Patented Research Tools and the 271(e)(1) Exemption

Proveris Scientific v. Innovasystems, (Civ. No. 05-12424 (D. Mass.)) a case pending before the Federal Circuit involving a "spray data acquisition system" used to test perfumes and nasal sprays, provides the court with an opportunity to clarify the applicability of the 271(e)(1) research use exemption to research tools. 271(e)(1) states in relevant part that “[i]t shall not be an act of infringement to . . . offer to sell, or sell . . . a patented invention solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.” Innova, the alleged infringer, argues that the device is intended solely for use in generating data as required under the FDCA and is only sold to pharmaceutical companies or FDA, and thus falls squarely within a plain reading of the statute.

The patent owner (Proveris) argues that 271(e)(1) does not encompass laboratory equipment, but is limited to what it refers to as “products” – drugs, medical devices, food additives and color additives regulated under the FDCA. In the alternative, Proveris argues that Innova does not fall within the exemption because it is not generating data for submission to FDA, but rather selling equipment used by others to generate such data. The district court sided with Proveris, and ruled that a machine is not a “patented invention” within the meaning of the statute, denying Innova recourse to the 271(e)(1) exemption as a matter of law.

Congress enacted 271(e)(1) primarily for the purpose of exempting generic drug companies from infringement liability for testing a patented drug prior to patent expiration for the purpose of generating the data necessary for FDA approval, but the language is much broader, and the courts have interpreted the statute as covering more than just patented drug candidates. For example, in Medtronic the Supreme Court held that the exemption encompasses medical devices, and in Merck the Court indicated that 271(e)(1) potentially reaches any invention used in the generation of data which might reasonably be appropriate for FDA submission. The Merck decision specifically refrained from deciding whether 271(e)(1) applied to “research tools,” but later in Classen the Maryland District Court held that 271(e)(1) (as interpreted in Merck) does apply to at least some research tools (in that case a computer-implemented system for analyzing adverse event data).

Innova seems to be correct in arguing that a plain reading of the statute would encompass the sale of a device that is only used for preparing data for FDA submission. But if the Federal Circuit agrees it would raise some interesting line drawing questions. Would it be enough if the device is predominantly used for generating data for FDA submission, even if it has some other minor R&D applications (the Proveris patent states that the invention is useful for R&D as well as generating data for FDA). Merck provides little guidance as to where in the process of going from early stage drug discovery to clinical trials the 271(e)(1) exemption kicks in. Would the courts adopt a standard similar to 271(c), where liability would depend upon whether the device has a “substantial non-exempt” use? In a case where a device can be used for both basic research and for generating data for FDA submission, could a seller of the device fall under the exemption by notifying its customers that they are only authorized to use the device for activities reasonably related to generating data for FDA? If FDA requires a certain type of test to secure marketing approval, could someone patent the test (or a device necessary for performing the test), and hence block competitors from securing approval of a non-patented product? (I don’t know how feasible that would be in practice, but it is essentially one of the arguments raised by Innova.)

The Significance of Quanta for Biotechnology

Quantas v. LEG Electronics is a patent infringement lawsuit that arose out of the computer sector, but it could have a substantial impact on biotechnology, particularly if the Supreme Court decides the case along the lines recommended by the U.S. solicitor general. In its amicus brief filed in support of the petitioners, the SG appears to argue for a rule that would bar a patent owner from using patent law to enforce post-sale restrictions on the use or resale of a patented product by an authorized purchaser, i.e., conditional sales. The patent owners only recourse would be under contract law. This would effectively overrule Mallinkrodt and Braun, two federal circuit decisions from the 1990s which held that a patent owner can impose post-sale restrictions on the use of patented products, at least under circumstances where the purchaser is given sufficient notice, and enforce a breach of such restrictions by means of a patent infringement suit.

The SG is not alone, a first wave of amicus briefs filed in Quanta includes many that echo the same position. In fact, when I checked recently all but three of the amicus briefs filed to date support petitioner and generally support a reversal of Federal Circuit precedent that sanctions conditional sales by patent owners and their licensees. Significantly, the three that don’t support the petitioner all came out of the biotechnology sector, with agricultural biotechnology particularly well represented. – The Biotechnology Industry Organization (BIO), the American Seed Trade Association, and Croplife International, trade organizations representing biotechnology, the plant science industry and seed producers, respectively. All three of these amici characterize their briefs as supporting neither party, but all argued forcefully against the SG’s position and in favor of Mallinkrodt and the continued ability of patent owners to make conditional sales and to enforce their patents against purchasers that have exceeded the scope of a limited license obtained by virtue of an authorized purchase.

The three biotech briefs point to two examples from biotechnology where conditional sales of patented goods are common and important: restrictions on the use of copies of a patented seed (or other genetic material) produced via self-replication, and "research use only" restrictions on research tools.

Producers of patented recombinant seeds restrict the ability of purchasers from saving the seeds and replanting or selling them. Such restrictions can be critical; without it, the patent owner might soon be forced to compete against subsequent generations of its own patented seed, produced as progeny of legitimately purchased seed. A rule barring the enforcement of such a restriction would be analogous to a rule prohibiting copyright owners from using copyright law to go after parties who purchase a CD and then produce and distribute unauthorized copies. Under the patent exhaustion rule championed by the SG, patent law would provide little effective protection for certain patented recombinant crops (such as soybeans) that can be grown from saved seed; for a variety of reasons, contract law would probably not be an adequate substitute. In the long run, Ag biotech would have to charge farmers much more for seeds, or find some legal or technical means to circumvent the rule. The implementation of genetic use restriction technologies (GURTs, often referred to as “terminator” technology) might be an option, but such technologies might be opposed by a public that has been led to believe they are dangerous or immoral (misled in my opinion).

Research tools are also often the subject of conditional sale, a practice which enables the patent owner to engage in differential pricing based on the nature of the purchaser’s use. Typically, the research tool is sold with notice to the purchaser that the product comes with a non-exclusive license to use the product for basic, non-commercial research, but that the license does not include commercial use of the product (e.g., in commercial drug development, or in commercial diagnostic testing). Commercial users are required to pay additional royalties based on that use. An example that comes to mind is PCR, a Nobel Prize winning and widely used technology with significant applications in basic and commercial research, diagnostics, identity testing, etc. The owners of the core PCR patents granted a non-exclusive research license to users who purchased the necessary laboratory equipment (thermocyclers) and reagents (taq polymerase) from an authorized source - the price of the equipment and reagents essentially included a royalty payment that covered such use. However, these products came with a notice that required commercial users to obtain permission an additional license and make additional royalty payments. These sorts of arrangements are beneficial in that they allow the patent owner to extract an appropriate royalty from high-value users of the technology while maintaining an affordable price for basic researchers. The SG approach would likely lead to higher prices and/or reduced access for academics and other non-commercial users of patented research tools.

Note that so far none of the amici have supported the respondent LGE. For example, BIO distinguishes conditional sales of research tools and self-replicating products from the facts of Quanta by arguing that: (1) LGE's license terms allowed purchasers no substantial use of the patented product, and (2) LGE imposed no strict restriction on who could purchase the Intel product - LGE simply required Intel to notify customers of LGE's view that its patent rights continued in the product. But these distinctions seem trivial. If the facts were changed slightly, such that purchasers of the Intel products were permitted some substantial use, and LGE required Intel to notify the purchasers that they were not authorized to use the products for other purposes, then BIO appears to argue that the restrictions would be legitimate, and asks the court to rule in a manner that allows for such restrictions.

BIO also argues that contract law will provide inadequate protection for biotechnology firms, particularly in cases where the patented products wind up in the hands of third-parties not bound by any contract.

Gen-Probe, a self-identified “global leader in the biotechnology industry” (but apparently not a member of BIO) filed an amicus brief supporting petitioner and essentially sided with the SG. Gen-probe is the provider of nucleic acid probe-based genetic diagnostic tests, and thus one of the high value users of patented products that could also be used as research tools. Such as company would likely benefit from a rule that prevented the owners of patents covering necessary inputs from engaging in differential pricing between commercial and non-commercial users. Note that the interests of genetic diagnostic testing companies tend to differ diverge those of mainstream biotechnology. For another example, see the statement given by the CEO of Bio-Reference Laboratories at the recent Congressional hearings addressing the issue of whether gene patents stifle innovation. (Statement of Dr. Marc Grodman before the House Judiciary, Subcommittee on Courts, the Internet, and Intellectual Property (October 30, 2007), available at Subcommittee on Courts, the Internet, and Intellectual Property http://judiciary.house.gov/media/pdfs/Grodman071030.pdf.) Dr Grodman argued that gene patents have a substantial negative effect on the availability of genetic diagnostic tests, while BIO testified at the same hearing that gene patents have not been much of a problem and are important for incentivizing innovation (http://judiciary.house.gov/media/pdfs/Kushan071030.pdf) .

Although as far as I can tell no amicus brief supporting petitioner has yet been filed, at least two amicus briefs supporting respondents will be filed shortly. One is being submitted on behalf of a number of law professors (including myself), and was drafted primarily by Professor F. Scott Kieff of the Washington University School of Law (draft is available at http://holmancm.googlepages.com/lawprofsamicusbriefinQuantavLGsuppor.pdf). The other is being filed on behalf of the AIPLA, a draft can be viewed at http://holmancm.googlepages.com/06-937_bsacAmericanIntellectual_Prop.pdf (kindly provided by Jeff Lewis, counsel of record).

The AIPLA brief argues that the Supreme Court should decide Quanta in a manner that allows a patentee to impose post-sale restrictions (with adequate notice), and require separate licenses from different downstream users. AIPLA points out the market efficiencies made possible by such arrangements, and that the alleged public policy concerns associated with post-sale restriction on patented products have been overstated by some amici supporting petitioner. Not surprisingly, the example of a socially useful restricted sale provided in the AIPLA brief comes from biotechnology – an antibody with uses as either a research tool or as a drug. This is not a particularly realistic example, since antibodies sold as diagnostic reagents and drugs are distinct products, but it does get at the importance of conditional sales in biotechnology and the research tool context.

The AIPLA notes that while some have characterized Quanta as involving post-sale restrictions by a patent owner or its licensee, in fact the patent owner is not selling anything, and the agreement is more accurately described as a covenant not to sue an alleged indirect infringer. The licensee, Intel, is selling a non-infringing product, and the alleged infringers are purchasers from Intel who use the product to make the allegedly infringing device. In essence, Intel settled to shelter itself from liability for indirect infringement, but did not secure a license that would cover their customers, the alleged direct infringers. Under the SG approach, such a settlement would apparently not be possible – a patent owner would be forced to settle with an alleged indirect infringer under terms that encompass all potential direct infringers, or not settle at all.

It seems to me that there are cases where allowing a patent owner and alleged indirect infringer reach a limited settlement makes good policy. For example, in Quanta the defendants argue that they are not infringing the patents. If that is the case, why should Intel not be able to make the decision to settle while leaving its purchasers free to make their own decision as to whether to challenge the patents or strike a deal with the patent owners? There are many instances I can think of where an alleged direct infringer might rationally decide to go ahead in spite of the threat of patent liability even though the alleged indirect infringer has decided to enter into a covenant not to sue with the patent owner. Maybe the alleged direct infringer has a higher tolerance for risk, or less exposure. Maybe it is an academic researcher, who decides to take the risk, knowing that academic researchers are virtually never sued for infringing a patent in the course of conducting non-commercial academic research. Or maybe the invention can be used in a medical procedure, and the purchaser is a medical practitioner exempted from infringement liability by virtue of 35 USC 287(c). In many situations, a covenant not to sue will benefit the parties and society even if it does not encompass all potential downstream users of a patented product.

The AIPLA also points out that the SG’s brief is inconsistent with its amicus brief in McFarling, a case involving a farmer who saved and replanted patented seeds in violation of an express conditional sales agreement. In that case, the SG argued that the court should not grant certioraria, and supported the enforcement of post-sale restriction by means of patent law, at least in the context of recombinant seeds.

Law Professor Amicus Brief: http://law.wustl.edu/faculty/documents/kieff/draft_quanta_amicus.doc


AIPLA Amicus Brief:
http://holmancm.googlepages.com/06-937_bsacAmericanIntellectual_Prop.pdf

Recent Developments in Japan and Europe Regarding Continuation Practice and Late Claiming

Although the PTO asserts that its controversial new continuation rules are motivated primarily by a need for improved Office efficiency, it has also acknowledged on multiple occasions that one of the “goals” of the new rules is to substantially restrict the ability of applicants to file continuations for the purpose of “late claiming.” By “late claiming,” I refer to the practice of filing new claims directed to previously unclaimed subject matter, particularly in an application claiming the priority benefit of an earlier filed application. Late claiming is particularly prevalent in the biotechnology and pharmaceutical industries, and has been facilitated in the past by the U.S.’s relatively liberal continuation rules. But critics argue that the practice has been subject to abuse. For example, it is alleged that some patent applicants wait for third parties to introduce new products on the market, and then file late claims specifically targeting those products. Late claiming that occurs years after the initial filing is also thought to provide inadequate notice to third parties, who might assume that previously disclosed but unclaimed subject matter has been dedicated to the public. The PTO appears to have sided with these critics, and characterizes the use of continuation practice to facilitate late claiming as improper and abusive of the system.

On the other hand, the patent bar and many users of the patent system argue that late claiming is legitimate and can promote innovation. As an example, they point to the substantial time lag between the initial discovery of a family of drug candidates and the eventual development of a demonstrably safe and effective therapeutic product, along with the huge cost and uncertainty inherent to the endeavor. Absent the ability to plant an early “stake in the sand,” and then file new claims over the ensuing years as the ultimate commercial product evolves, they argue that it would be difficult to justify the huge capital investment required to support drug development. Far from being a reason to limit continuation practice, opponents of the PTO’s new rules point to late claiming as a compelling justification for maintaining the traditional continuation practice.

It is interesting to note that Japan and Europe have both recently addressed essentially the same issue, and in both cases decided on the side of liberal continuation rules and late claiming. In Japan, a 2005 report sponsored by the Intellectual Property Policy Committee of the Industrial Structure Council tackled the question of whether Japan might benefit from loosening its rules on divisional filings in order to allow applicants a greater opportunity to late claim (See http://www.iip.or.jp/e/summary/pdf/detail2004/e16_01.pdf). The report acknowledged the potential for inadequate notice to third parties, but decided that this concern was outweighed by the incentive to innovation that would occur if Japan were to follow the lead of the U.S. and Europe and liberalize divisional practice to permit an expanded opportunity for late claiming. Shortly after the report came out, Japan amended its law to permit the filing of divisional applications within 30 days from notice of allowance or decision of refusal. Prior to the change, applicants were only allowed to file divisional applications at certain times prior to notice of allowance, or within 30 days after filing a notice of appeal against a final rejection. The new law went into effect April 1, 2007, and applies to applications having an effective filing date on or after that date (See http://www.soei.com/english/wnew07_03_01.html and http://www.soei.com/english/wnew06_07_20.html).

The European Patent Office (EPO) has traditionally allowed applicants to file a chain of divisional patent applications for the purpose of late claiming, but the legality of this practice was recently called into question by certain decisions of EPO Technical Boards of Appeal. The issue was ultimately brought to the EPO’s Enlarged Board of Appeals (EBA), essentially the European equivalent of the en banc Federal Circuit. On June 28, 2007, the EBA issued a decision (G 0001/05) holding that under the European Patent Convention applicants are permitted to late claim, and to file of a series of divisional applications to maintain the pendency of a priority application for the purpose of late claiming, thus effectively maintaining the status quo in Europe.

In reaching its decision, the EBA considered amicus briefs filed in support of both sides that essentially echoed the current debate in the U.S., i.e., notice to third parties vs. incentives to innovation. The European patent bar, not surprisingly, weighed in on the side of late claiming and more liberal divisional rules. Interestingly, the President of the EPO also submitted comments in support of the traditional practice, in contrast with the situation in the U.S., where the PTO and patent bar have taken opposing sides in the debate. The EBA’s decision acknowledges substantial public policy concerns with allowing an applicant to maintain the pendency of a sequence of divisional applications for up to 20 years and to file new claims at anytime during that period, but concluded that if any reform is deemed necessary it must come from the legislature.

Perhaps the U.S. could learn from the experiences of Japan and Europe. While late claiming does raise public policy concerns, particularly with respect to notice to third parties, it also plays a critical role in incentivizing innovation in important industries such as biotechnology and pharma. These competing effects need to be balanced. The rule changes would have a substantial impact on the rights of patent applicants, and the PTO should acknowledge this rather than seeking to make substantive policy under the guise of procedural rulemaking. Perhaps it would be beneficial to impose some sort of restriction on late claiming, but if so we should be up front about it and consider reforms that address the issue directly, rather than through arbitrary restrictions on continuation filings. Moreover, substantive changes to patent law of this nature should emanate from Congress rather than the PTO, at least until Congress decides to confer substantive rulemaking authority on the Office.