Quanta Oral Arguments

Quanta Computer v. LG Electronics, argued before the Supreme Court on January 16, 2008, addresses an issue of critical importance to the biotechnology industry, i.e., to what extent, if any, can a patent owner impose restrictions on the use or resale of a patented product subsequent to an “authorized purchase,” and enforce such restrictions by means of a patent infringement action. In 1992, the Federal Circuit held in Mallinkrodt that patent owners can impose post-sale restrictions on authorized purchasers by providing adequate notice to the purchasers, essentially granting purchasers a limited license under the patent. The Solicitor General and others argue that Mallinkrodt was wrongly decided and have asked the Supreme Court to decide Quanta in a manner that overrules it. They assert, along with the defendant Quanta, that under Supreme Court precedent an authorized sale exhausts all patent rights in the purchased item.

In a previous post, I discussed the importance of enforceable post-sale restrictions to biotechnology, and noted that BIO and organizations representing seed and agricultural biotechnology companies have filed amicus briefs in support of Mallinkrodt and the Federal Circuit’s position on post-sale restrictions. However, it seems to me that the particular facts of Quanta and the manner in which the case has been framed by the parties render it a poor vehicle for resolving this important issue. As a consequence, the oral arguments for the most part failed to adequately address the crux of the question to be decided.

The patent owner, LGE, has completely distanced itself from Mallinkrodt and the question of whether a patent owner can impose post-sale restrictions on a patented product. Instead of defending Mallinkrodt, LGE seeks to avoid patent exhaustion by arguing that the doctrine only applies in cases where the asserted patent covers the product that was the subject of the authorized sale, and that its patents do not cover the products sold by Intel (i.e., the “authorized purchases”). They point out that their patents are not infringed until LGE combines the non-infringing Intel product with other components to make an infringing computer. In effect, LGE is providing the Court with an opportunity to rule in its favor without necessarily upholding, or even addressing Mallinkrodt or post-sale restrictions on the sale of patented products. This might be good litigation strategy, particularly with the SG coming down in favor of overturning Mallinkrodt, but as a consequence during oral arguments there was no one to advocate in defense of Mallinkrodt and enforceable post-sale restrictions.

Mallinkrodt has been championed by a diverse coalition of supporters in addition to representatives of biotech and seed companies. The list includes AIPLA, IPO, Qualcomm, Yahoo!, IPO, WI-LAN, academics (including myself), and many others. I particularly liked the AIPLA and WI-LAN briefs – WI-LAN provides a good case study of the important role enforceable post-sale restrictions have played in the development of HD radio. Clearly, the importance of the case extends far beyond biotechnology. Unfortunately, the legal and policy argument in favor of Mallinkrodt received little attention during oral arguments, with one brief exception. Near the end of the Quanta attorney’s initial argument, Justice Kennedy asked the following question (the only question he asked throughout the entire oral arguments): “Are there cases where some downstream restrictions on use might be necessary to prevent the patent from becoming worthless, i.e., in the biological area for replication of seeds in agriculture and so forth?”

Quanta’s attorney started to distinguish between the patent owner’s right to use and the right to make – I assume that she was preparing to argue that patent exhaustion only bars the enforcement of post-sale restrictions on the right to use an invention, not the right to make an invention, and restrictions on the replanting of patented progeny seeds implicate the right to make rather than the right to use. However, before she could develop this argument Justice Kennedy noted that Univis, one of the principal cases cited by Quanta and the SG, involved the right to make a product. After fumbling a bit, she dropped the issue without ever really answering the question. Aside from this brief exchange, the positive aspects of the Mallinkrodt rule were never addressed during oral arguments.

I don't think that distinction between the rights to make and use is really applicable to patented crop seeds. The only use of these seeds is to plant them and grow more seeds, which can be harvested and sold as food or feed, or saved and replanted. In other words, use of the seeds necessarily involves making new copies of the patented invention, so in a sense making and using the invention are one in the same. But seed patent owners do not object to farmers to growing copies of the patented seeds, they seek to restrict the subsequent use of those copies, i.e., sale as food or feed is permitted, saving for replanting is not permitted.

Furthermore, while the downstream control of patented recombinant seeds is important, there are others contexts where post-sales restrictions play a critical role in permitting biotechnology patent owners to profit from their innovations. As noted in an earlier post, post-sale restrictions provide an important means for a patent owner to engage in differential pricing. For example, the owner of a patent claiming an invention useful as a research tool might charge a relatively low price to purchasers that use a product for basic research, and a higher price when the product is used commercially, such as in drug development or a diagnostic test. This flexibility in pricing is beneficial in making the technology accessible to basic researchers, while allowing the patent owner to share in the profits when the technology is employed in more lucrative commercial applications. Such restrictions would be difficult to enforce if Mallinkrodt were overturned, and would not be saved by the distinction between restrictions on using and making alluded to by Quanta’s attorney in her response to Justice Kennedy.

Transcript of the oral arguments can be found here.

Do Gene Patents Deny US Patients Access to the Best Available Genetic Diagnostic Testing Services?

Last week, while at the annual meeting of the American Association of Law Schools (AALS), I attended a talk by Professor Lori Andrews in which she described the supposed evils of gene patents and called for legislation to ban them. She alleged that US patients are dying as the result of gene patents, and asserted in particular that superior genetic diagnostic testing for mutations of the BRCA breast cancer gene is available in other countries because Myriad’s US gene patents block availability to the supposed superior test in the US. I’ve seen this assertion made a number of times by opponents of gene patents. But to what extent is it true? I personally lack the expertise to evaluate the relative merits of the competing genetic testing protocols, but it seems to me that if superior tests are available outside the US, then US patients and clinicians would seek to avail themselves to these tests rather than relying on the allegedly inferior Myriad test.

To investigate the question, I decided to ask someone with some actual practical expertise in the area, an M. D. who works at a breast cancer clinic and who has a great deal of experience ordering and using BRCA testing services. She informed me that the Myriad test is quite good and comprehensive, and is the test that she uses, but that it is possible that there might be tests in other countries that look for certain mutations not considered in the Myriad test. However, no test is perfect, and she did not think that any foreign test provided sufficient added value relative to the Myriad test that would warrant a US patient having their blood tested outside the US, and she knew of no instances where this had occurred.

If there were a significant difference in test quality, it would certainly be feasible for a US clinic to send a patient blood sample to a non-US laboratory for testing. Europeans regularly send their blood samples to other countries for testing, and there are predictions that in the future diagnostic testing will be increasingly off-shored to India and other Asian countries. To be sure, there are logistic hurdles that must be overcome by a US patient wishing to use the genetic testing services of a non-US laboratory. In particular, international shipments of blood are regulated and certain paperwork must be completed. This can be burdensome, but international shipments of blood happen all the time, so not a real obstacle for a determined patient or clinic. Perhaps more important is the issue of insurance reimbursement. Myriad has negotiated with major insurance companies and has procedures in place that facilitate patient reimbursement for tests conducted by Myriad. A patient using the services of a non-US laboratory might have more difficulty in receiving the necessary authorization for reimbursement from their insurance company.

Nevertheless, there are quite a few laboratories performing BRCA testing in other countries, and they can be identified at website such as www.genetests.org (a site funded by NIH), which lists a number of laboratories throughout the world that perform BRCA testing. This website is set up as a service for US patients and clinicians, implying that US patients could avail themselves of the services of these non-US laboratories if there was reason to do so.

With this in mind, it seems to me doubtful that US patients are being denied substantially superior tests because of US gene patents, and if they are there is nothing to stop a determined US patient from having their test done overseas. Advocates seeking to make the best genetic diagnostic testing services available to US patients might do well to consider reforms aimed at facilitating transfer of blood samples outside the US and insurance reimbursement rather than seeking to ban the patenting of DNA.

Gene patents have played a critical role in securing investments in biotechnology that have resulted in life-saving products, including products benefiting women afflicted with cancer (Genentech’s Herceptin, for example). Even in the context of BRCA testing, patents have incentivized Myriad to make investments that have resulted in the continuing improvements in BRCA testing, so that today’s tests provide much more information than the tests that were first made commercially available. Moreover, Myriad has raised public awareness of the availability of BRCA testing, and facilitated insurance reimbursement for the testing, which has probably resulted in many more women being tested than would have occurred otherwise. On the other hand, the negative aspects of gene patents (to the extent they exist) could be circumvented by off-shoring genetic testing services. In my view, the fact that this option appears not to have been pursued with any vigor supports my position that gene patents are probably not such a grave threat to public health as some would have us believe.