When Caught with Your Hand in the Cookie Jar...Argue Standing

Posted by D. Daniel Sokol

Jay L. Himes (Labaton Sucharow) explains that When Caught with Your Hand in the Cookie Jar...Argue Standing.

ABSTRACT: In Walker Process v. Food Mach. & Chemical Corp., the Supreme Court held that a patent holder who enforces a patent obtained by fraud on the patent office can violate Sherman Act § 2, so long as the other elements of a monopolization claim are proven. Nevertheless, under prevailing law merely obtaining a patent by fraud, however egregious, does not establish an antitrust violation, absent some measure of enforcement. In Walker Process itself, the plaintiff-patent holder and the defendant, the alleged infringer, were themselves competitors. So, when in later cases, competitors of a patent holder asserted comparable § 2 claims, based on Walker Process fraud on the patent office, the courts had no difficulty recognizing the competitor’s standing to sue.

Commonly, the competitor pleaded the Walker Process claim as a counterclaim in the patent holder’s infringement suit. Whether the claim was legally sufficient, however, often turned on whether the patent holder not only fraudulently procured the patent, but also engaged in activity amounting to “enforcing” it against the counterclaiming competitor. Moreover, whether the patent holder’s conduct directed to the competitor constitutes “enforcement” for these purposes was held to be a matter of federal patent law.

The morphing of patent holder conduct – fraudulent procurement and enforcement – into a Sherman Act § 2 violation has led several courts off track. In recent cases, these courts have held that customers of the patent holder – the ones who pay the artificially inflated prices charged under cover of the fraudulently obtained patent – lack standing to allege a Walker Process § 2 claim against the patent holder. These decisions hold, instead, that only a person against whom the patent holder has sought to enforce the patent – typically a competitor or, less frequently, a customer of a competitor – may assert a Walker Process claim.

The decisions are unsound. A Walker Process claim arises under the antitrust laws. Established antitrust principles teach that where a monopolist excludes or otherwise wrongfully restrains a competitor, both the competitor and those who pay the supra-competitive prices that the monopolist is able to extract have standing to sue under Sherman Act § 2. The fact that the monopolist uses a fraudulently procured patent as the means to harm competition, and to impose inflated prices, does not detract from the standing of both groups – competitors and customers who purchase at inflated prices – to sue under § 2.

One of these district court rulings is a case known as DDAVP. Because this case aptly illustrates this recurring issue, I use it as a springboard to discuss standing to allege Walker Process fraud. After discussing the lower court’s ruling in DDAVP, I address the issues raised, and arguments made by the defendants in the Court of Appeals. As I endeavor to demonstrate, DDAVP and similar rulings denying standing to those purchasing directly from the monopolist are incorrectly decided. After that, I critique a commentator-proposal that state attorneys general take up the mantle of asserting Walker Process claims on behalf of direct purchasers. Finally, I conclude by briefly addressing wrinkles in the standing issue when indirect purchasers, typically end-user consumers, sue under state law.

By way of summary, Walker Process establishes that no patent law interest is served by permitting a party who fraudulently procures a patent to use it to inhibit competition. Affording purchasers standing to assert Walker Process claims will advance the compensatory and deterrent functions of the antitrust laws, while also promoting the patent law system by deterring fraud on the patent office.