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Exploring the Latest in Intellectual Property Law
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What Do You Meme? TFW Commercial Use Outweighs Fair Use

by | Jun 20, 2024 |

The US Court of Appeals for the Eighth Circuit affirmed a district court’s copyright infringement decision, finding that a congressional reelection campaign’s use of a popular meme to solicit donations was commercial in nature and therefore not fair use. Laney Griner v. King for Congress, Case No. 22-3623 (8th Cir. June 7, 2024) (Benton, Erickson, Kobes JJ.)

Laney Griner owns the copyright for the popular meme “Success Kid,” which is a photograph of then 11-month-old Sam Griner with his hand in a fist clenching sand at the beach.

Griner took the photograph in 2007. The photograph went on to become one of the first viral memes, with billions of internet users spreading the image with a variety of captions. Griner registered the copyright of the Success Kid meme in 2012 and has since licensed that photograph to many companies, including Virgin Mobile, Vitamin Water, Microsoft and Coca-Cola, for commercial use.

Steven King served as a congressional representative from Iowa from 2003 to 2021. During his 2020 reelection campaign, the King for Congress Committee, which supported the congressional campaign, posted the meme on its website, Facebook and Twitter in an effort to seek donations:

After requesting the removal of the posts to no avail, Griner filed a lawsuit for copyright infringement and violation of Sam’s privacy. The jury found that neither the committee nor the congressman violated Sam’s privacy, but it did find that the committee (but not the congressman) had “innocently” infringed Griner’s copyright. The jury awarded $750 in damages, which is the statutory minimum. The committee appealed.

The committee argued that its use of the meme was fair use under Section 107 of the Copyright Act. Under the Copyright Act, four factors define fair use:

  1. The purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes
  2. The nature of the copyrighted work
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole
  4. The effect of the use upon the potential market for or value of the copyrighted work

The Eighth Circuit found that the first factor weighed against the committee since the post clearly used the meme to call for donations and was undoubtedly commercial in nature. The commercial nature of the use voided the committee’s argument that the meme had been used millions, if not billions, of times without permission by users across the internet. Likewise, the “transformative elements” that the committee added (original text) were not persuasive enough to overcome this commercial nature. The Court found that the third factor also weighed against the committee since the “most substantial part of the work,” the “Success Kid himself,” was used in the committee’s post. The Court found that the fourth factor weighed in neither party’s favor, despite the fact [...]

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Fourth Estate Redux: Dismissal for Lack of Registration Not on the Merits

by | Jun 20, 2024 |

In the latest development of a complicated eight-year court battle regarding a copyright infringement claim, the US Court of Appeals for the First Circuit vacated and remanded the district court’s dismissal on claim preclusion grounds. The Court concluded that dismissal for failure to register the copyright was not “on the merits,” and therefore preclusion did not apply. Foss v. Marvic Inc. et al., Case No. 23-1214 (1st Cir June 10, 2024) (Barron, C.J.; Lipez, Kayatta, JJ.)

In 2006, Cynthia Foss designed a brochure for Marvic, a purveyor of sunrooms, for $3,000. Foss’s grievance with Marvic began in 2016 when she discovered that Marvic had been using a modified version of that brochure without permission. Foss filed a copyright infringement claim in January 2018 demanding $264,000. She inaccurately alleged that she had applied to register the copyright for the brochure. Eight months later, Foss amended her complaint, falsely alleging that she had registered the brochure with the US Copyright Office in February 2018 when in fact she had only applied for registration.

The district court stayed the action pending the Supreme Court’s decision in Fourth Estate v. Wall-Street, which construed 17 U.S.C. § 411(a) to require registration before a copyright claimant may sue for infringement. After Fourth Estate was issued, the district court dismissed Foss’s copyright infringement claim because the Copyright Office had not acted on her application for copyright. Later, the Copyright Office granted Foss a copyright registration in the brochure. Rather than move for reconsideration of the dismissal of her claim in the first action, Foss filed an appeal, which she lost.

After losing the appeal, Foss filed a second copyright infringement complaint against Marvic based on the same facts as the first. Foss also filed an amended complaint naming Charter Communication. She sought a declaratory judgment that Charter was not entitled to assert a safe harbor defense under the Digital Millenium Copyright Act (DMCA). Marvic and Charter filed motions to dismiss. In February 2023, the district court granted the motions, finding that “[b]ecause Foss’s prior copyright infringement claim against Marvic was dismissed with prejudice, [we] agree[d], for substantially the reasons stated in their supporting memorand[a], that her copyright claims . . . are barred by res judicata.” Foss appealed.

On the issue of claim preclusion, the First Circuit concluded that the first dismissal had not been a “final judgment on the merits” because it was based exclusively on the failure to satisfy the precondition of registration. The Court noted that it had ruled on this issue in Foss v. Eastern States Exposition, another copyright infringement action brought by Foss. The Court explained that, as it concluded in the Eastern States Exposition case, dismissal due to lack of prior registration is “too disconnected from the merits of the underlying claim” to be claim preclusive.

Marvic argued that the prior dismissal “with prejudice” constituted a final judgment on the merits and that the dismissal was “a sanction” based on Foss’s “repeatedly ignoring court directives [...]

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New Arguments Yield Same Unpatentability Outcome

by | Jun 13, 2024 |

On remand from the US Court of Appeals for the Federal Circuit in connection with inter partes review (IPR) proceedings, the Patent Trial & Appeal Board considered the petitioner’s reply arguments and evidence regarding the claim constructions that were first proposed in the patent owner’s response but again found that the claims were not unpatentable. Axonics, Inc. v. Medtronic, Inc., IPR2020-00712; -00680 (May 30, 2024) (Tartal, Jeschke, Dougal, APJ)

Axonics filed IPR petitions challenging two patents owned by Medtronic that are directed to the transcutaneous charging of implanted medical devices. In its petitions, Axonics did not propose any express claim constructions. In its preliminary response, Medtronic agreed that claim construction was not necessary. In its patent owner response, however, Medtronic – for the first time – advanced a new claim construction that differed from the interpretation of the relevant claims implied in Axonics’s claim charts. Axonics defended its own implicit construction but also offered new arguments and evidence that the prior art anticipated the patents even under the alternative construction. The Board adopted Medtronic’s new claim construction but refused to consider Axonics’s new arguments and evidence because they were first presented in the reply. The Board then found that Axonics failed to show by a preponderance of the evidence that the challenged claims were unpatentable. Axonics appealed.

Axonics did not dispute the new claim construction first introduced by Medtronic in its response and adopted by the Board; it argued only that the Board erred in refusing to consider its reply arguments and evidence under the new construction. The Federal Circuit agreed, concluding that in such a situation, “a petitioner must be given the opportunity in its reply to argue and present evidence of anticipation or obviousness under the new construction, at least where it relies on the same embodiments for each invalidity ground as were relied on in the petition.” The Court remanded for the Board to consider Axonics’s new arguments.

On remand, the Board considered Axonics’s new arguments and evidence that the challenged claims were unpatentable over the prior art under the new construction. It also considered Medtronic’s amended sur-reply. The Board again determined that none of the challenged claims were unpatentable. In its analysis, the Board pointed out that some of Axonics’s new arguments and evidence regarding what the prior art disclosed in light of the new claim construction were inconsistent with the arguments and evidence it initially offered in its petition. In particular, the Board observed that the declaration testimony of Axonics’s expert regarding the prior art, on which Axonics relied in its petition, did not support the new claim construction, even considering the expert’s supplemental declaration. The Board also rejected Axonics’s attempts in its post-remand brief to discredit Medtronic’s arguments as “untimely and wrong,” “incorrect” and “contradictory of the positions on infringement it has taken in district court.” Citing the Federal Circuit, the Board pointed out that in an IPR, the burden of persuasion to prove unpatentability by a preponderance of the evidence [...]

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The $X Factor: Demystifying Damages Calculations

by | Jun 13, 2024 |

The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to deny a defendant’s motion for a new trial on damages, finding that the plaintiff’s damages expert sufficiently showed that prior license agreements were economically comparable to a hypothetically negotiated agreement between the parties. EcoFactor, Inc. v. Google LLC, Case No. 23-1101 (Fed. Cir. June 3, 2024) (Reyna, Lourie, JJ.) (Prost, J., dissenting).

EcoFactor owns a patent directed to mitigating strain on the electricity grid by adjusting thermostat settings within HVAC systems. The patent describes a system where thermostats collect internal temperature readings and use them alongside external temperatures to estimate internal temperature change rates, including future predictions. EcoFactor sued Google alleging infringement based on Google’s Nest smart thermostat products.

After discovery, Google sought summary judgment, arguing that claims of EcoFactor’s patent were invalid as abstract ideas under 35 U.S.C. § 101. The district court denied this motion as well as Google’s Daubert motion to exclude the testimony of EcoFactor’s damages expert. At trial the jury found that Google infringed EcoFactor’s patent and awarded damages. The district court denied Google’s subsequent motions for judgment as a matter of law on noninfringement and for a new trial on damages. Google appealed.

Google raised three key issues. First, it argued that the district court erred in denying its motion for summary judgment. Second, Google asserted that the district court erred in denying its motion for judgment as a matter of law concerning the noninfringement of EcoFactor’s patent. Third, Google claimed that the district court wrongly denied its motion for a new trial on damages, arguing that EcoFactor’s damages expert opinion was based on unreliable methodology.

The Federal Circuit upheld the district court’s decision to deny summary judgment because there were genuine issues of material fact warranting a trial. The Court also affirmed the jury’s infringement verdict against Google, finding that it was supported by substantial evidence. Despite Google’s argument that its Nest thermostats did not meet the claims of EcoFactor’s patent, the Court concluded that expert testimony and corroborating documentation demonstrated otherwise.

On the damages issue, Google argued that EcoFactor’s expert testimony was unreliable because there was no evidence that the parties to the three license agreements used by the expert actually applied the royalty rate stated in the agreement. While Google acknowledged that each of the license agreements include a specified royalty rate, Google argued that each also included a “whereas” clause indicating that the licensee would pay EcoFactor a lump sum amount “set forth in this Agreement based on what EcoFactor believes is a reasonable royalty calculation of [$X] per-unit for . . . estimated past and [] projected future sales of products accused of infringement in the Litigation.” Google asserted that while the agreements may have included a stated rate, there was no evidence that the agreements actually applied the rate in calculating the lump sum payment.

The Federal Circuit rejected Google’s argument. The Court explained that the proposed royalty rate was derived from three [...]

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Interference Analysis Is a Two-Way Street

by | Jun 6, 2024 |

On appeal from an interference proceeding, the US Court of Appeals for the Federal Circuit reversed a Patent Trial & Appeal Board decision that found the claims of the senior party’s patent were not invalid as time-barred under 35 U.S.C. § 135(b)(1). The Federal Circuit concluded that the “two-way test” requires looking to see if either set of pre-critical and post-critical date claims contains a material limitation not found in the other and not just looking to see if the post-critical date claims have additional material limitations. Speck et al. v. Bates et al., Case No. 22-1905 (Fed. Cir. May 23, 2024) (Dyk, Bryson, Stoll, JJ.)

35 U.S.C. § 135(b)(1), pre-AIA, provides that “a claim which is the same as, or for the same or substantially the same subject matter as, a claim of an issued patent may not be made in any application unless such a claim is made prior to one year from the date on which the patent was granted.” This has been described as a statute of repose that places a time limit on a patentee’s exposure to an interference, the deadline for which is referred to as the “critical date.” At issue in this appeal was the “long-standing” exception to § 135(b)(1) for instances where the applicant files its claim after the critical period but has already been claiming substantially the same invention as the patentee during the critical period.

This case involves drug-coated balloon catheter technology. Bates is the senior party that filed a patent application, and Speck is the junior party that owns an issued patent. Speck’s patent issued on September 4, 2012, whereas Bates filed his application on August 29, 2013, six days before the critical date of Speck’s patent (i.e., one year after the filing date). Bates amended the application on August 30, 2013 (still before the critical date), and canceled all of the original claims and replaced them with new claims. Bates later amended the claims after the critical date to add a requirement that the device be “free of a containment material atop the drug layer.” The amendment was made to overcome a rejection from the examiner during prosecution.

Speck filed a motion to terminate the interference on the ground that the claims of Bates’s application were time-barred under § 135(b)(1) because Bates amended the claims more than one year after Speck’s patent issued. Speck also moved the Board to find that the claims of Bates’s application were unpatentable for lack of written description.

The Board denied Speck’s motion to terminate under § 135(b)(1), finding that the later-amended claims did not differ materially from the claims in other patents and patent applications Bates owned that were filed prior to the critical date, because “Speck ha[d] not directed [the Board] to a material limitation of the Bates involved claims that is not present in the earlier Bates claims.” Speck filed a motion for rehearing, which the Board denied. The Board also denied Speck’s motion to find that Bates’s claims lacked [...]

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Sour Grapes: Winery Minority Ownership Insufficient for Statutory Standing at Trademark Board

by | May 30, 2024 |

The US Court of Appeals for the Federal Circuit affirmed the dismissal of a petition seeking to cancel the registered marks of two wineries, finding the petitioner (a trust owning an interest in a competitor winery) lacked statutory standing under 15 U.S.C. § 1064. Luca McDermott Catena Gift Trust v. Fructuoso-Hobbs SL, Case No. 23-1383 (Fed. Cir. May 23, 2024) (Lourie, Reyna, Chen, JJ.) (en banc). The Court found that while the cancellation petitioner, Luca McDermott, had Article III standing to seek judicial review of the Trademark Trial & Appeal Board’s decision, it did not have statutory standing under the Lanham Act to petition for cancellation of the registrations at issue.

Paul Hobbs is a winemaker and partial owner of California-based Paul Hobbs Winery. The Paul Hobbs Winery owns the registration for the PAUL HOBBS mark in International Class 33 for “Wines.” Luca McDermott and two other related family trusts are each limited partners of the winery, collectively owning more than 21% of the business. Paul Hobbs is also affiliated with two other wineries: Fructuoso-Hobbs, a Spanish winery and owner of the registered mark ALVAREDOS-HOBBS, and New York winery Hillick & Hobbs Estate, owner of the registered mark HILLICK AND HOBBS. Both marks are registered in International Class 33 for “Alcoholic beverages except beers; wines.”

Luca McDermott and the other two family trusts petitioned to cancel both of the registered marks on the grounds of likelihood of confusion, alleging that the use of the ALVAREDOS-HOBBS and HILLICK AND HOBBS marks in connection with wine was likely to cause confusion with the Paul Hobbs Winery’s use of the PAUL HOBBS mark for wine. The trusts also alleged that Fructuoso-Hobbs committed fraud because it caused its lawyer, the same lawyer of record who managed the registration of the Paul Hobbs Winery’s PAUL HOBBS mark, to declare that the marks would not be likely to cause confusion with another mark.

Fructuoso-Hobbs moved to dismiss the petition, arguing that the family trusts were not entitled by statute to bring the cancellation action because they were not the owners of the PAUL HOBBS mark. Fructuoso-Hobbs also argued that the trusts could not show they had the necessary “proprietary interest” to bring the likelihood of confusion claim. The Board granted the motion to dismiss. Luca McDermott, one of the three trusts in the original action, appealed.

Before it could review de novo the Board’s decision regarding the trust’s lack of standing under the Lanham Act, the Federal Circuit addressed whether the trust had Article III standing to seek judicial review of the Board’s decision. The Court had little trouble concluding that the alleged injury (i.e., the diminished value of the trust’s investment in the winery) constituted an individual injury-in-fact, even for a minority partner. Furthermore, the Court found that the causation requirement was satisfied because the constitutional standard did not require proximate causation but only that the injury be “fairly traceable” to the allegedly unlawful registration of the challenged marks. Finally, the Federal Circuit found it [...]

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No Attorneys’ Fees Available for Successful IPR in Parallel Court Proceedings

by | May 30, 2024 |

The US Court of Appeals for the Federal Circuit concluded that a party that voluntarily elects to pursue parallel proceedings before the Patent Trial & Appeal Board and the district court is not entitled to recover attorneys’ fees under 35 U.S.C. § 285 (exceptional case doctrine) in connection with the Board proceedings, nor does § 285 entitle a party to hold opposing counsel jointly and severally liable for fees. Dragon Intellectual Property LLC v. Dish Network L.L.C., Case Nos. 2022-1621; -1777; -1622; -1779 (Fed. Cir. May 20, 2024) (Moore, C.J.; Stoll, J.) (Bencivengo, J., dissenting).

Dragon sued DISH Network, Sirius XM Radio (SXM) and eight others for patent infringement. The district court stayed proceedings as to DISH and SXM while they pursued inter partes review (IPR) but proceeded with claim construction for the other defendants. Following claim construction, all parties stipulated to noninfringement, and the district court accordingly entered a noninfringement judgment that was subsequently vacated following appeal to the Federal Circuit. Following the Board’s determination that the asserted claims were unpatentable, DISH and SXM filed a motion for attorneys’ fees in the district court proceeding. The district court granted the motion for time spent litigating the district court case but denied for fees incurred solely during the IPR proceedings and recovery from Dragon’s former counsel. DISH and SXM appealed the denial-in-part, and Dragon cross-appealed the grant-in-part.

The Federal Circuit affirmed the district court’s grant-in-part, finding that the district court did not abuse its discretion in declaring these cases exceptional. The Federal Circuit explained that the vacated noninfringement judgment did not require the district court to ignore its claim construction order in determining exceptionality. The Court further explained that even though Dragon was not entitled to a claim construction “do-over,” the prosecution history disclaimer issue was independently considered during the exceptionality inquiry, and Dragon did not provide any grounds for the conclusion that this constituted an inadequate inquiry.

The Federal Circuit also affirmed the denial of attorneys’ fees with regard to fees incurred during the IPR proceedings and Dragon’s former counsel’s liability for fee awards under § 285.

First, the Federal Circuit rejected DISH and SXM’s argument that § 285 allows recovery of fees incurred during parallel IPR proceedings, principally on the grounds that the IPR proceedings were pursued voluntarily. The Court reasoned that there are many advantages to leveraging IPR proceedings and, therefore, “where a party voluntarily elects to pursue an invalidity challenge through IPR proceedings, we see no basis for awarding IPR fees under § 285.”

Second, the Federal Circuit relied on the statutory text and determined that liability for attorneys’ fees awarded under § 285 does not extend to a party’s counsel. The Court explained that while other statutes explicitly allow parties to recover costs and fees from counsel, § 285 is silent as to who can be liable for a fee award, and therefore it is reasonable to conclude that fees cannot be assessed against counsel.

Sitting by designation, Judge Bencivengo of the US District Court for the Southern District of California dissented [...]

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Getting to the Core of It: Assignment Clause Is Ambiguous

by | May 30, 2024 |

The US Court of Appeals for the Federal Circuit vacated and remanded a district court’s grant of summary judgment, finding that the language used in an invention assignment clause was subject to more than one reasonable interpretation (i.e., ambiguous) and thus remand was necessary for further fact finding. Core Optical Tech., LLC v. Nokia Corp., Case Nos. 23-1001; -1002; -1003 (Fed. Cir. May 21, 2024) (Dyk, Taranto, JJ.) (Meyer, J., dissenting).

Core Optical filed complaints against three groups of defendants alleging patent infringement. The lead defendant, Nokia, moved for summary judgment, arguing that Core Optical did not have standing to bring the patent infringement suit. Nokia argued that by virtue of an invention assignment clause in an employment-related agreement signed in 1990, the inventor, Dr. Core, had assigned the patent rights to TRW, his employer at the time of the invention. In the agreement, Dr. Core “agreed to disclose to TRW and automatically assign to TRW all of his inventions that ‘relate to the business or activities of TRW’ and were ‘conceived, developed, or reduced to practice’ during his employment with TRW.” Nokia argued that by virtue of that earlier assignment, the subsequent assignment to Core Optical was ineffective. The agreement had a carveout from the assignment for inventions “developed entirely on [Dr. Core’s] own time” that was unrelated to his work for TRW. According to Nokia, based on the assignment, Core Optical did not have standing to assert the patent. The district court agreed and granted Nokia’s motion for summary judgment. Core Optical appealed.

The Federal Circuit reviewed the district court’s grant of summary judgment de novo, following Ninth Circuit and California law relating to the underlying contract dispute and related factual determinations. Under California law, the “fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties” (citing City of Atascadero v. MLPF&S (1998)). In granting summary judgment, the district court had held that the 1990 invention assignment agreement’s carveout did not encompass Dr. Core’s PhD research, which undisputedly led to the invention claimed in the patent. That finding was based in part on the TRW fellowship program that supported and enabled Dr. Core’s PhD work. However, Core Optical presented evidence that “Dr. Core was careful not to work on his PhD research while ‘on the clock’ at TRW and not to use TRW equipment, facilities, or supplies when working on his PhD research.”

The Federal Circuit disagreed with the district court that the matter was subject to resolution on summary judgment. The Court agreed with Core Optical that the “entirely-own-time” phrase did not unambiguously express a mutual intent to designate all the time Dr. Core spent performing his PhD research as his own time or, as Nokia argued, to indicate that some of the time Dr. Core spent performing his PhD research was partly TRW’s time (as the district court held). The Federal Circuit walked through the undisputed facts, including that Dr. Core sought funding from TRW for his PhD research and [...]

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Second Circuit Tells Rapper to Face the Music for Failing to Register the Work

by | May 23, 2024 |

The US Court of Appeals for the Second Circuit affirmed the dismissal of a copyright infringement claim by one rap artist against another on the grounds that the plaintiff failed to register the work in question. The Court emphasized the distinction between a musical work and a sound recording of that work, noting that they are separately copyrightable and require separate registrations. Nwosuocha v. Glover, Case No. 23-703 (2d Cir. May 10, 2024) (Jacobs, Park, Nathan, CJ.) (per curium) (nonprecedential)

In fall 2016, the rapper Emelike Nwosuocha, who goes by Kidd Wes, wrote and published a song called “Made in America.” In May 2017, Kidd Wes registered an album that included “Made in America” with the US Copyright Office and was issued a sound recording registration. In 2018, the rapper Donald Glover, known as Childish Gambino, released the song “This is America.” The song won in all four of its nominated categories at the 61st Grammy Awards in 2019: Song of the Year, Record of the Year, Best Rap/Sung Performance and Best Music Video. Kidd Wes then filed a complaint in the US District Court for the Southern District of New York against Glover and his music labels, alleging infringement of his copyright.

A valid copyright registration is a prerequisite to suit under 17 U.S.C. § 411(a). Here, Kidd Wes only registered his copyright for the sound recording of “Made in America,” not for the musical work itself. Since his infringement allegations concerned the work and not the recording of the work, the district court granted Childish Gambino’s motion to dismiss the claim for failure to register the copyright at issue. The court also dismissed the claim for the independent reason that Childish Gambino’s song did not infringe.

Kidd Wes appealed, arguing that § 411(b) permits suit “regardless of whether the certificate [of registration] contains any inaccurate information,” unless the inaccuracy was knowing or material, and that the distinction between a sound recording and a musical work is an administrative classification imposed by the Register of Copyrights and therefore has “no significance with respect to the subject matter of copyright or the exclusive rights provided by [Title 17 of the United States Code].”

The Second Circuit rejected both lines of argument. First, the Court noted that failing to register the musical work “Made in America” is not the same as accidentally including inaccurate information on the registration form. The Court explained that “the difference between forgiving technical mistakes in a copyright application and allowing applications to create registrations in material never mentioned” is an important distinction, and they should not be conflated.

Second, the Second Circuit noted that the distinction between a musical work and a sound recording of that work is not just an administrative classification, but a distinction created by statute. (17 U.S.C. §§ 102(a)(2) and (a)(7).) The distinction is important, the Court explained, because “sound recordings and musical works are different artistic works that can be copyrighted by different creators and are infringed in different ways.”

Having [...]

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Pay for Delay Is Sometimes Okay

by | May 23, 2024 | ,

The US Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit against pharmaceutical companies accused of violating antitrust laws by using reverse payments to delay entry of a generic version of a patented drug. CVS Pharmacy, Inc. v. Forest Labs. Inc., Case Nos. 23-410; -418; -420; -423 (2d Cir. May 13, 2024) (Jacobs, Sack, Nardini, JJ.)

This case involves a drug called Bystolic, which is a beta blocker designed to treat high blood pressure. Numerous purchasers of Bystolic and its generic versions brought state and federal antitrust claims against Forest Labs. and the generic manufacturers. The purchasers alleged that Forest Labs. unlawfully paid off the generic manufacturers to delay the market entry of their products and prolong Forest Labs.’ ability to reap monopoly profits. The purchasers claim that Forest Labs. covered up these payments by pretextually compensating the generics for goods and services that Forest Labs. did not truly need. The purchasers claim that without such “side deals,” generic versions of Bystolic would have entered the market earlier – whether by the generic manufacturers prevailing in the infringement litigation, entering at risk (i.e., with litigation ongoing) or agreeing to a settlement allowing for earlier market entry.

The payments made by Forest Labs. are known as “reverse payments” because, unlike a typical settlement payment, the patent holder pays the alleged patent infringer even though they have no claim for damages. In 2013, the Supreme Court explained in FTC v. Actavis that such payments should be evaluated pursuant to antitrust law’s rule of reason, under which courts balance anticompetitive effects against procompetitive benefits. The Supreme Court explained that while reverse payments may look dubious, they are not automatically unlawful. Instead, these payments may “sometimes” violate the antitrust laws, but only if they are both “large” and “unjustified.” According to the Supreme Court, whether a reverse payment passes antitrust muster “depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” including fair value for goods and services exchanged as part of a bona fide commercial relationship.

Forest Labs. and the generic manufacturers moved to dismiss the purchasers’ claims for failure to state a claim. The district court granted the motion, concluding that the purchasers’ allegations did not plausibly show an antitrust violation under Actavis. The purchasers’ appealed.

The Second Circuit affirmed the dismissal. Analyzing Actavis, the Court explained that reverse payments are subject to the rule-of-reason analysis and the relevant inquiry involves determining why the payment was made. The Court noted that the payments must be analyzed against a backdrop of the strong public policy favoring settlement of disputes, meaning that the payments violate antitrust law only if they are both large and unjustified or unexplainable. In turn, whether a reverse payment is “unjustified” depends on whether it “reflects traditional settlement considerations,” including “fair value” for products or services provided by the generic manufacturer pursuant [...]

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