WCK1114
`Wockhardt Bio AG v. Janssen Oncology, Inc.
` IPR2016-01582
`
`1
`
`

`

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`2
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`

`

`l
`‘
`
`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`commercial success could in principle
`From an economic perspective,
`be defined by a single criterion: Does the patented invention earn a pos—
`rn (risk—adjusted) on invested capital after accounting for all
`itive net retu
`ng and commercializing the patent
`relevant costs associated with developi
`as well as any alternatives available to t
`protect the human and financial investmen
`ses. This investment, however, IS only beneficial,
`ucts, services, or proces
`if consumers are willing to purchase an embod—
`from a social perspective,
`iment of the invention at such a price as to fully compensate the inventor
`for all costs incurred in bringing the product to market.Z Put simply,
`patents are not needed to protect inventors from making poor invest—
`ment decisions.
`The courts’ use 0f the previously mentioned factors is not necessarily
`in conflict with this definition, and many—perhaps most~previous deci—
`made by courts are likely to have been consistent with it. Given the
`sions
`it is entirely reasonable that an analysis of
`limitations on available data,
`der and place significant weight on the
`commercial success should consi
`ket share or revenue growth. However,
`traditional measures such as mar
`under certain circumstances, rapid sales growth and gains in market share
`will not necessarily reflect a profitable underlying invention. Moreover,
`calculating the proper measure of profitability can be a complicated task
`and should be considered in an appropriate context—for example, relative
`or alternative. Consequently, it is our opin—
`to an appropriate benchmark
`deeply into the economic characteristics
`ion that courts should look more
`f the commercial
`of the product before arriving at a determination 0
`success of the patent.
`
`A Summary of the Case Law
`In Graham v. John Deere Co., the semina
`cess as a relevant secondary consideration in a determination of patent
`
`validity,theSupremeCourtoftheUnitedStatescitedanarticleinthe
`spectiveforevaluatingthecommercialsuccessofapatent.Thearticle
`
`University of Pennsylvania Law Review that focused on the consumer per-
`
`stated that “[t]he operative facts...are the actions of buyers rather than
`those of producers.”3 Case law since Graham has generally followed this
`
`/2
`
`One could imagine that, for reasons of public policy, a patented invention related to
`health care could be sold at an artificially low price, or even given away, but such a
`strategy would not reduce the true value of the invention.
`3 Graham v. John Deere Co., 383 U.S. 1 (1966); and Richard L. Robbins, “Subtests of
`‘Nonobviousness,’” University of Pennsylvania Law Review 112 (1963—1964): 1175.
`
`196
`
`g
`
`3
`
`
`
`

`

`4
`
`

`

`
`
`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`in the product life cycle. The Manual ofPatent Examining Procedure, pub—
`lished by the United States Patent and Trademark Office, identifies this
`nexus between the success of the product and the patent itself as a key
`component of a nonobviousness claim:
`'
`An applicant who is asserting commercial success to support its
`contention of nonobviousness bears the burden of proof of estab-
`lishing a nexus between the claimed invention and evidence of
`commercial success.7
`
`Courts have recognized some of these possibilities and have generally
`required a showing that any commercial success be directly linked to
`demand for the patented feature rather than any other factors.
`Consequently, for any data on sales or market share to be relevant, one
`must be able to demonstrate that whatever demand for the product
`exists, it is due, at least in part, to the patent, not some other features or
`actions by the seller.8 A simple thought experiment can shed light on the
`concept of a nexus. Suppose the patented invention were made unavail—
`able and removed from the product. Could the seller attain the same level
`of commercial success? Or, from an economic perspective, what is the dif—
`ference in net profits that would accrue to the patent holder if the
`patented invention were removed from the product?
`Despite the courts’ tendency to view commercial success from only
`the consumers’ perspective, a few decisions have recognized profitability
`as a factor that might be considered along with other objective economic
`evidence. For example, in Cable Electric Products Inc. v. Genmork Inc., the
`court stated:
`
`Without further economic evidence, for example, it would be
`improper to infer that the reported sales represent a substantial
`share of any definable market or whether the profitability per unit
`is anything out of the ordinary in the industry involved.9
`Discussions of profitability or other “supply-side” considerations have
`been included in assessments of commercial success in only a few other
`
`7 United States Patent and Trademark Office, Manual ofPatent Examining Procedure,
`February 2.003 revision, § 716.03. See also Demaco, 351 F..zd 1387.
`8 Altimugh the courts have consistently recognized that the issue of a nexus is critical
`in a detemfination of commercial success, in many cases they have found that the
`existence of a significant advertising budget does not in itself rebut the presumption
`that the commercial success of the product at issue must be due to the patented
`invention. For example, see Merck and Co. v. Danbury Pharmacal Inc., 694 F.Supp. 1, 21
`(D. Del. 1988); and Hybritech, 802 F.2d 1367.
`9 Cable, 770 F.2d 1015.
`
`198
`
`
`
`5
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`

`

`
`
`COMMERCIAL SUCCESS: ECONOMIC PRINCIPLES
`APPLIED TO PATENT LITIGATION
`
`
`
`
`
`cases.10 As these cases properly point out, ultimately an inventor’s suc—
`cess should be judged by the returnsvto his investment relative to that
`inventor’s next—best alternatives.
`
`Economic Criteria
`
`In the first edition Of his ground-breaking book, Economic Analysis OfLaw’
`the distinguished Junst Richard Posner discussed the nor-meme (Lev
`prescriptive) and pOSItwe (i.e., descriptive) roles of economics in the law:
`
`Economics turns out to be a powerful tool of normative analysis of
`law and legal institutions—a source of critici5m and reform...The
`normative role of economic analysis in the law is fairly obvious.
`The positive role—that of explaining the rules and outcomes in
`the legal system as they are—is less obvious, but not less impor—
`tant- AS we shall see, many areas of the law, eSPeCially the great
`common law fields of property, torts, and contracts) bear the stamp
`0f economlc reasoning. Few Iega1 opinions: to be sure, contain
`explicit references to economic concepts and few judges have a
`substantial background in economics. But the true grounds of
`decision are often concealed rather than illuminated by the charac—
`teristic rhetoric of judicial opinions.11
`
`As described above, we suggest that there is a straightforward norma—
`tive role for economics in determining commercial success: A patented
`invention should be considered a commercial success if it can be shown
`to have earned, or can reasonably be expected to earn, a positive net
`return on invested capital after accounting for all relevant costs associ—
`ated with deveIOpment and commercialization as well as any alternatives
`available to the patent holder and the amount of risk borne by the patent
`holder. Although courts would do well, in our view, to adopt more explicit
`economic reasoning along these lines in their analysis of commercial suc-
`cess issues, our reading of the relevant cases suggests that a substantial
`amount of economic analysis has already found its way into judicial opin—
`ions regarding commercial success.
`Under certain circumstances, it appears that economic analySiS COUId
`EIOVIde a definitive answer to the question “Has a patented mventlon
`em a Comrnercial success?” Fo1r example, suppose that:
`_.—___'—-_—_—
`
`10
`
`For example, see Miles Laboratories Inc. v. Shandon Inc" 1992 WL 503432 (W- D' P3);
`11 and In re Ben Hunting, 100 F.3d :35, 40 USPQ2d 1685(Fed-Cifi-1996l
`Richard A pflmfl’ Economic Analysis {Jr-Law (Boston, MA: Little, Brown and Co.,
`1972). s.
`
`199
`
`6
`
`

`

`
`
`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`1.
`
`a start—up company, founded solely to exploit a single patented
`
`invention, incurred costs (in present value terms) of $1 million to
`develop a single saleable product;
`
`2. over its entire life cycle—now completed—sales of that product
`generated net profits of $2 million (again, in present value terms);
`and
`
`3.
`
`there is no doubt that the product characteristics and/or other
`
`factors that led consumers to purchase the product were all due to
`the invention.
`
`The first assumption allows us to say with certainty that it cost pre—
`cisely $1 million to develop a product embodying the patented invention,
`
`since we assume away any difficulties that would be caused by the need to
`
`associate “common costs” in, say, a central research—and—development
`
`(R&D) facility with the development of a particular invention. The second
`
`assumption eliminates the difficulty of evaluating the potential profits still
`
`to be earned by a product currently on the market. The third assumption
`
`assures that the nexus between patented invention and sales success has
`
`been established. Assuming that an appropriate interest rate has been used
`
`to “discount” (or appreciate) the investment and the resultant profits, a $2
`million return on a $1 million investment would surely count as a com—
`mercially successful venture from the perspective of the producer. Since
`
`(by assumption) the patented invention is what made that return possible,
`then the patented invention should be deemed a commercial success.
`In our experience, however, the issues that need to be addressed are
`
`always more complicated than the stylized example above, so it is hardly a
`surprise that—as far as we know—no reported case has reached a decision
`
`regarding the commercial success of a patented invention simply by compar—
`
`ing the cost of developing and selling the patented product with profits
`
`earned on that product. Our own research has made clear that even large,
`
`technology—oriented companies have difficulty associating early— stage R8cD
`costs with what ultimately became a commercially Viable product, inevitably
`
`leading to some uncertainty regarding the total cost of bringing a patented
`invention to market.12 In addition, determining profitability for a single
`product sold by a multiproduct company can be further complicated if the
`
`growth in—that product’s sales comes at least partly at the expense of profits
`
`12 Even if detailed product—specific R&D cost data were not available, however, one
`might be able to make a reasonable evaluation of commercial success by comparing a
`product’s profits to the average cost of developing and commercializing broadly simi-
`lar products.
`
`200
`
`
`
`7
`
`

`

`COMMERCIAL SUCCESS: ECONOMIC PRINCIPLES
`APPLIED TO PATENT LITIGATION
`
`elsewhere in the company or, alternatively, if sales of the patented product
`generate additional profits for the company by drawing consumers to other
`products. Another complication arises from the fact that most patent dis-
`putes involve products currently or not yet on the market, not products
`whose life cycles have ended, adding further uncertainty regarding the prof—
`its that will ultimately be generated.13 And finally, while there are certainly
`instances in which there is no doubt that the patented invention has created
`the performance characteristics that were responsible for the product’s suc—
`cess, our studies have also revealed contrary examples in which it was clear
`that a patent played little, if any, role in generating product sales. Given the
`data imperfections that frequently make a “direct” measure of commercial
`success impractical,14 it is therefore not surprising that courts have tended
`to focus on “indirect” evidence, such as growth in market share. As Judge
`Posner suggested, however, many of the courts’ decisions on commercial
`success nevertheless “bear the stamp of economic reasoning.”
`For example, economic reasoning makes clear that pharmaceutical
`companies would not invest in research on a particular class of drugs,
`such as antibiotics, unless they believed that on an expected-value basis
`that research would be profitable. If companies’ expectations are rational,
`then a bundle of “average” marketed antibiotics will generate enough prof-
`its over their life cycles to yield an acceptable return on the companies’
`R&D investments. A drug that clearly does much better than average is
`very likely, therefore, to be a commercial success.15
`
`itable industry, a “below-average” product may still be a commercial success.
`
`How would we know that a drug is much better than average? A large
`(i.e., much above-average) market share would be a likely indicator, and
`rapid growth in market share—particularly if the product is not too far
`into its life cycle—would also likely be relevant, since the expected pres—
`ent value of a product’s profit stream will be greater the sooner those
`————_——_—_—_—__
`
`13 Sometimes. however, as with a blockbuster prescription drug that has performance
`features clearly due to the patent at issue, the sales and profits generated during the
`first few years of the product’s life will be sufficiently large to leave little doubt about
`the parent’s commercial success even if uncertainties remain regarding the precise
`magnitude of early-stage R&D costs.
`A further complication relates to the possibility that infringement by a competitor
`may affect the profitability of a patent holder’s product, and therefore its apparent
`commercial success. In order for an analysis of profitability to he of use in assessing
`commercial success, one should account for the actions of the infringe-r. Moreover,
`assessing only the infringer’s profitability, rather than the patent holder's, may not
`provide an appropriate measure of commercial success. Such a problem could arise if.
`for example. the infringer had a different cost structure or sold to a different group of
`customers than the patent holder.
`Note. however, that the inverse is not necessarily true. For eitample, in a highly prof-
`
`8
`
`

`

`
`
`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`profits are earned.16 The courts’ reliance on market—share data and
`growth in market share, as described in the previous section, appears to
`be sensible in light of the likely imperfections in the data that would have
`shed a more direct light on the issue of a product’s commercial success.
`Despite the fact that, for the most part, courts’ general approach to
`determining commercial success has been consistent with these eco—
`nomic concepts, it appears that some decisions would have benefited
`from more, or at least more explicit, economic analysis. For example, in
`the Neupak Inc. 1/. Ideal Manufacturing and Sales Corp. case, the court of
`appeals found the following:
`
`Because the record shows that between 1995 and 2000 Neupak’s
`patented mobile filling carts enjoyed a significant increase in sales
`and constituted an increasing share of Neupak’s business, the dis—
`trict court did not clearly err in concluding that Neupak demon—
`strated a nexus between commercial success and the ‘233 patent.17
`
`In this case, not only did the courts (both the district and appeals)
`apparently fail to put Neupak’s sales into any “meaningful context,” there
`appears to be a possibility that the product embodying the patented
`invention became successful at the expense of other Neupak products. It
`is likely that a relatively simple analysis of the company’s financial
`records could provide a definitive answer to that question.
`In another case, In re Ben Huang, the United States Court of Appeals
`upheld a finding by the Board of Patent Appeals and Interferences that the
`pending claims made by Huang for a patent covering a particular kind of
`tennis racket grip were obvious, in part through a finding that Huang had
`not presented sufficient evidence of commercial success.18 In this case, the
`patent holder had cited several factors that he claimed were indicators of
`commercial success, including 1) sales of over 1 million units for use on
`both new and resold rackets and 2) the fact that since Huang began selling
`the claimed grip, sales of his company’s prior grips had decreased by about
`50 percent. In this case, a relatively basic review of the economics of the
`claimed product by the patent holder would likely have provided a sounder
`basis for his claim. For example, from a review of the product and patent
`descriptions, it appears that development costs were likely quite low—the
`
`profits ever the next three years will be greater than the NPV of a product that gener—
`ates $5 next year, $10 the second year, and $15 the third year, even though both prod—
`ucts will generate $30 in {undiscounted} profits.
`17 Neupak, 41 Fed. Appx. 435.
`18 Huang. :00 F.3d 135.
`
`202
`
`9
`
`

`

`COMMERCIAL SUCCESS: ECONOMIC PRINCIPLES
`APPLIED TO PATENT LITIGATION
`
`
`
`patent claimed a change in the ratio of the thickness of the various materi—
`als used in the grip. If this were the case, then net profitability could have
`been reliably estimated for both the patented version of the product and
`the older version that it replaced. Assuming that Huang’s sales of the new
`grip were not a result of discounting relative to the preexisting product
`and that manufacturing costs for the two products were similar, then a
`determination of commercial success could be made based on an evalua—
`tion of the increased revenues generated by the patented product relative
`to an appropriate benchmark (such as Huang’s revenues prior to introduc—
`tion of the new product or to revenues of competitors in the industry).
`
`Two Case Studies
`
`We were asked to evaluate and testify on commercial success issues in
`two recent cases. These cases provide an illustration of how traditional
`measures may be insufficient to prove commercial success, as well as an
`illustration of how, if properly applied, economic analysis can provide the
`complete picture.
`In the first case, we were asked to carry out research and testify on
`behalf of an accused infringer who was challenging the validity of a patent
`allegedly covering a particular type of packaged snack product. Despite
`rapid growth in sales of the product embodying the patented invention
`(approximately $30 million in revenues during the first year rising to about
`$110 million by the fourth year) and attainment of a substantial share of any
`reasonably defined market, we identified several key facts that nonetheless
`indicated that the patent may not have been a commercial success.
`Our first concern was that, although revenues were increasing rapidly,
`the trend in profits was not so promising. As shown in Figure 1, the com—
`pany experienced a cumulative net Operating loss of approximately $10
`million to $15 million during the first five years of the product’s life cycle.
`Moreover, the trend through the last two years was downward—offering
`no indication that profits would be forthcoming in the near future.
`Furthermore, our analysis found that sales of the product were coming, in
`part, from customers that were switching from other snack products man—
`ufactured by the same company. We estimated that an additional $13 mil—
`lion in profits had been lost due to “cannibalization” of other product
`lines. These data indicated to us that although the product apparently had
`been deemed a success in the marketplace by consumers, it did not appear
`to be a commercial success from the perspective of the patent holder.
`
`203
`
`10
`10
`
`

`

`
`
`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`—_——_—————_—
`
`Figure 1. Snack Product Patent Holder Profitability,
`Annual and Cumulative
`
`
`
`10,000,000
`
`5,000,000
`
`0
`
`(5,000,000)
`
`(10,000,000)
`
`A
`
`32_
`
`oen
`
`.._
`:
`8Q.
`mC
`'43
`5Q.
`0
`
`NJ";
`Deve|opment
`Development
`’ I__' -_.'
`Expenses
`Expenses
`(15,000,000)——
`1998
`1999
`2000
`2001
`2002
`2003 Cumulative
`Total
`
`A second major concern related to the issue of the putative nexus
`
`between the revenues earned by the company and the patented invention.
`
`In this case, a competitor had entered the market one year after the
`
`patent holder with a product—acknowledged to be noninfringing and
`
`apparently not protected by any other patent or critical trade secret—that
`
`provided virtually the same benefits to the consumer as the disputed
`
`product, including such characteristics as ease of preparation, portion
`control, and shape of the package (important for product placement on
`
`the store shelf). Moreover, as shown in Figure 2, this product experienced
`a path of revenue growth almost identical to the product at issue. The
`patent holder claimed that the product embodying the patented invention
`
`was one way to achieve the benefits cited by customers. However, despite
`
`the dramatic growth in revenues, in our opinion the performance of this
`alternative product demonstrated that causation had not been established.
`
`Based on information we reviewed, it appeared that rapid growth in rev—
`enues and market share for products of this type were not dependent on
`
`the patented invention. Finally, we pointed out that the patent holder had
`
`a very well—known brand name and had used innovative techniques to
`introduce and market the product at issue. These factors further weak—
`
`ened the link between the patented invention and any success (at least in
`
`terms of gross revenues) that the product had in the marketplace.
`
`2.04
`
`11
`11
`
`
`
`

`

`
`
`COMMERCIAL SUCCESS: ECONOMIC PRINCIPLES
`APPLIED TO PATENT LITIGATION
`
`# F
`
`igure 2. Snack Product Annual Revenues Based on Number
`of Years Since Product Introduction
`
`I Competitor
`
`2! Patent Holder
`
`120,000,000
`
`100,000,000
`
`80,000,000
`
`60,000,000
`
`40,000,000
`
`20,000,000
`
`
`
`Revenues(Dollars)
`
`
`
`The facts were very different in the second patent dispute in which we
`
`testified for the patent holder regarding the commercial success of an anti—
`
`infective drug. First, there did not appear to be much dispute about the
`
`nexus between the patented invention and the product’s efficacy, since—as
`
`one might expect with pharmaceutical products—the patent disclosed the
`
`drug itself and its methods of use. Second, although the accused infringer
`
`contended that the product’s success was due to advertising and promo—
`
`tion, that argument was weakened by (1) physicians’ testimony and other
`
`evidence that while promotional activities may well lead physicians to try
`
`a new product, repeated prescribing for patients is likely only if the prod—
`
`uct performs well; and (2) our analysis, which showed that the product at
`issue had the second—lowest ratio of promotional spending to sales of all
`
`major anti—infective products introduced in the past decade.
`
`Traditional metrics, such as growth in market share, also pointed to
`
`the product’s commercial success, as did a direct comparison of profits
`
`and R&D expenditures. Figure 3, for example, shows that after just four
`years on the market, the product ranked fourth among all oral tablet
`
`antibiotics, a market that included well over 200 products.
`
`205
`
`12
`12
`
`

`

`ECONOMIC APPROACHES TO INTELLECTUAL PROPERTY POLICY,
`LITIGATION, AND MANAGEMENT
`
`Figure 3. Revenues for Best—Selling Competing Brands in
`the Oral Tablet Antibiotic Market
`
`- - Patented Product — Products in the — Products in the
`Same Class
`Other Classes
`
`Dollars)
`
`Revenues(Constant
`
`1991
`
`1992
`
`1993
`
`1994
`
`1995
`
`1996
`
`1997
`
`1998
`
`1999
`
`2000
`
`2001
`
`2002
`
`2003
`
`Although competition among antibiotics spans several classes of
`drugs, each class has a unique mechanism of action and therefore repre—
`sents a distinct market segment that should be examined as part of an
`evaluation of the commercial success of a patented invention. As Figure 3
`also shows, sales of the patented product grew faster than any other com—
`peting antibiotic. Figure 4 shows that within drugs of the same class, the
`market leader began losing share as soon as the patented product was
`introduced. The product’s rapid acceptance as the treatment of choice for
`dangerous infections such as hospital—acquired pneumonia demonstrated
`both the product’s commercial success and the importance of its per-
`formance characteristics (since no amount of advertising or promotion
`would be likely to influence the use of a product in life—threatening situ-
`ations). The huge sales of the product were even more impressive in light
`of the long odds against success in the pharmaceutical industry19 and a
`history of failed attempts to develop safe and effective anti—infective
`drugs, leaving no doubt in our minds that the product and the patented
`invention were commercial successes.
`
`206
`
`13
`13
`
`
`
`

`

`COMMERCIAL SUCCESS: ECONOMIC PRINCIPLES
`APPLIED TO PATENT LITIGATION
`
`E F
`
`igure 4. Shares of Revenue for a Class of Antibiotic Drugs
`
`
`
`
`Patented Product
`
`1991
`
`1992 1993 1994 1995 1996
`
`1997 1998 1999 2000 2001 2002 2003
`
`90
`
`80
`
`70
`
`60
`50
`
`40
`
`30
`
`20
`
`10
`
`’5
`U)
`
`S g
`
`76
`9/
`
`§
`fi
`*5.1
`E
`E
`
`Conclusions
`
`Based on our understanding of the purpose of patent protection and our
`interpretation of precedents, it is our opinion that commercial success
`should be evaluated on the basis of the economic contribution of a
`
`patented invention to an inventor’s financial well—being. Thus, from the
`perspective of economics, a key indicator of commercial success ought to
`be the profits generated by the patented invention, relative to an appro—
`priate benchmark or alternative. When available, financial data on these
`factors should be considered in an evaluation of commercial success.
`
`Courts’ historic use of factors such as revenue growth and large market
`share is likely to be consistent with this standard in most cases, if
`applied correctly.
`
`
`19 Recent studies estimate that only one out of every 5,000 potential drug compounds
`synthesized during applied research ends up being marketed. See Alfonso Gambardella,
`Science and Innovation: The US. Pharmaceutical Industry During the 19805 (Cambridge
`University Press. 1995), 20; and Pharmaceutical Research and Manufacturers of
`America, Pharmaceutical Industry Profile 2003, 2—6. Only 3 of every 10 approved drugs
`have sales revenue that exceed the average after—tax development costs of a new drug
`product. See Pharmaceutical Research and Manufacturers of America, "The Lengthy
`and Costly Challenge of Drug Development,” in "Leading the Way in the Search for
`Cures." (brachure), available at wwwphrmam-glpublications/pubficationafbmchure/
`leading/index2.cfm, accessed 6 July 2004.
`
`207
`
`
`
`14
`14
`
`