Monday, June 23, 2008

BIO 2008

I spent last week in San Diego at the annual Biotechnology Industry Organization (BIO) international meeting, and wanted to share a few of my impressions.

Biotech Profitability

At a well-attended panel presentation by Ernst & Young summarizing and commenting upon the results of their 2008 Global Biotechnology Report, day reported that publicly traded US biotechnology companies came very close in 2007 to realizing a net profit (a net loss of $0.3b, compared to a $5.6b net loss in 2006). If the trend toward profitability continues, 2008 might be the first year in which US biotechnology is able to report a profit, which I think would be a huge psychological breakthrough if nothing else.

Major Themes

For those who have not attended a BIO conference, it is a huge event with many parallel presentation tracks, so it is very difficult to take in and make sense of more than a small fraction of the information presented. However, from my perspective some of the important topics which received a great deal of attention included biomarkers, genomics, personalized medicine, and the integration of diagnostics and drug products; reimbursement issues; globalization, particularly the rising importance of Asia as a producer and consumer of biotechnology products; the use of biotechnology to address environmental and energy concerns; and of course, recent developments in patent law, particularly in US courts and Congress. There was also a great deal of emphasis on finding and implementing incentives and market-based approaches for the development of products to address orphan diseases, diseases primarily affecting the developing world, and other under-addressed conditions.

For example, BIO has spun out BIO Ventures for Global Health (BVGH), a small nonprofit charged with the mission of harnessing the biopharmaceutical skills and resources that have transformed medicine in the industrialized world to accelerate the development of innovative vaccines, drugs and diagnostics targeting the most pernicious diseases of the developing world. BVGH is funded by BIO, the Rockefeller Foundation, the Bill and Melinda Gates Foundation, and members of industry. These diseases have received relatively little attention due to a lack of a market able to pay for any resulting product, and BVGH is attempting to facilitate and encourage market-based solutions to encourage greater industry investment, and public-and private partnerships, to create a pipeline of innovative solutions for the developing world.

In a similar fashion, groups like FasterCures seek to develop mechanisms to encourage biotechnology investment in developing drugs for orphan diseases and other conditions which have so far failed to garner sufficient industry interest. In one session, representatives of FasterCures held a discussion forum seeking input on ways to encourage the sort of innovation. Some of the ideas discussed involved better funding for FDA, a reduction of regulatory hurdles to reduce the cost of developing drugs and speeding their entry to market, and the use of prizes to incentivize innovation. In particular, there was discussion of expanding the use of market exclusivity rewards, such as those currently available for the developers of certain orphan drugs, or for companies performing pediatric studies. Another sort of prize discussed is a transferable "priority review the voucher.” The Food and Drug Administration Amendments Act (HR 3580), signed into law Sept 27, 2007, authorizes FDO to award a priority review voucher to the sponsor of a newly approved drug or biologic the targets and neglected tropical disease. The voucher, which is transferable and can be sold, entitles the bearer to a priority review for another product. It is estimated that such a voucher could shave months off approval times, resulting in valuations potentially in the tens of millions of dollars.

Intellectual Property Hot Topics

Hot topics in intellectual property at Bio 2008 included obviousness, especially the impact of KSR on the patentability of pharmaceutical and biotechnological inventions in the United States; patent reform legislation; USPTO rule changes; and the potential impact of World Health Organization (WHO) proposals to modify intellectual property practices and policies on member states. Many speakers expressed the view that proposed patent reforms being considered by Congress would substantially weaken patent laws and have an inordinately deleterious impact on biotechnology, characterizing the debate as pitting biotechnology and pharma versus the computer and information sectors. While I support strong patent rights, and agree they are of critical importance to biotechnology, sometimes I think the rhetoric goes a little overboard. While some speakers made it sound like many of the proposed patent reforms would severely harm biotechnology, a number of the reforms that have been called for in recent years have essentially been put in place in the courts, particularly in recent Supreme Court decisions. Other aspects of patent reform, like the availability of opposition proceedings, are available in other parts of the world like Europe, and do not seem to have impeded the progress of biotechnology. I think that there is a danger that if representatives of biotechnology keep promoting the idea that patent reforms will substantially undermine the future of biotechnology, and these reforms ultimately to come to pass, investors will heed the warnings and interpret the changes as more detrimental to biotechnology than is actually the case. If this occurs, it might be that investor perception of harm ends up hurting biotechnology more than the changes to patent law themselves. Whether it is KSR, Quanta, or eBay, or proposed reforms aimed at damages, venue and post-grant opposition, I predict that biotechnology will be able to cope with the changes and the industry will continue moving forward and accomplish great things.

All in all, I left the conference feeling very optimistic about the future of biotechnology. The motto of the conference was “Feed. Fuel. Heal the World,” a lofty mission, but one that I think will ultimately be successful, thanks in no small part to the important incentives provided by a robust patent system.

For more commentary on BIO 2008, you might want to check out the Biolaw blog for postings by my colleague at the University of Kansas School of Law, Andrew Torrance.

Monday, June 16, 2008

Quanta and Agricultural Biotechnology

In previous posts, I have discussed why it is important for agricultural biotechnology companies to be able to prevent farmers from saving genetically modified seeds for replanting, and the potential for Quanta to limit the ability of companies to enforce such post sale restrictions under the patent laws. To the extent Quanta prohibits enforcement of these restrictions by means of patent infringement actions, the value of many agricultural biotechnology patents could be severely eroded, which could in turn negatively impact an industry that has historically relied heavily on patents. I think most people, even those who argued in favor of the Supreme Court overruling the Federal Circuit approach to patent exhaustion, as exemplified by the Mallinckrodt and Braun decisions, would agree that enforceable post sale restrictions are important in the context of agricultural biotechnology. Concerns with the impact of the Court's decision on ag biotech is evidenced by some of the questions asked by Justice Kennedy during oral arguments, as well as a footnote in the Solicitor General's amicus brief stating that the Court has never ruled on the question of whether patent exhaustion applies to copies of a self replicating patented product, and that this question was not implicated by Quanta. In the amicus brief it filed recommending denial of cert in McFarling v. Monsanto, the Solicitor General expressed the view that patent exhaustion should not apply with respect to the progeny of patented seeds.

It appears to me that the ability of agricultural biotechnology companies to enforce these important restrictions under the patent laws has not been severely impacted by Quanta. At least, I hope this is the case. For one thing, I think that a court faced with the question would side with the Solicitor General, and find that patent exhaustion does not apply to copies made from a self replicating patented invention, particularly when the invention is a genetically modified seed. I don't think anything in Quanta would preclude such a determination, and for public policy reasons the courts would side with the innovator in a case raising the issue. I also think drawing such a line between a purchased patented product and a copy of the product would be entirely consistent with Microsoft v. AT&T, the 2007 Supreme Court decision which made an analogous distinction between software and copies of software. In Microsoft, the Court held that while software made in the US can constitute a component of a patented invention originating from the US for purposes of 271(f), copies of the software made outside the US do not originate from the US and hence cannot form the basis for infringement under 271(f).

Another element of Quanta that will facilitate the enforcement of post sale restrictions in agricultural biotechnology is the Court's endorsement of the rule announced in its General Talking Pictures decisions. As I noted in my last post, General Talking Pictures, when read in combination with other Supreme Court patent exhaustion precedent such as Univis and Quanta, creates what the solicitor General has described as an anomalous outcome which “allow[s] a patentee to achieve indirectly - through an enforceable condition on the licensee - a limitation on use or resale that the patentee could not itself impose on a direct purchaser.” Under General Talking Pictures, I think that agricultural biotechnology companies will be able to impose post sale restrictions through licensee seed companies, and enforce violations of those restrictions under the patent laws.

The facts of General Talking Pictures appear to be right on point in this regard. Recall that in that case the patent owner licensed a manufacturer to sell the product only to private users, not to commercial users. Because sales to commercial users were not authorized by the patent owner, patent exhaustion did not apply and the patent owner was permitted to sue commercial users for patent infringement, even though the seeds were purchased from licensee. If we tweak the facts only slightly, substituting seed saving farmers for commercial users, it seems clear that if a patent holding biotechnology company licenses seed companies to sell seed only for use in the production of food and a farmer saves and replants seeds, under General Talking Pictures the patent owner will not be barred from bringing suit under the patent laws. As I understand it, a company like Monsanto generally does not sell seed directly to farmers, but rather licenses seed companies to produce and sell seeds incorporating the patented technology. In a case where the patent owner is selling seeds directly to farmers, Quanta might prompt a patent owner to structure its business such that sales are made through a licensee so as to avoid patent exhaustion.

Moreover, the Federal Circuit's LGE decision (the subject of appeal in Quanta), along with earlier decisions like Mallinckrodt and Braun, suggest that the Federal Circuit generally disfavors a strong patent exhaustion doctrine that cannot be overridden by an agreement between the patent owner and purchaser to limit post-sale uses. For example, prior to Quanta, the Federal Circuit was confronted with Supreme Court precedent that on its face seemed to mandate patent exhaustion in all cases where a patented product was the subject of an authorized sale. Nevertheless, the Federal Circuit circumvented this precedent by holding that the doctrine only applies to product claims, not method claims, and even then only when the post sale restriction independently violates some other law or policy, such as patent misuse or an antitrust violation. When faced with a new fact patterns implicating patent exhaustion, the Federal Circuit might well read Quanta in a similarly narrow fashion, thereby limiting its impact, particularly with respect to self replicating products. This sort of circumvention will be facilitated by Quanta’s failure to directly address Mallinckrodt, or any other Federal Circuit decisions relating to patent exhaustion other than LGE.

Wednesday, June 11, 2008

Quanta and Its Impact on Biotechnology

Quanta’s Impact on Mallinckrodt

Many people viewed Quanta as an important opportunity for the Supreme Court to address the viability of Mallinckrodt (976 F.2d 700), a 1992 Federal Circuit decision which held that the doctrine of patent exhaustion applies only to unconditional sales, and that a patent owner is thus permitted to impose post-sale restrictions on purchasers of a patented product by providing purchasers with notice to that effect, and enforce those restrictions under the patent laws. Many, including the Solicitor General, argue that Mallinckrodt should be overruled, and that the decision conflicts with Supreme Court precedent, particularly the 1942 Univis decision, which they interpret as mandating a doctrine of patent exhaustion that bars the enforcement of such restrictions by means of a patent enforcement action.

Unfortunately for those seeking Supreme Court clarification on this point, the patent holder in Quanta (LGE) chose not to defend the Mallinckrodt rule. Instead, LGE sought to circumvent the issue by arguing that, regardless of the validity of Mallinckrodt, its patents were not exhausted because the Intel products at issue were not covered by the patents. This strategy, in turn, permitted the Supreme Court to avoid addressing the issue head on, and its decision makes absolutely no direct mention of Mallinckrodt (or any Federal Circuit decisions for that matter, other than the one on appeal). Nevertheless, it appears to me that Quanta implicitly overrules Mallinckrodt, an unfortunate result, as I have explained in previous posts.

In Mallinckrodt, the Federal Circuit distinguished Univis and other related Supreme Court cases which found patent exhaustion by interpreting those decisions as only applying to post-sale restrictions that violate “some other law or policy (in the patent field, notably the misuse or antitrust law).” However, in Quanta the Supreme Court cites Univis as controlling authority and finds that it applies to the post-sale restrictions imposed by LGE – importantly, there is no suggestion that the restrictions imposed by LGE violated antitrust law or any other non-patent “law or policy.” Thus, Quanta appears to cut the doctrinal footing out from under the Federal Circuit with respect to Mallinckrodt; there appear to be no legitimate basis for confining Univis to restrictions that violate some other law or policy. To drive this point home, the Court summarizes its decision in Quanta as establishing that “[t]he authorized sale of an article exhausts the patent holder’s rights and prevents the patentholder from invoking patent law to control postsale use of the article.” It is hard to see how Mallinckrodt could survive this clear statement, although perhaps the Federal Circuit will find a way, given ita apparent aversion to the doctrine of patent exhaustion.

Exhaustion of Method Claims

In Quanta the Court reversed the Federal Circuit on the issue of whether patent exhaustion applies to method claims – the Federal Circuit had held that patent exhaustion only applies with respect to product claims. This aspect of Quanta is surely correct, albeit trivial – it makes no sense allow patent exhaustion with respect to a patent claiming a product, but to impose a per se rule barring its application to method claims, particularly in cases where the only substantial uses of the purchased product would infringe the method claim. In the decision below the Federal Circuit cited this supposed rule distinguishing between product and process claims, but provided absolutely no rationale in support of the rule, instead citing to two earlier Federal Circuit decisions as supporting the proposition. The earlier of these decisions (Bandag) did hold that that under the facts of that case the sale of an article did not exhaust the asserted method claims, but in that case the court found that there existed substantial uses of the product that would not infringe the method claims. The decision did not announce a per se rule that would apply in cases where the only substantial uses of the product would infringe a method claim. It is also entirely consistent with the holding in Quanta – sale of an article should only exhaust method claims in cases where there are no substantial noninfringing use (or, in the words of Quanta, when the article “embodies” the method patent). The second Federal Circuit decision cited in the decision below did not provide any rationale for distinguishing between product and process claims, but merely cited to Bandag for the proposition.

In short, the Federal Circuit’s position lacked any rationale support and was correctly rejected by the Supreme Court.

Exhaustion of Claims not Covering the Article Sold

LGE’s patents did not cover the products sold by Intel, but only covered products made by combining the Intel product with other components. LGE argued that patent exhaustion did not apply because the Intel products were not covered by the patent. However, the Supreme Court rejected LGE’s argument and held that it is not necessary for the patent to cover the product sold, so long as the product “substantially embodies” the patent. The Court found that the “Intel Products constitute a material part of the patented invention and all but completely practice the patent.” In making its determination of “substantial embodiment,” the Court noted that Quanta was not required to make any “creative or inventive decisions” when combining the Intel products with other components to arrive at the patented invention, and that the only difference between the patented invention and the Intel products was the “addition of standard parts.”

In my view, the court erred in adopting a “substantially embodied” standard to define the scope of the patent exhaustion doctrine. The “substantially embodied” language presumably owes its origin to Univis, but the court could (and should) have achieved essentially the same desired outcome by creating a different standard, such as “not suitable for substantial noninfringing use.” This standard would have the virtue of consistency with other doctrines of patent law, particularly contributory infringement under 271(c), and would be much more amenable to application by a court.

I foresee difficulty as courts attempt to apply the “substantially embodied” standard. For example, the Court suggests that in applying the doctrine to a patent claiming a “combination invention,” the purchased product would have to incorporate all claim limitations to “substantially embody” the patent (citing Aro). But for other patents, wherein the inventive element resides in only certain claim limitations (such as the LGE patents), the court will need to identify the “inventive” claim limitations and determine whether a product comprising those limitations “embodies” the patent. The court might also need to address the question of whether the purchaser’s use of the product required “creative or inventive decisions,” or whether any additional parts added to the product to arrive at the patented invention are “standard.” The “substantially embodied” standard seems to me to unnecessarily weaken the internal consistency of patent law and impair predictability for patent owners in structuring their licensing and sales arrangement.

Anomolous Treatment of Direct Sales and Sales by a Licensee

Curiously, Quanta appears to permit a patent holder to impose post-sale restrictions on purchasers if those sales are made by a licensee, even though the patent holder would not be able to impose the same restrictions on a direct purchaser. Thus, for example, Quanta would seem to bar a patent holder from selling a product under the condition that purchasers are only permitted to use the product for personal, non-commercial uses, and then suing purchasers who violate this condition for patent infringement. However, in Talking Pictures (1938) the Supreme Court held that a patent holder can accomplish essentially the same result when the product is sold by a licensee. In Talking Pictures, the patent owner authorized a licensed manufacturer to sell a patented product solely for private use; the licensee was barred from selling the product to commercial users. Nevertheless, some purchasers used the product commercially, and the Supreme Court held that because the sales were not authorized under the license patent exhaustion did not apply; the patent owner was permitted sue the commercial purchasers for patent infringement. In Quanta, the Supreme Court cited Talking Pictures with approval, apparently clearing the way for a patent owner to restrict the use of a product by sales through a licensee in a manner that would not be permitted if the patent owner sold the product directly.

This is clearly an anomalous outcome, and seems to make little economic sense. If this sort of restriction is permissible when accomplished through a licensee, why not let the patent owner achieve the same result directly? In fact, the Solicitor General pointed out this inconsistency in its brief supporting grant of cert in Quanta, stating that “[a]lthough there is a seeming anomaly in allowing a patentee to achieve indirectly - through an enforceable condition on the licensee - a limitation on use or resale that the patentee could not itself impose on a direct purchaser, the distinction is a necessary and explicable result of the Court's decision in General Talking Pictures.”

Interestingly, in the SG’s subsequent brief supporting petitioner, filed after cert was granted, the SG removed the above-quoted sentence and replaced it with the following: “The distinction between the rights of licensees and of authorized purchasers is thus a necessary and explicable result of the differences in their respective positions.” Apparently the SG rethought the wisdom of pointing out the illogic of the rule it was arguing in favor of, and chose to advocate rather than to clearly explain the clear implications of the ruling sought. Nonetheless, the anomaly clearly exists. If the case had been better briefed, and LGE had actually advocated on behalf of the continued validity of Mallinckrodt, perhaps the Supreme Court would have recognized the lack of economic rationale for such an inconsistent doctrine, and rethought the wisdom of its patent exhaustion precedent in the same manner it has recently rethought other patent and antitrust doctrines, as reflected in recent cases such as Leegin and Independent Ink.

Effect on Biotechnology

In earlier posts I discussed the importance to the biotechnology industry of the Mallinckrodt rule, as reflected in amicus briefs filed by BIO and the seed industry in support of those decisions. In particular, post-sale restrictions enforceable under the patent laws are important in allowing biotechnology companies to price discriminate between basic research users and commercial users of patented technologies, and to restrict the use and sale of the progeny of self-replicating biotechnology inventions, especially genetically modified seeds. How will Quanta impact the ability of biotechnology companies to enforce these sorts of important post-sale restrictions?

Consider a biotechnology product with substantial uses in either basic, non-commercial research, or in commercial drug discovery or diagnostic testing. In the past, biotechnology companies have achieved price discrimination by selling such a product with notice to purchasers that they are only authorized under the patents to use the product for non-commercial research, and that if the purchaser intends to use the product for more lucrative commercial purposes it must seek an additional license. This approach seems to be precluded by Quanta, at least when the patent owner seeks to impose these restrictions directly. But under Talking Pictures, the patent owner should be able to achieve essentially the same outcome by licensing a third party to sell the product only to basic researchers. The patent owner could then reserve commercial sales for itself, and sue under the patent laws anyone who purchases the product from the licensee but uses the product commercially. The same outcome, but it requires a more cumbersome legal and business framework. This hardly seems the most sensible approach, but apparently flows directly from Quanta and earlier Supreme Court decisions in this area.

Regarding the impact on agricultural biotechnology and its ability to use patent law to prevent farmers from saving progeny seed for re-planting or sale, I don’t think Quanta will be a substantial impediment, primarily because courts will find that patent exhaustion does not apply to progeny seed. The SG has expressed this view in a footnote in its amicus brief supporting Quanta, which states: “This Court has never suggested that the patent-exhaustion doctrine applies to the products of a patented item that is capable of reproducing itself in the hands of the purchaser - e.g., newly-grown seeds that are identical to, and grown from, a patented genetically-modified seed that was purchased from the patentee or an authorized licensee. See U.S. Amicus Br. at 14 & n.8, McFarling v. Monsanto Co., 545 U.S. 1139 (2005) (No. 04-31). This case presents no opportunity to address that question.” I think the SG is correct, and that courts will carve out an exception to the patent exhaustion doctrine for the progeny of self-replicating biotechnology products such as generically-modified seeds. This distinction between a product embodied by a patent vs. a copy of the product would also be consistent with the distinction the Supreme Court recently drew between a component of a patent invention under 271(f) and a copy of that component made outside the US (Microsoft v. AT&T).