Abstract
When an inventor discovers a novel, useful, and non-obvious way to use a patent or unpatented product, the Patent Office may issue a method-of-use patent. Because the method-of-use is information, it suffers from the same appropriability and excludability problems that all information bears. This paper examines vertical integration, patent licensing, and bundled pricing as business strategies for extracting the surplus. It also evaluates potential antitrust challenges to bundled pricing.
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Notes
Method-of-use patents are not confined to pharmaceuticals. They may be issued for any novel, useful, and non-obvious method of using existing patented or unpatented products.
The estimated cost of R&D for approval of a new drug varies with several factors that include but are not limited to: the phase of R&D that is being considered; the mean phase length; and the clinical success rate. DiMasi et al. (2016, p. 25) found an “out-of-pocket clinical period cost per approved new drug estimate of $965 million and a capitalized clinical period cost per approved new drug estimate of $1.460 billion.” These estimates are in 2013 dollars and are aggregated across the three phases of the clinical trial process.
See, e.g., Blair and Knight (2013) for some thoughts on sharing the surplus.
Only a fraction of drugs successfully passes through all three phases of clinical trials. DiMasi et al. (2016, p. 23) estimated the phase transition probability for 1442 self-originated compounds of the top 50 pharmaceutical firms: “The overall probability of clinical success (i.e., the likelihood that a drug that enters clinical testing will eventually be approved) was estimated to be 11.83%”.
Although the patentee may sue for damages, the award is apt to be not fully compensatory due to the cost of litigation. Damage awards for patent infringement are limited to the patentee’s lost profit. After paying the litigation costs and sharing the recovery with his or her attorneys, the net recovery may be no more than half of the lost profit. For a discussion of a patentee’s rights and remedies, see Blair and Cotter (2005).
That is, \(\stackrel{\sim }{c}=w+c\), where w is the competitive price of adenosine and c captures the costs of performing the procedure.
If we include transaction costs in the model, the per-unit license fee will decline as will the lump-sum license fee. Profit for the patentee will also decline. Transaction cost considerations may complicate matters, but do not change the basic problems that are associated with method-of-use patents.
When a supplier sells product A on the condition that the buyer also purchases product B, tying is said to exist.
Eastman Kodak v. Image Technical Services., 504 U.S. 451 (1992).
Dawson Chemical Company v. Rohm and Haas Company, 448 U.S. 176 (1980).
If tying were per se unlawful in the usual sense of that term, the inquiry would stop here. The fact of tying is established by showing that two separate goods—the patent license and the pharmaceutical product—are sold together and one cannot be bought without the other. But a successful plaintiff must prove much more in a tying case.
Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006). For an interesting analysis of this decision, see Kobayashi (2008).
For example, if a grocery store offers a “Buy one get one free” deal, a customer cannot “buy” the free one without buying one at the regular price. This deal is clearly promotional.
In Fortner, a developer obtained credit from U.S. Steel on the developer’s purchases of homes from U.S. Steel. The developer alleged that the overpriced homes were tied to the favorable credit. The Supreme Court observed that U.S. Steel may have provided cheap credit in order to sell expensive houses. Several franchisees have alleged that they were required to buy overpriced inputs from the franchiser in order to obtain a franchise license. If there is an overcharge on the inputs, the plaintiff must subtract from that amount any undercharge for the franchise license. In most instances, this will not leave a positive damage figure. United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610 (1977); Midwestern Waffles, Inc. v. Waffle House, Inc., 734 F.2d 705 (11th Cir. 1984); Kypta v. McDonald’s Corp., 671 F.2d 1282 (11th Cir. 1982); Siegal v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971).
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Acknowledgements
Without implicating them in what follows, we thank Thomas Cotter, Herbert Hovenkamp, and Anthony Palmieri for their helpful advice. To the extent that it is relevant, RDB served as a consultant for the defendant in Lakeland Regional Medical Center v. Astellas Pharma US Inc., CA 8:10-CV-2008-T-33TGW, which involved method-of-use patents. Many thanks to Keith Hylton and Lawrence White for helpful comments. We are also grateful to John Turner for sharing his research with us.
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Blair, R.D., Walsh, A.N. Method-of-Use Patents, Appropriability, and Antitrust Policy. Rev Ind Organ 56, 651–666 (2020). https://doi.org/10.1007/s11151-020-09753-3
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DOI: https://doi.org/10.1007/s11151-020-09753-3