Copyright (c)1998 by Douglas F. Broder (see endnote 1)

Here's a question for a first year law school exam: Would a party's intentional failure to disclose material information to a government agency in an application constitute fraud? Would it be fraud if the applicant knew the application would be denied if it disclosed the information? Would it be fraud if the applicant had signed a statement under oath in the application that it was aware it had a legal duty to disclose the information? If you answered yes to any or all of those, and your law professor was the United States Court of Appeals for the Federal Circuit, you'd be wrong.

In Nobelpharma AB v. Implant Innovations, Inc., the Federal Circuit has issued a decision that, if upheld, could needlessly alter the delicate balance between the U.S. patent and antitrust laws. (see endnote 2) The case involved the long-standing but little-used Walker Process doctrine. The doctrine, articulated in the 1965 Supreme Court case of the same name, provides one exception to the general rule that a patent-holder's assertion of patent rights cannot form the basis of an antitrust monopolization claim against him. (see endnote 3) The Walker Process exception: an antitrust plaintiff may succeed if he can prove that the patent-holder obtained its patent through fraud on the United States Patent and Trademark Office (the "PTO").

The plaintiff in Nobelpharma was a Swedish manufacturer of dental implants and the holder of a U.S. patent for its implant technology. Nobelpharma had charged the defendant, Implant Innovations, Inc. ("3I"), a U.S. implant maker, with infringing its patent. As is common, 3I countersued. It alleged that Nobelpharma's patent was invalid, in part because it had been obtained through fraud on the PTO. 3I alleged that Nobelpharma had failed to disclose critical prior art in its patent application - information that would have caused the PTO to deny the application. Relying on Walker Process, 3I claimed that Nobelpharma had used its fraudulently obtained patent to monopolize the U.S. implant market and injure 3I.

A combined bench and jury trial resulted in near total victory for 3I. The district court held Nobelpharma's patent invalid. And it upheld the jury's verdict for 3I on 3I's antitrust counterclaim. The result was a judgment for 3I for $9.9 million (after damages were trebled as required by the antitrust laws).

On appeal, the Federal Circuit affirmed the finding that the patent was invalid. But it overturned 3I's antitrust judgment. In a split decision, it ruled that Walker Process applies only where the claimant can prove that the patent-holder made an affirmative misrepresentation to the PTO in connection with its patent application. Applying a rule it purported to have found in later cases, the majority held that Walker Process does not apply where, as here, the patent-holder merely failed to disclose critical prior art. The court made this ruling even though the U.S. patent laws explicitly require patent applicants to disclose this information and to certify under oath that they are aware of and understand this duty and even though Nobelpharma's own lawyers had counseled against suing because it had obtained the patent fraudulently.

The court acknowledged that it was motivated partly by a fear that Walker Process claims could proliferate and discourage valid patent infringement claims. ("Were we to hold that failure to cite prior art provides a basis for Walker Process antitrust liability, most patent infringement actions would be converted into antitrust cases.") Yet, although Walker Process has been around for over thirty years, 3I's was the first reported successful claim under the theory. Moreover, the Supreme Court in Walker Process had already made allowance for this possibility. It placed an added burden on antitrust claimants asserting the doctrine, requiring that they prove fraud on the PTO not by the normal civil burden of preponderance of the evidence, but by clear and convincing evidence.

In a searing dissent, Judge Plager denounced the reasoning of the majority. Remarking that the majority's holding apparently means that "in patent law, anything goes," he argued that their reasoning was inconsistent with commonly accepted notions of what constitutes fraud. He characterized Nobelpharma's actions as "knowing and willful fraud." And he roundly criticized the majority for allowing its fear of a "parade of horribles" - a concern he obviously did not share - to interfere with an appropriate holding on the facts.

Judge Plager was right. The majority's new rule is legally unsupportable and bad policy. Nothing in Walker Process, or in any later decision, even suggests that a knowing and intentional failure to disclose material prior art would not constitute Walker Process fraud. Indeed, Nobelpharma did not even raise the argument in its appellate papers - the majority came up with it on its own.

The debate about where and how to strike a balance between the patent laws' grants of monopolies and the antitrust laws' attempts to prevent them is constantly with us. Yet Walker Process is one area of the law that wasn't broke and didn't need fixing (at least not this way). The history of unsuccessful Walker Process litigation shows that the majority's rule is not needed to protect patent-holders from the predations of rabid antitrust litigants.

If anything, the heavy burden imposed on an antitrust claimant by Walker Process already tilts the balance too far in the other direction. The patent application process - which depends almost entirely upon the good faith and candor of patent applicants in reporting prior art - can be abused. Walker Process claims provide one deterrent to such abuse. Having recently settled a Walker Process case on behalf of an antitrust plaintiff, I am convinced that widespread adoption of the new Federal Circuit rule would discourage virtually all Walker Process claims and actually encourage what anywhere else would be viewed as fraud.

3I has asked the Federal Circuit for a rehearing. If that fails, 3I has expressed an intention to seek Supreme Court review. With any luck, one or both will succeed in revising this misguided decision.

ENDNOTES

1. Douglas F. Broder is an antitrust partner in the New York office of the international law firm Coudert Brothers. He writes frequently on antitrust topics and is a regular contributor on U.S. legal developments to the European Competition Law Review.

2. Nobelpharma AB v. Implant Innovations, Inc., 129 F. 3d 1463 (Fed. Cir., Nov. 18, 1997).

3. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965)
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