawsuit over his odor-resistant fibers would put him out of business, but the board believed that his willingness to drop a grand to keep his competitors at bay was a much more accurate representation of Peter’s confidence in his patent.  Specifically, the board found Peter’s payment of $1,000 to be a “strong indicator of power.”  In an effort to come up with a more “middle of the road” approach, the board created the “rule of reason” to determine the legality of reverse settlement payments.  No real guidance was provided, though, on how to apply the new rule—just not too hard, not too soft.

Without any elaboration on how this new “rule of reason” is to be applied in antitrust lawsuits, did the board cause more confusion than clarity?  And, how large must a reverse settlement payment be to stand as an “indicator of power” and “lack of confidence” in the patent?  If Peter’s patent was iron-clad and his competitors were infringing, should he have had the right to pay any amount he deemed fit to protect his patent, or was $1,000 too much for some piddly pooch pelts?  Does this unfairly prohibit Peter from settling litigation that he may see as too costly or damaging?  Or, does the need to protect consumers from the Puggie monopoly Peter created outweigh Peter’s patent rights?

It is hard to say exactly what effect the Supreme Court’s “rule of reason” decision in FTC v. Actavis will have on future antitrust litigation.  We are likely to see an increase in the number of antitrust suits that are tried as opposed to settled. What do you make of this amorphous, middle-of-the-road approach?

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