By Sungho Cho, Associate Professor, Bowling Green State University, Peter Park, Partner, Sughrue Mion, PLLC, and June Won, Head Golf Professional, Stone Ridge G.C.
The sporting goods market is dominated by a small number of multinational firms competing at the international level. Such multinational brands would occasionally compete with a fringe of small local companies in domestic markets. Because a price war would not likely be prevalent in the oligopolistic market, the typical business strategy of sport merchandising conglomerates primarily hinges on building a variety of entry barriers including aggressive enforcement of intellectual property rights (Cho, 2015; Cho & Kim, 2018; see Already v. Nike, 2013). Thus, aggressive enforcement of patent rights is one of the most crucial tactics pursued by golf equipment brands. This project examines a dispute between two golf equipment companies over a set of club-design technologies where the parties had aggressively litigated before they reached a cross-licensing settlement (Stachura, Feb. 1, 2019), i.e., Parsons Xtreme Golf, LLC. v. Taylor Made Golf Company, Inc. (D. Ariz., filed on Sept. 12, 2017; settled on Feb. 1, 2019). This article explores a notable crossroad between patent and antitrust law.
Parties and Technologies at Issue
In 2014, the founder of GoDaddy.com, Bob Parsons, established his own global golf equipment company, Parsons Xtreme Golf, LLC., (“PXG” hereafter). After recruiting former senior product designer and director of engineering of PING, Parson and his R&D team invented and introduced the allegedly best-performing and one of the most expensive luxury golf club sets, i.e., the PXG 0311 forged iron set. (Burke, 2017, October 18; Gray, 2016, March 20).
In 1979, a golf equipment salesman, Gary Adams, incorporated Taylor Made Golf Company, Inc. By 2018, Taylor Made has become the worldwide market leader in both driver and iron categories according to a survey conducted by Swing by Swing (Nackel, 2018, February 8). In 2017, Taylor Made launched P790 iron in the market. Like PXG’s GEN irons, the new iron had a forged hollow body construction filled with so-called SPEEDFOAM inside the cavity. PXG alleged that Taylor Made infringed upon multiple patents related to the PXG’s “revolutionary iron,” which purportedly contains “an expanded sweet spot, having an ultra-thin club face, and an elastic polymer material injected in the hollow bodied club head.” (McCann, 2017, September 13; Stachura, 2017, September 28).
Complaint and Answer/Counterclaim
On September 12, 2017, PXG filed a complaint against Taylor Made with the District Court of Arizona by claiming that Taylor Made P790 series infringed PXG’s 11 patents relating to golf club designs and methods of manufacturing. Throughout the complaint, the plaintiff’s alleged that manufacturing, sales, and distribution of Taylor Made P790 clubs were in violation of the patents at issue under 35 U.S.C. § 271(a)-(c) (Nexis Uni, 2019). The remedy sought by the lawsuit included a declaratory judgement against Taylor Made for the infringement, damages incurred by the infringement, injunctive relief, and reasonable attorney fees as an exceptional case under 35 U.S.C. § 285 (Nexis Uni, 2019).
In the answer, Taylor Made primarily set forth three affirmative defenses, i.e., non-infringement, invalidity of PXG’s patent, and prosecutorial estoppel (Festo v. Shoketsu, 2002). In addition, the defendant brought a counterclaim to seek declaratory judgment of non-infringement, invalidation of PXG’s patents, and infringement of preexisting Taylor Made’s patents under the doctrine of equivalents.
Settlement and Antitrust Implications
Parsons and Taylor Made reached a settlement on Feb. 1, 2019. While the details of the settlement were not disclosed to the public for confidentiality provisions, the crux of the settlement was known to be a cross-licensing deal (Stachura, Feb. 1, 2019).
Federal antitrust law prohibits a concerted action that unreasonably restrains trade in interstate commerce whereas patent law allows patentees to maintain limited monopoly. While the both systems are designed to increase consumer welfare, they have different approaches, i.e., punitive v. incentivizing. While many restrictive or exclusionary business practices might not be illegal as far as they are carried out within the scope of patent rights, there are outer limits. For instance, two patentees in competition may not horizontally fix prices of their goods even if both maintain valid patents (U.S. v. Line Material Co., 1948; U.S. v. Masonite Corp., 1942).
A more complicated case would be when a patentee and its potential competitor make a settlement deal that might have anticompetitive effects, e.g., reverse payment (In re Cardizem CD Antitrust Litigation, 2003). While civil lawsuits are usually settled for some payment from defendants to plaintiffs, a reverse payment settlement works opposite. That is, a plaintiff would pay a defendant to end the litigation, and more importantly, reduce potential competition in the market. Most reverse payment settlements have been in patent litigation relating to pharmaceutical products where plaintiffs promise to pay defendants for not introducing generic brand drugs (FTC v. Actavis, 2013).
Several Federal Circuits decided that such type of settlement may not be scrutinized under the federal antitrust law because the reverse payment would still be deemed an exclusionary practice executed within the scope of patent enforcement (Arkansas Carpenters Health and Welfare Fund v. Bayer, AG, 2010; In re Ciprofloxacin Hydrochloride Antitrust Litigation, 2008; In re Tamoxifen Citrate Antitrust Litigation, 2006). On the other hand, the Sixth Circuit declared that a reverse payment settlement intended for a delayed market entry was per se illegal (In re Cardizem CD Antitrust Litigation, 2003). Given the circuit split, the U.S. Supreme Court granted a writ of certiorari in FTC v. Actavis (2013).
Shapiro (2003) introduced a notion that a patent settlement’s competitive effects should not be more restrictive than the expected result of patent litigation for the purpose of antitrust analysis. In FTC v. Actavis (2013), the Supreme Court adopted the Shapiro’s methodology to examine the possible anticompetitive effects of a reverse payment settlement among multiple pharmaceutical companies. The Court in essence compared the likelihood of patent invalidity in the litigation and the value exchanged for the delayed market entry, e.g., amount of settlement payment. The Court decide that FTC should have been able to scrutinize the anticompetitive effects of the settlement under the rule of reason “[s]ince a large, unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the patent’s validity” (FTC v. Actavis, 2013, p. 3). Actavis holding has been extended to a non-cash settlement deal (King Drug Co. of Florence v. Smithkline Beecham Corp., 2015).
Pursuant to Actavis, antitrust scrutiny of patent settlement is indeed conceivable when the proportionality test indicates notable anticompetitive effects. In addition to the reverse payment, there are other provisions that may raise noteworthy anticompetitive concerns, namely, counter-restraints and cross-licensing (Hovenkamp, 2019). First, if Parsons-Taylor Made settlement had a counter-restraint clause, it is problematic. Under the provision, Parsons and Taylor Made would be restrained from selling their goods in specific geographical areas (U.S. v. National Lead, 1947) or product categories. Such agreement is arguably analogous to a territorial allocation, which is a quintessential cartel behavior (U.S. v. Topco Assocs, Inc., 1972). A study demonstrated that a plaintiff’s territorial confinement exchanged for a competitor’s partial monopoly has anticompetitive effects similar to a reverse payment (Hovenkamp, 2019).
Secondly, if the settlement had cross-licensing, it would also possibly be subject to antitrust scrutiny. When two or more patent holders in litigation decide to settle, it is more likely a cross-licensing agreement. Since a cross-licensing settlement is typically negotiated where both parties allege countervailing patent infringement claims, at least one or both firms would be enjoined from using the other’s technology upon the conclusion of the litigation (Hovenkamp, 2019). “As a result of this comparative symmetry, the profits expected to accrue from litigation do not necessarily skew sharply in one party’s favor” (Hovenkamp, 2019, p. 464). Nevertheless, if one party in the settlement negotiation has more leverage due to its prominent market power or more resources to bear cost of prolonged litigation, the advantaged party would act like the sole patentee, which will result in the same anticompetitive effects almost identical with the foregoing reverse payment and counter-restraint agreement. In consideration of the disparity of the parties’ market power and establishments in Parsons, it is more probable than not that Taylor Made might have pursued an anticompetitive deal which would be attractive enough to Parsons yet harmful to the consumer welfare.
