It is black letter law that “natural phenomena, principles of nature and abstract ideas," as exemplified by fundamental physical relationships such as E=mc2 and the law of gravity, are unpatentable under section 101 of the patent statute. It is less clear what the criteria is for determining when a patent claim sufficiently embodies a natural phenomenon to be unpatentable; a series of recent decisions have interpreted Supreme Court precedent as establishing that a patent claim which wholly preempts a natural phenomenon is unpatentable. In LabCorp v. Metablolite (548 U.S. 124 (2006), Justice Breyer (joined by Souter and Stevens in a dissent from the Court’s decision to dismiss the case as improvidently granted) expressed his view that a patent claim that “embodies” a naturally existing biological phenomenon (in this case a correlation between homocysteine and vitamin B in the body) is unpatentable for improperly claiming a natural phenomenon.
Breyer’s Labcorp dissent has opened the door to challenging the validity of claims directed to biological phenomena under section 101. Of particular note, at least three subsequent district court decisions have weighed in on the question of whether a biological or physiological phenomenon is properly considered an unpatentable “natural phenomenon” – a question of particular importance to the biotechnology sector in the wake of LabCorp.
In one case, Ariad v. Lilly (529 F.Supp.2d 106 (D.Mass 2007)), the district court rejected Lilly’s argument that Ariad’s claim (directed to inhibition of the NF-kB pathway, a naturally occurring signal transduction pathway in humans) embodies a natural phenomonen. The court’s reasoning in Ariad was quite bizarre – first the court identified the relevant natural phenomenon narrowly as the so-called NF-kB “Autoregulatory Loop,” and then held that the Autoregulatory Loop is “an incomplete model ... subject to a significant amount of ambiguity and inconsistency” and “that Lilly has failed to prove by clear and convincing evidence that the Autoregulatory Loop exists in living cells in a way that is encompassed by Ariad's claims.” The existence of the NF-kB pathway is well established, as is the fact that its inhibition can have a physiological effect, and the claim at issue broadly covers inhibition of the pathway. The court appears to have been bamboozled into adopting an unduly narrow definition of the relevant natural phenomenon, and then found that the evidence supporting this narrowly defined phenomenon was insufficient to overcome the statutory presumption in favor of patent validity.
In two other recent decisions the district court came to the opposite conclusion, finding the claims at issue invalid for impermissibly claiming a physiological natural phenomenon. What is interesting about these cases is that the supposed natural phenomena actually relate to biological correlations that only exist as the result of human, medical intervention in the body, by either the administration of a vaccine or a drug. In contrast, the natural phenomena at issue in LabCorp and Ariad involve correlations and pathways that exist absent any human intervention.
In Classen v. Biogen (not reported), the patents are based on Dr. Classen’s purported discovery of a relationship between vaccination schedule (the timing of the administration of a series of vaccinations) and the development of a “chronic immune-mediated disorder,” and broadly claim methods of comparing vaccine schedules to determine the safest schedule. Defendant’s include manufacturers and distributors of vaccines, who allegedly infringe the patents (directly and/or indirectly) by participating in post-approval vaccination safety studies. In that case, the district court held that the relationship between vaccination schedule and autoimmune disorders is without question a natural phenomonen, and that the claims at issue impermissibly embodied that natural phenomonen. The court did not address the issue of whether a biological phenomenon that exists only as a result of human intervention (the introduction of vaccine in the human body) is accurately characterized as a natural phenomenon. Arguably, a phenomena that does not exist absent human intervention should not be considered a natural phenomenon in the same way as fundamental principles of nature that exist outside of human intervention, such as inhibition of the NF-kB pathway, or the correlation between homocysteine and vitamin B at the center of the claims at issue in LabCorp.
To my mind, perhaps the most troubling decision is the most recent, Prometheus v. Mayo (2008 WL 878910). In that case, the court held that the correlation between the level of thiopurine drug metabolites in the human body and therapeutic efficacy and safety is a “natural phenomonen,” and that Prometheus’ asserted claim were invalid under section 101 for “wholly preempting” this supposed natural phenomenon. Prometheus argued that since the drug metabolites only exist in the human body as the result of human intervention (i.e., by administration of the thiopurine drugs), the correlation cannot be considered a natural phenomonen. However, the court ruled that because thiopurine drugs “are converted naturally by enzymes within the patient’s body to form an agent that is therapeutically active, . . . the correlation results from a natural body process,” and is thus is an unpatentable “work of nature.”
Thus, the court in Prometheus finds that the mere involvement of a natural process renders a correlation that exists only as the result of human intervention an unpatentable natural phenomenon. This seems nonsensical – after all, what invention, in any area of technology, does not at some level involve natural processes? Any electronic invention relies on the fundamental nature of electrons and materials such as silicon. Mechanical inventions rely on the law of gravity and friction. And what biological invention does not involve natural biological processes?
All three decisions are on track for review by the Federal Circuit. I think it is particularly important that the court reverse the Prometheus courts unduly broad definition of unpatentable natural phenomenon, which in combination with its “wholly preempted” test could render many important biotechnology or pharmaceutical patents susceptible to challenge under section 101. For example, a patent claiming a drug product could be characterized as wholly preempting the “natural phenomenon” of the drugs pharmacologic effect in the human body. A method of treatment claim might be challenged for wholly preempting the correlation between administration of the drug and therapeutic effect.
The approach adopted by the Prometheus court would seem to bode particularly ill for the patentability of personalized medicine inventions. In a broad sense, personalized medicine refers to assessment of an individual patient’s safety and efficacy profile for a drug, and selecting drugs and dosage regimens based on this assessment. Fundamentally, personalized medicine relies on the discovery of correlations between biomarkers and the safety and efficacy of drugs in an individual. But under the Prometheus court’s approach, such correlations would seem to be natural phenomena, since they are based on natural processes, even though the correlations would not exist absent human intervention by administration of a drug to a patient. This approach would render questionable the validity of any patent broadly claiming the use of such a correlation.
It is unclear to what role the patenting of such man-made correlations will play in the development of personalized medicine. Perhaps some would argue that broad personalized medicine patents will actually deter innovation and commercialization in this important area. But I question whether the blunt tool of the patentable subject matter doctrine is the appropriate mechanism for determining the patentability of such inventions. This interpretation of Section 101 would seem to open up the door to challenging a number of important issued patents in the biological realm, leading at the very least to increased litigation and uncertainty in this important technology sector.
Wednesday, August 27, 2008
Tuesday, August 5, 2008
Federal Circuit Interprets the 271(e)(1) Regulatory Approval Exemption Narrowly, a Welcome Development for the Developers of Research Tools
Today in Proveris Scientific v. Innovasystems the Federal Circuit construed the Section 271(e)(1) regulatory approval exemption narrowly, holding that the sale of a device known as an Optical Spray Analyzer (“OSA”)" does not fall within the 271(e)(1) safe harbor. As discussed in a previous post, the defendant argued that because the device is intended solely for use in generating data for submission to FDA under the FDCA and is only sold to pharmaceutical companies or FDA, sales of the OSA falls squarely within the plain language of the statute, which 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.” However, in a unanimous decision penned by Judge Schall, the Federal Circuit rejected this argument, holding that the OSA is not a “patented invention” because it is not a product that requires FDA premarket approval.
Citing to Eli Lilly v. Medtronic, a 1990 Supreme Court decision which held that the 271(e)(1) safe harbor applies to class III medical devices, Judge Schall noted that Congress had enacted 271(e)(1) primarily as a means of addressing two unintended “distortions” of the effective patent term of drugs. As the result of the second of these distortions, prior to the enactment of 271(e)(1) (as part of the Hatch-Waxman Act) drug patent owners enjoyed a de facto patent term extension resulting from the lag between patent expiration and the time required to secure FDA approval for a generic version of a drug (or other FDA regulated product.” However, the court held that “[b]ecause the OSA device is not subject to FDA premarket approval, and therefore faces no regulatory barriers to market entry upon patent expiration, [the defendant] is not a party who, prior to enactment of [271(e)(1)], could be said to have been adversely affected by the second distortion. For this reason, we do not think Congress could have intended that the safe harbor of section 271(e)(1) apply to it.”
Of course, in its 2005 Merck v. Integra decision, the Supreme Court held that the 271(e)(1) exemption applied to patented peptides used as research tools in preclinical drug discovery. Thus, the “patented invention” in Merck was not subject to FDA premarket approval but nevertheless fell within 271(e)(1). So although on its face Proveris suggests that 271(e)(1) only applies to products that require premarket approval, this would appear to be inconsistent with Merck - although in principle one might argue that one could seek FDA approval for Integra’s patented peptides, from a practical point of view these were never true drug candidates. Notably, Proveris does not mention the nature of the “patented invention,” in Merck, or attempt to reconcile the two decisions. But if the court had held that 271(e)(1) applied to the patented OSA, the decision would have raised serious doubts as to the value of a host of patents claiming instruments used in drug development research, and research tool patents in general. In his dissent to the Federal Circuit’s decision in Merck on remand, Judge Rader suggested that in that case the majority had effectively eliminated patent protection for research tools, but judging from the court’s decision in Proveris this clearly does not seem to be the case. A great deal of uncertainty remains with respect to where the court’s will draw the line between the “patented inventions” falling within the exemption (such as the peptides in Merck), and research tools falling outside the safe harbor.
Citing to Eli Lilly v. Medtronic, a 1990 Supreme Court decision which held that the 271(e)(1) safe harbor applies to class III medical devices, Judge Schall noted that Congress had enacted 271(e)(1) primarily as a means of addressing two unintended “distortions” of the effective patent term of drugs. As the result of the second of these distortions, prior to the enactment of 271(e)(1) (as part of the Hatch-Waxman Act) drug patent owners enjoyed a de facto patent term extension resulting from the lag between patent expiration and the time required to secure FDA approval for a generic version of a drug (or other FDA regulated product.” However, the court held that “[b]ecause the OSA device is not subject to FDA premarket approval, and therefore faces no regulatory barriers to market entry upon patent expiration, [the defendant] is not a party who, prior to enactment of [271(e)(1)], could be said to have been adversely affected by the second distortion. For this reason, we do not think Congress could have intended that the safe harbor of section 271(e)(1) apply to it.”
Of course, in its 2005 Merck v. Integra decision, the Supreme Court held that the 271(e)(1) exemption applied to patented peptides used as research tools in preclinical drug discovery. Thus, the “patented invention” in Merck was not subject to FDA premarket approval but nevertheless fell within 271(e)(1). So although on its face Proveris suggests that 271(e)(1) only applies to products that require premarket approval, this would appear to be inconsistent with Merck - although in principle one might argue that one could seek FDA approval for Integra’s patented peptides, from a practical point of view these were never true drug candidates. Notably, Proveris does not mention the nature of the “patented invention,” in Merck, or attempt to reconcile the two decisions. But if the court had held that 271(e)(1) applied to the patented OSA, the decision would have raised serious doubts as to the value of a host of patents claiming instruments used in drug development research, and research tool patents in general. In his dissent to the Federal Circuit’s decision in Merck on remand, Judge Rader suggested that in that case the majority had effectively eliminated patent protection for research tools, but judging from the court’s decision in Proveris this clearly does not seem to be the case. A great deal of uncertainty remains with respect to where the court’s will draw the line between the “patented inventions” falling within the exemption (such as the peptides in Merck), and research tools falling outside the safe harbor.
Thursday, July 24, 2008
To what extent do protein patents cover posttranslationally modified proteins?
People often treat proteins as simply a string of amino acids as specified by a gene, and in particular this is often how they are represented in patents, i.e., essentially as a string of letters. For example, many patents claim proteins as defined by an amino acid sequence referenced by SEQ ID NO. However, while this simplistic view of proteins holds true for most bacterial proteins, and some very small proteins such as human growth hormone, most eukaryotic proteins (and in particular naturally occurring human proteins) are posttranslationaly modified. That is, the process of protein translation in a cell results in a string of amino acids as specified by the corresponding gene, but this polypeptide backbone is subsequently chemically modified to result in a final protein product having a markedly different structure than the originally translated polypeptide backbone. These posttranslational modifications involve the chemical addition of sugars and other molecules to certain amino acids in the polypeptide backbone. Common examples of posttranslational modifications include phosphorylation, sialation, glycosylation, and acetylation. Posttranslational modifications can dramatically affect the structure and function of the protein. Some modifications, particularly glycosylations, dramatically increase the size of the posttranslational modified protein relative to the protein as initially translated. Furthermore, these modifications entail the removal of one or more atoms from the modified amino acid, e.g., most of these modifications cause the removal of a hydrogen atom from the original amino acid and replacement by the modifying chemical group.
As a side note, posttranslational modification is one of the primary rationales offered by the biotechnology industry as to why an abbreviated approval process for generic biologics would raise safety and efficacy issues not presented by traditional small molecule generic drugs. Posttranslational modifications can be quite complex, and purified protein preparations are typically heterogeneous mixtures of a variety of different posttranslationally modified forms of the protein. The specific nature of posttranslational modifications for any given protein preparation can vary based on the particular cell line in which the gene is expressed, and the production conditions under which the cells are grown, the protein is expressed, and the protein is harvested and purified. The potential for substantial alteration in safety and/or efficacy based on minor changes to the production process, or use of a different cell line, is cited as necessitating a full scale assessment of safety and efficacy for any follow-on biologic, even if it has the same amino acid backbone sequence as a currently approved originator biologic.
Back to my main point, which is, to what extent do patent claims directed to proteins encompass posttranslationally modified proteins? The issue has been presented to the Federal Circuit in a brief filed by Roche on May 13, 2008 appealing the decision by the lower court in Amgen v. Roche (2008 WL 2231038). The allegedly infringing Roche product is MIRCERA, a pegylated version of erythropoietin (EPO) that has been on the market in Europe since 2007, and has been approved in the US by FDA. Pegylation is a form of non-natural posttranslational modification, which is accomplished outside of the cell in a chemical process that results in a covalent attachment of polyethylene glycol (PEG) to one or more amino acids on a protein. Pegylation can dramatically affect the biological and pharmacologic function of the protein, particularly by altering binding characteristics and increasing the half-life of the protein in the human body. Increased half-life translates into less frequent administration of the drug to the patient, with obvious clinical benefits.
Roche's challenge is directed particularly at claim 3 of U.S. Patent No. 5547933, which claims a “non-naturally occurring glycoprotein product of the expression in a mammalian host cell of an exogenous DNA sequence comprising a DNA sequence encoding human erythropoietin said product possessing the in vivo biological property of causing bone marrow cells to increase production of reticulocytes and red blood cells.” Roche argues that MIRCERA is not and cannot be produced by a mammalian host cell, as required by the claim, but can only produced by means of the cell free pegylation reaction. Roche also stresses the very different chemical and functional characteristics of MIRCERA in comparison to EPO produced in a cell. In particular, Roche argues that MIRCERA has twice the molecular weight, a lower molecular charge, different hydrodynamic size, different chromatographic profiles, different binding, distinct carbohydrate structures, and a much longer half-life. Roche also emphasizes the functional distinctions between MIRCERA and Amgen’s EPO products, arguing that MIRCERA provides substantially superior outcome for at least some subset of patients, and thus fulfills a medical need that is not currently being satisfied in the US.
It will be interesting to see how the Federal Circuit responds to Roche’s argument. In a previous decision involving a related Amgen EPO patent, Amgen v. HMR (314 F.3d 1313) the Federal Circuit strictly limited another claim directed towards the EPO protein to the amino acid sequence referenced in the claim. In that case, the claim defined EPO by reference to an amino acid sequence listing containing 166 amino acids. This amino acid sequence was derived from the DNA sequence of the corresponding EPO gene. However, subsequent to the filing date of the patent it was learned that the initially translated 166 amino acid EPO was posttranslational processed in the cell, resulting in the removal of a terminal amino acid, such that the final EPO product actually only contains 165 amino acids. The Federal Circuit held that this unanticipated posttranslational modification resulted in the claim not covering mature human EPO literally or under the doctrine of equivalents.
Looking beyond Amgen v. Roche, what are the ramifications of this issue for other protein patents? Many patents claim proteins solely in terms of amino acid sequence, with no explicit mention of posttranslational modifications. Commercially relevant products, such as biologic drugs, are often posttranslationally modified, and one might argue that many proteins claims are not literally infringed by posttranslationally modified versions of the claimed sequences. To find literal infringement, at the very least a court would have to find that the amino acids recited in the claim include derivatives of an amino acid lacking a hydrogen atom, and that the claim encompasses any of a host of chemical additions not defined in the specification. And if the court interprets the claim this broadly, potential 112 issues are raised. The Federal Circuit has repeatedly stated that biomolecules (like proteins and DNA) are chemical compounds, and that patent law should be applied to biomolecules in the same manner as it is to other chemicals. But in other contexts, an inventor is not permitted to claim a genus of chemical compounds sharing a common structural backbone and encompassing any chemical additions to that backbone. If the court were presented with this argument, and chose to actually treat a protein claim like any other chemical claim (as it did in Amgen v. HMR), then perhaps it would find that an interpretation of the claim that would encompass any posttranslationally modified version of the recited amino acid sequence violates the disclosure requirements of section 112.
As a side note, posttranslational modification is one of the primary rationales offered by the biotechnology industry as to why an abbreviated approval process for generic biologics would raise safety and efficacy issues not presented by traditional small molecule generic drugs. Posttranslational modifications can be quite complex, and purified protein preparations are typically heterogeneous mixtures of a variety of different posttranslationally modified forms of the protein. The specific nature of posttranslational modifications for any given protein preparation can vary based on the particular cell line in which the gene is expressed, and the production conditions under which the cells are grown, the protein is expressed, and the protein is harvested and purified. The potential for substantial alteration in safety and/or efficacy based on minor changes to the production process, or use of a different cell line, is cited as necessitating a full scale assessment of safety and efficacy for any follow-on biologic, even if it has the same amino acid backbone sequence as a currently approved originator biologic.
Back to my main point, which is, to what extent do patent claims directed to proteins encompass posttranslationally modified proteins? The issue has been presented to the Federal Circuit in a brief filed by Roche on May 13, 2008 appealing the decision by the lower court in Amgen v. Roche (2008 WL 2231038). The allegedly infringing Roche product is MIRCERA, a pegylated version of erythropoietin (EPO) that has been on the market in Europe since 2007, and has been approved in the US by FDA. Pegylation is a form of non-natural posttranslational modification, which is accomplished outside of the cell in a chemical process that results in a covalent attachment of polyethylene glycol (PEG) to one or more amino acids on a protein. Pegylation can dramatically affect the biological and pharmacologic function of the protein, particularly by altering binding characteristics and increasing the half-life of the protein in the human body. Increased half-life translates into less frequent administration of the drug to the patient, with obvious clinical benefits.
Roche's challenge is directed particularly at claim 3 of U.S. Patent No. 5547933, which claims a “non-naturally occurring glycoprotein product of the expression in a mammalian host cell of an exogenous DNA sequence comprising a DNA sequence encoding human erythropoietin said product possessing the in vivo biological property of causing bone marrow cells to increase production of reticulocytes and red blood cells.” Roche argues that MIRCERA is not and cannot be produced by a mammalian host cell, as required by the claim, but can only produced by means of the cell free pegylation reaction. Roche also stresses the very different chemical and functional characteristics of MIRCERA in comparison to EPO produced in a cell. In particular, Roche argues that MIRCERA has twice the molecular weight, a lower molecular charge, different hydrodynamic size, different chromatographic profiles, different binding, distinct carbohydrate structures, and a much longer half-life. Roche also emphasizes the functional distinctions between MIRCERA and Amgen’s EPO products, arguing that MIRCERA provides substantially superior outcome for at least some subset of patients, and thus fulfills a medical need that is not currently being satisfied in the US.
It will be interesting to see how the Federal Circuit responds to Roche’s argument. In a previous decision involving a related Amgen EPO patent, Amgen v. HMR (314 F.3d 1313) the Federal Circuit strictly limited another claim directed towards the EPO protein to the amino acid sequence referenced in the claim. In that case, the claim defined EPO by reference to an amino acid sequence listing containing 166 amino acids. This amino acid sequence was derived from the DNA sequence of the corresponding EPO gene. However, subsequent to the filing date of the patent it was learned that the initially translated 166 amino acid EPO was posttranslational processed in the cell, resulting in the removal of a terminal amino acid, such that the final EPO product actually only contains 165 amino acids. The Federal Circuit held that this unanticipated posttranslational modification resulted in the claim not covering mature human EPO literally or under the doctrine of equivalents.
Looking beyond Amgen v. Roche, what are the ramifications of this issue for other protein patents? Many patents claim proteins solely in terms of amino acid sequence, with no explicit mention of posttranslational modifications. Commercially relevant products, such as biologic drugs, are often posttranslationally modified, and one might argue that many proteins claims are not literally infringed by posttranslationally modified versions of the claimed sequences. To find literal infringement, at the very least a court would have to find that the amino acids recited in the claim include derivatives of an amino acid lacking a hydrogen atom, and that the claim encompasses any of a host of chemical additions not defined in the specification. And if the court interprets the claim this broadly, potential 112 issues are raised. The Federal Circuit has repeatedly stated that biomolecules (like proteins and DNA) are chemical compounds, and that patent law should be applied to biomolecules in the same manner as it is to other chemicals. But in other contexts, an inventor is not permitted to claim a genus of chemical compounds sharing a common structural backbone and encompassing any chemical additions to that backbone. If the court were presented with this argument, and chose to actually treat a protein claim like any other chemical claim (as it did in Amgen v. HMR), then perhaps it would find that an interpretation of the claim that would encompass any posttranslationally modified version of the recited amino acid sequence violates the disclosure requirements of section 112.
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.
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.
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).
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).
Sunday, May 4, 2008
Limitations on the scope of DNA patent claims in Europe: Monsanto struggles in its attempt to block importation of soy meal containing patented DNA
A while back Hal Wegner of Foley and Lardner forwarded me an English translation (courtesy of Dutch IP lawyer Charles Gielen) of a recent decision by a Dutch [corrected May 6] court in the case of Monsanto Technology v. Cefetra. I think the decision should be of great interest to the biotech community, so I’ve attached it here, and provide some of my own commentary below.
Monsanto holds a European patent (EP 0 546 090) essentially claiming a gene that encodes a glyphosate-tolerant form of the enzyme EPSPS, derived from bacteria. Expression of this gene in a recombinant plant, such as soy, renders the plant resistant to glyphosate (Round-Up®), and is the basis for Monsanto's highly successful line of Roundup-Ready® crops. However, Monsanto was unable to secure patent protection for the invention in Argentina, a major agricultural country, so farmers in that country are essentially free to use the technology without paying royalties to Monsanto.
In the currently pending case of Monsanto v. Cefetra, a Dutch court is struggling with the question of whether importation into Europe of Argentinian soy meal constitutes infringement of Monsanto’s European patent. Monsanto argues that because the processed soy meal comprises the patented DNA, the importation of the product is infringing. However, Cefetra argues that the mere presence of patented DNA in the processed soy meal does not amount to infringement of any of the claims, and so far has met with some success.
The Dutch court hearing the case held that "there can be no question” that Monsanto's claims directed to "isolated" DNA sequences were not infringed because DNA incorporated in soy meal is not present as "isolated matter.” Monsanto argued that the term isolated encompasses any DNA sequence taken out of its natural environment - in this case, the bacterial chromosome. But the court found that “the average person skilled in the art would understand the term isolated DNA as DNA that has been retrieved from the cell (core) of an organism for further treatment in a manner as is usual in the relevant profession.”
Likewise, the court held that claims directed to a method of producing a genetically modified plant harboring the glyphosate resistant gene were not infringed by the soy meal. While the court accepted that the soy plant and soybean have been directly obtained by the method, the court found that the subsequent crushing, separation, and treatment stages were "too drastic to still assume a direct relationship between the methods and the soy meal."
The remaining unresolved question for the court is whether claims directed to the DNA sequence per se, without any limitation to "isolated DNA," are infringed by the soy meal. The court found that even if the “DNA sequence is only present in the soy meal in minimal quantity, this does not deter from the fact that there is a breach of the Monsanto patent, if and to the extent that the scope of protection extends to the product, the DNA, as such.” In other words, the court rejected a de minimis argument, holding that even traces of DNA as a contaminant amount to literal infringement of a claim broadly directed to the DNA. The court did note that mere coincidental contamination, for example, resulting from residue from previous cargo in the ship, might not constitute infringement, but the court did not have to decide this issue because it was clear that the defendant's soy meal was the source of the patented DNA.
However, the defendants argue that Article 9 of the EU Biotech Directive bars patent protection for DNA present in an inert material such as soy meal. The Biotech Directive was issued by the European Parliament in 1998, essentially to clarify that biotechnological inventions are patentable in Europe, and provides direction with respect to the scope of that protection. Article 9 states that the “protection conferred by a patent on a product containing or consisting of genetic information shall extend to all material . . . in which the product is incorporated and in which the genetic information is contained and performs its function.” The defendants argue that since soy meal is dead material, the DNA present in the soy meal is incapable of performing its function of coding for a protein, and hence is not eligible for patent protection under Article 9. Monsanto counters that soy meal is not a biological material and thus does not fall under Article 9. Monsanto further argues that the Directive is intended to extend the scope of protection for biotechnological inventions, not to restrict it, and that in any event, it is “sufficient that the [claimed] DNA has exercised its function (namely the provision of resistance to glyphosate in the soy plant) or that the DNA, should it be isolated from the soy meal, can be incorporated in a cell in a soy plant and can then (once again) exercised its function."
The Dutch court found this Article 9 argument important and novel, and has referred the question to the European Court of Justice. In particular, the ECJ has been asked to address whether Article 9 should be understood such that patent protection is extended in situations where “the DNA is present in a material and does not express its function at the time of the stated breach but has indeed expressed its function or possibly, following the isolation from the material and its incorporation in the cell in organism, could once again express its function.” The ECJ has also been asked whether Article 9 "stand[s] in the way for the national patent legislation to (additionally) allow absolute protection for the product (the DNA) as such, whether or not the DNA expresses its function and must the protection provided by article 9 therefore be considered exhaustive?”
Monsanto has already lost similar infringement lawsuits in 2007 in Spain and England. Monsanto’s Jan. 1, 2008 10-Q filing with the SEC reports that the English court found that patent valid, and that the patented sequence is present in the imported soy meal, but that the claims as interpreted by the court were not infringed. In Spain, the judge ruled that the soy meal does not fall under the protection of the patent as the [patented] DNA in the meal no longer expresses its function (apparently the same argument that the Dutch court is referring to the ECJ) I.
The 10-Q filing also reports that the “Argentine government has opposed our use of patent infringement actions as a means of securing payment for the use of our technology in Argentina and has been admitted as a co-defendant to the proceedings in the Netherlands and as an observer to the proceedings in Denmark. In addition, the national competition commission in Argentina (CNDC) has initiated a formal investigation regarding our patent infringement actions in the European Union.”
These cases raises a number of fascinating but perhaps troubling issues for the biotechnology industry. Claims directed to isolated DNA sequences are extremely common, particularly in the United States, where the patent office normally will not allow a claim directed to a DNA molecule per se, but will require the applicant to include a limitation like "isolated" to distinguish from naturally occurring forms of the molecule, e.g., naturally occurring genes. I'm not sure how common it is even in Europe to get claims to DNA molecules per se as a Monsanto was able to do in this case. But if a US court were to construe the term “isolated” as narrowly as this Dutch court did then patent owners might find themselves in possession of a very limited scope. In the US it is often assumed that a claim to isolated DNA covers the DNA essentially in any context different from us naturally occurring environment - people often refer to claims reciting isolated polynucleotide' as gene claims and assume that they broadly cover any use of the gene. However, depending on how a court interprets the term isolated, the scope of such claims might be much narrower, as exemplified by this Dutch court’s interpretation.
Also, consider the impact of new genetic use restriction technologies (GURTs) which essentially result in removal of recombinant genes from the seeds produced by recombinant plant. This technology has a number of advantages. For example, it would obviate much of the arguments by opponents of genetically modified crops, because the seeds and food produced by the plants would not contain any foreign DNA. It would also make it harder for farmers to save and replant genetically modified seeds, because the second-generation seeds would not retain the trait. But if farmers in a country such as Argentina, where an effective patent protection for a genetic modification is lacking, were able to get access to the first-generation seeds they would seem to be free to export the recombinant DNA-free crops to other countries without having to worry about infringing any patent directed to the DNA sequence encoding the trait.
Most importantly, it is a good example of the challenges biotechnological patent owners face in enforcing their patents. Although many critics of gene patents argue that gene patents are particularly restrictive of follow-on technology because it is difficult if not impossible to design around a gene, in practice the actual scope of protection is often dramatically limited in the courts, in many cases allowing accused infringers to escape liability.
Monsanto holds a European patent (EP 0 546 090) essentially claiming a gene that encodes a glyphosate-tolerant form of the enzyme EPSPS, derived from bacteria. Expression of this gene in a recombinant plant, such as soy, renders the plant resistant to glyphosate (Round-Up®), and is the basis for Monsanto's highly successful line of Roundup-Ready® crops. However, Monsanto was unable to secure patent protection for the invention in Argentina, a major agricultural country, so farmers in that country are essentially free to use the technology without paying royalties to Monsanto.
In the currently pending case of Monsanto v. Cefetra, a Dutch court is struggling with the question of whether importation into Europe of Argentinian soy meal constitutes infringement of Monsanto’s European patent. Monsanto argues that because the processed soy meal comprises the patented DNA, the importation of the product is infringing. However, Cefetra argues that the mere presence of patented DNA in the processed soy meal does not amount to infringement of any of the claims, and so far has met with some success.
The Dutch court hearing the case held that "there can be no question” that Monsanto's claims directed to "isolated" DNA sequences were not infringed because DNA incorporated in soy meal is not present as "isolated matter.” Monsanto argued that the term isolated encompasses any DNA sequence taken out of its natural environment - in this case, the bacterial chromosome. But the court found that “the average person skilled in the art would understand the term isolated DNA as DNA that has been retrieved from the cell (core) of an organism for further treatment in a manner as is usual in the relevant profession.”
Likewise, the court held that claims directed to a method of producing a genetically modified plant harboring the glyphosate resistant gene were not infringed by the soy meal. While the court accepted that the soy plant and soybean have been directly obtained by the method, the court found that the subsequent crushing, separation, and treatment stages were "too drastic to still assume a direct relationship between the methods and the soy meal."
The remaining unresolved question for the court is whether claims directed to the DNA sequence per se, without any limitation to "isolated DNA," are infringed by the soy meal. The court found that even if the “DNA sequence is only present in the soy meal in minimal quantity, this does not deter from the fact that there is a breach of the Monsanto patent, if and to the extent that the scope of protection extends to the product, the DNA, as such.” In other words, the court rejected a de minimis argument, holding that even traces of DNA as a contaminant amount to literal infringement of a claim broadly directed to the DNA. The court did note that mere coincidental contamination, for example, resulting from residue from previous cargo in the ship, might not constitute infringement, but the court did not have to decide this issue because it was clear that the defendant's soy meal was the source of the patented DNA.
However, the defendants argue that Article 9 of the EU Biotech Directive bars patent protection for DNA present in an inert material such as soy meal. The Biotech Directive was issued by the European Parliament in 1998, essentially to clarify that biotechnological inventions are patentable in Europe, and provides direction with respect to the scope of that protection. Article 9 states that the “protection conferred by a patent on a product containing or consisting of genetic information shall extend to all material . . . in which the product is incorporated and in which the genetic information is contained and performs its function.” The defendants argue that since soy meal is dead material, the DNA present in the soy meal is incapable of performing its function of coding for a protein, and hence is not eligible for patent protection under Article 9. Monsanto counters that soy meal is not a biological material and thus does not fall under Article 9. Monsanto further argues that the Directive is intended to extend the scope of protection for biotechnological inventions, not to restrict it, and that in any event, it is “sufficient that the [claimed] DNA has exercised its function (namely the provision of resistance to glyphosate in the soy plant) or that the DNA, should it be isolated from the soy meal, can be incorporated in a cell in a soy plant and can then (once again) exercised its function."
The Dutch court found this Article 9 argument important and novel, and has referred the question to the European Court of Justice. In particular, the ECJ has been asked to address whether Article 9 should be understood such that patent protection is extended in situations where “the DNA is present in a material and does not express its function at the time of the stated breach but has indeed expressed its function or possibly, following the isolation from the material and its incorporation in the cell in organism, could once again express its function.” The ECJ has also been asked whether Article 9 "stand[s] in the way for the national patent legislation to (additionally) allow absolute protection for the product (the DNA) as such, whether or not the DNA expresses its function and must the protection provided by article 9 therefore be considered exhaustive?”
Monsanto has already lost similar infringement lawsuits in 2007 in Spain and England. Monsanto’s Jan. 1, 2008 10-Q filing with the SEC reports that the English court found that patent valid, and that the patented sequence is present in the imported soy meal, but that the claims as interpreted by the court were not infringed. In Spain, the judge ruled that the soy meal does not fall under the protection of the patent as the [patented] DNA in the meal no longer expresses its function (apparently the same argument that the Dutch court is referring to the ECJ) I.
The 10-Q filing also reports that the “Argentine government has opposed our use of patent infringement actions as a means of securing payment for the use of our technology in Argentina and has been admitted as a co-defendant to the proceedings in the Netherlands and as an observer to the proceedings in Denmark. In addition, the national competition commission in Argentina (CNDC) has initiated a formal investigation regarding our patent infringement actions in the European Union.”
These cases raises a number of fascinating but perhaps troubling issues for the biotechnology industry. Claims directed to isolated DNA sequences are extremely common, particularly in the United States, where the patent office normally will not allow a claim directed to a DNA molecule per se, but will require the applicant to include a limitation like "isolated" to distinguish from naturally occurring forms of the molecule, e.g., naturally occurring genes. I'm not sure how common it is even in Europe to get claims to DNA molecules per se as a Monsanto was able to do in this case. But if a US court were to construe the term “isolated” as narrowly as this Dutch court did then patent owners might find themselves in possession of a very limited scope. In the US it is often assumed that a claim to isolated DNA covers the DNA essentially in any context different from us naturally occurring environment - people often refer to claims reciting isolated polynucleotide' as gene claims and assume that they broadly cover any use of the gene. However, depending on how a court interprets the term isolated, the scope of such claims might be much narrower, as exemplified by this Dutch court’s interpretation.
Also, consider the impact of new genetic use restriction technologies (GURTs) which essentially result in removal of recombinant genes from the seeds produced by recombinant plant. This technology has a number of advantages. For example, it would obviate much of the arguments by opponents of genetically modified crops, because the seeds and food produced by the plants would not contain any foreign DNA. It would also make it harder for farmers to save and replant genetically modified seeds, because the second-generation seeds would not retain the trait. But if farmers in a country such as Argentina, where an effective patent protection for a genetic modification is lacking, were able to get access to the first-generation seeds they would seem to be free to export the recombinant DNA-free crops to other countries without having to worry about infringing any patent directed to the DNA sequence encoding the trait.
Most importantly, it is a good example of the challenges biotechnological patent owners face in enforcing their patents. Although many critics of gene patents argue that gene patents are particularly restrictive of follow-on technology because it is difficult if not impossible to design around a gene, in practice the actual scope of protection is often dramatically limited in the courts, in many cases allowing accused infringers to escape liability.
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