Strategies For Licensing Your
Way Out Of Trouble
Brian V. Slater, Esq.
Fitzpatrick, Cella, Harper & Scinto
American Conference Institute, New York City
November 11, 2003
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Licensing Strategies
• What to do at the first sign of
infringement?
• Under what circumstances should a
license be sought?
• Will a license always get you out of
trouble?
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What To Do At The First Sign Of
Infringement?
Obtain opinion of counsel, and then:
– Cease & desist
– Consider non-infringing alternatives
(either design around or license in)
– Litigate (wait for suit or file
declaratory judgment action)
– Negotiate for a license
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Under What Circumstances Should A
License Be Sought?
• General considerations
• Research tool patents
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–General trend
away from
General Considerations
reading
limitations into
the claims
• Evaluate strength of defenses
–Overbroad
claims at risk for
• Consider litigation burdens of proof
description/enabl
– Patentee must prove infringement
ement (e.g., U. of
by preponderance
Rochester v.
– Accused infringer must prove
Searle)
invalidity by clear and convincing
evidence
lack of
–Patent can
cover
• Jury v. Judge
improvements
even though not
• Venue
specifically
disclosed
(DeKalb)
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Section 283 only
provides
injunction to
prevent remedy
future
infringement so
would not •cover
Damages award:
drug products
– To “compensate”, not punish infringer
resulting from tool
use if tool use – Cannot award infringer’s profits
over
General Considerations
– Two possible measures:
• Lost profits of patentee
• Not less than a reasonable royalty
– (a) “established” royalty
– (b) hypothetical, pre-infringement
negotiation between willing parties
• Treble damages/attorney fees
35 U.S.C. §§ 283-286; Nike, Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437, 1442 (Fed. Cir. 1998)
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General Considerations
• Injunction
• Litigation fees/expenses*
At risk
<$1million
$1-25 million
>$25 million
Average Costs
$0.5 million
$2 million
$4 million
• Diversion of human resources
* AIPLA 2003 Report of the Economic Survey
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Research Tool Patents
• What are research tools?
• When are research tool patents
infringed?
• What special considerations apply to
licensing of research tools?
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What Are Research Tools?
• “[T]he full range of tools that scientists
use in the laboratory, including . . .”:
– cell lines
– monoclonal antibodies
– reagents
– animal models
– growth factors
– combinatorial chemistry and DNA
libraries
– clones and cloning tools (such as
PCR)
– methods (e.g., screening methods)
– laboratory equipment and machines
64 Fed. Reg. 246 Page 72090 (December 23, 1999)
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When Are Research Tool Patents
Infringed?
• Infringement includes:
– making, using, and selling patented
invention in U.S., and importing
patented invention into U.S.
– importing into the U.S. a product
which is made by a process
patented in the U.S.
35 U.S.C. §§ 271 (a), (g)
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When Are Research Tool Patents
Infringed?
• Exemptions from infringement:
– “Safe harbor” (35 U.S.C. §
271(e)(1))
– “Experimental use” exception
• Importation into U.S. of “information”
based on use of research tools abroad
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The 271(e)(1) Safe Harbor
“It shall not be an act of infringement to make
use, offer to sell, or sell within the United
States or import into the United States 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 . . . . ”
35 U.S.C. § 271(e)(1) (emphasis added)
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The Safe Harbor Pre-Integra v. Merck
Under Intermedics, no infringement if it would
have been:
“reasonable, objectively for a party in
defendant’s situation to believe that there was
a decent prospect that the ‘use’ in question
would contribute (relatively directly) to the
generation of kinds of information that was
likely to be relevant in the processes by which
the FDA would decide whether to approve the
product”
Intermedics, Inc. v. Ventritex, Inc., 775 F. Supp. 1269, 1280 (N.D. Cal. 1991), aff’d 991 F.2d
808 (Fed. Cir. 1993).
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The Safe Harbor Pre-Integra v. Merck
Intermedics test applied to exempt from
infringement use of patented intermediates as
part of research program to identify possible
drug
Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer, Inc., 2001 U.S. Dist. LEXIS 19361 (S.D.N.Y.
11/28/01)
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Integra v. Merck
• Patents on peptide sequence that regulates cell
adhesion to substrates by interacting with a particular
receptor
• Scripps discovered same peptide sequence inhibits
angiogenesis (i.e., generation of new blood vessels)
• Merck hired Scripps to identify potential drug
candidates that inhibit angiogenesis
• Scripps work culminated in drug candidate chosen for
clinical development
• Integra offered license to Merck; Merck declined
Integra LifeSciences I, Ltd. v. Merck KGaA, 331 F.3d 860 (Fed. Cir. 2003)
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Integra v. Merck
• District court held § 271(e)(1) did not immunize
Merck against liability
• Jury awarded reasonable royalty of $15 million for
infringement
• Federal Circuit:
– affirmed finding that § 271(e)(1) did not
exempt Merck from infringement liability
– overturned jury damages award as
unsupported and remanded back to district
court
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Integra v. Merck
• Issue was “whether the § 271(e)(1) safe harbor
reaches back down the chain of experimentation
to embrace development and identification of new
drugs that will, in turn, be subject to FDA
approval” (Rader, J.)
• Majority concluded that exemption does not apply
to general biomedical research to identify new
drug compounds
• Dissent (Newman, J.) that pre-clinical research
should be exempt either under (i) the
experimental use exception or (ii) § 271(e)(1)
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Madey was prof.
And lab director;
Duke removed
him but continued
to use some of
his equipment
“Experimental Use” Exception
Madey v. Duke University, 307 F.3d 1351
(Fed. Cir. 2002)
• District Court found Duke’s use of patented
laser technology exempt from infringement
because its patent policy stated Duke was
dedicated to “teaching, research and the
expansion of knowledge . . .”
• Federal Circuit reversed and remanded,
holding experimental use exception does
not immunize use that is “in any way
commercial” and is strictly limited to uses
“solely for amusement, to satisfy idle
curiosity, or for strictly philosophical inquiry”
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Conclusion Re Scope of Exemptions
• Use of patented research tools (and
patented intermediates) to identify drug
candidates no longer exempt
• Experimental use exception practically
irrelevant
• Renewed vitality of research tool (and
intermediate) patents
• Importance of licensing raised
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Use Of Patented Research Tools
Abroad: Bayer v. Housey
• Bayer filed declaratory judgment action
re Housey patents on cell-based assays
• Housey counterclaimed for infringement
under § 271(g) based on:
– Bayer’s importation of information
generated by the patented process;
– Bayer’s importation of
pharmaceutical composition
identified by patented process.
• Dist. Ct. dismissed Housey’s 271(g)
infringement counterclaim
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Use Of Patented Research Tools
Abroad: Bayer v. Housey
• Federal Circuit affirmed, holding:
– infringement under § 271(g) is
limited to importation of physical
articles manufactured abroad, and
does not extend to information
generated by patented process
– a pharmaceutical composition
produced using information created
by patented processes is not a
product “made by” those claimed
processes under 271(g)
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Conclusion re Use Of Patented
Research Tools Abroad
• Importation of information generated by using
research tool patent abroad does not infringe
U.S. process patent
• Encourages moving drug screening activities
off shore to avoid reach of U.S. research tool
process patents
• Avoid Integra by importing into U.S. only
information on drug candidate then testing
drug in U.S. to generate data reasonably
related to FDA approval?
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Special Considerations Applying To
Licensing Of Research Tools
• Licensing government-funded research
tools
• Compensation issues
• Patent misuse
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Government-Funded Research Tools
• Reach through royalties on unpatented
end products are discouraged
• Execution or annual use fees
appropriate when licensing to for-profit
entities
• Royalties on sale of end products more
appropriate where for-profit entity seeks
to market tool or product containing tool
or service based on tool
NIH Principles and Guidelines for Recipients of NIH Research Grants
and Contracts on Obtaining and Disseminating Biomedical Research
Resources: Final Notice, 64 Fed. Reg. 246 Page 72090-96
(December 23, 1999)
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Compensation For Research Tools
Licensor’s perspective:
• Recoup cost of developing tool and generate
income/profit
– up front payments
• Shift to licensee risks of failure/technology
being overtaken
– annual minimum royalties
• Share in profits from downstream products
resulting from use of tool
– reach through royalties for life of
downstream products
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Compensation For Research Tools
Licensee’s perspective:
• Cost savings v. alternatives
– Payment not to exceed cost savings
• Shift risk to licensor
– Use based royalties only if tied to cost
savings
– Avoid annual minimums
– Ability to terminate
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Compensation For Research Tools
Licensee’s perspective:
• Licensee taking most of the risk due to cost
of drug discovery infrastructure
– Avoid reach through royalties (especially
for life of product)
• Problem of stacking royalties
– Rate reductions based on other licenses
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even if compete,
difficult to show
but for because
speculative at
time of
infringement
and tool may not
be for drug
discovery • Lost
Compensation For Use Of Research
Tools: Infringement Damages
profits not generally applicable, e.g.
– patentee does not usually sell a competing
product
– availability of non-infringing alternative
• Established royalty often unavailable in rapidlychanging biotech field
• Most likely reasonable royalty (RR) based on
hypothetical negotiation between willing
licensor & willing licensee
D. Ware, Research Tool Patent Judicial Remedies, 30 AIPLA Q.J. 267 (2002)
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even if compete,
difficult to show
but for because
speculative at
time of
infringement
and tool may not
be for drug
discovery • RR
Compensation For Use Of Research
Tools: Infringement Damages
–
–
–
–
–
factors (exemplary):
Rates paid by licensee for comparable
patents
Nature and scope of license (e.g.,
exclusivity)
Duration of patent and license
Established profitability of product made
under patent; its commercial success and
current popularity
Utility and advantages of patent over
alternatives
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Georgia-Pacific Corp v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970)
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Compensation For Use Of Research
Tools: Integra v. Merck
Factors relevant to RR:
• Must be based on “sound economic and
factual predicates”
• Date of hypothetical negotiation critical
especially where technology is rapidly
developing (should be prior to first
infringement)
• Ability to project success at that date
(e.g., pre-clinical)
• Other, similar licenses (“inherently
suspect” because risks can vary greatly)
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Compensation For Use Of Research
Tools: Integra v. Merck
Factors relevant to RR:
• Price licensor paid for technology
• Point at which tools are employed in the
drug development process (e.g.,
screening v. safety/efficacy)
• Effect of stacking royalties, particularly
in case of reach through royalties
• NB. CAFC took no position on
applicability of a reach through royalty in
case before it
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Compensation For Use Of
Research Tools
Other RR factors (not mentioned by
Integra):
• Acceptable non-infringing alternatives
(must be “available” but need not have
been on market). Grain Processing Corp. v. American MaizeProducts Co., 185 F.3d 1341 (Fed. Cir. 1999)
• RR can be based on cost savings to
infringer. Hanson v. Alpine Valley Ski Area Inc., 718 F.2d 1075, 108081 (Fed. Cir. 1983); Ajinomoto Co. v. Archer-Daniels-Midland Co., 1998 WL
151411 (D. Del. 3/13/98), aff’d 228 F.3d 1338 (Fed. Cir. 2000).
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Compensation For Use Of
Research Tools
Other RR factors (not mentioned by
Integra):
• RR can be based on sale of unpatented
end product where direct connection
with patented process. Minco, Inc. v. Combustion
Engineering, Inc., 95 F.3d 1109 (Fed. Cir. 1996); Ajinomoto Co. v. Archer-DanielsMidland Co., 1998 WL 151411 (D. Del. 3/13/98), aff’d 228 F.3d 1338 (Fed. Cir.
2000).
• Compare: Use royalty on end product
inappropriate where no evidence
industry expects to pay use royalty. Stickle v.
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Heubllin, Inc., 716 F.2d 1550 (Fed. Cir. 1983).
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Compensation for Use of
Research Tools
Other factors (not mentioned by Integra):
• Facts after infringement, such as
infringer’s profits, are a “book of
wisdom” that can and often must be
taken into account Fromson v. Western Litho Plate and
Supply Co., 853 F.2d 1568, 1575 (Fed. Cir. 1988); Trans-World Mfg. Corp. v. Al
Nyman & Sons, Inc., 750 F.2d 1552, 1568 (Fed. Cir. 1984); State Contracting &
Eng’g Corp. v. Condotte America, Inc., Slip Op. 02-1588 (Fed. Cir. 10/7/03)
• Compare: Evidence of low use and low
profits admitted but given little weight
Hanson v. Alpine Valley Ski Area Inc., 718 F.2d 1075, 1079-81 (Fed. Cir. 1983)
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Compensation for Use of
Research Tools
Questions arising:
• Does connection between use of screening
tool and drug candidate justify reach through
royalty on end drug product?
• What effect will NIH Guidelines have on NIHfunded licensing and for-profit licensing?
• What effect does entering into reach through
royalty license now have on future
negotiations?
• Is it fair to allow post-hypothetical negotiation
evidence of high use/profits but ignore such
evidence of low use/low profits?
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Compensation For Use Of Research
Tools: SIBIA v. Cadus
• Patent on screening method for identifying
agonists/antagonists re proteins
• SIBIA’s expert sought $18.3 million reasonable
royalty:
– up front fee and equity stake ($6.6 million)
– $100,000 milestone flat fee per molecular
target validated for screening ($3 million)
– royalty on sales of future drugs discovered
using infringing assays ($ 8.7 million) (based
on industry average hit rates)
• Jury awarded $18 million reasonable royalty
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Compensation For Use Of Research
Tools: SIBIA v. Cadus
• Cadus appealed portion of damages award
based on future sales of drugs as speculative
• Cadus argued actual hit rate up to 100 times
lower than industry average and no drugs had
been found
• Patent invalidated for obviousness by CAFC
so court did not reach damages issues
• If damages had been affirmed, would Cadus
have been better off with or without a license?
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical Corp., 225 F.3d 1349 (Fed. Cir.
2000); Michael J. Stimson, Damages as Infringement of Research Tool Patents: The
Reasonableness of Reach Through Royalties, 2003 Stan. Tech. L.R. 3 (2003)
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Patent Misuse
• Equitable defense to infringement
charge
• Patent misuse arises where patentee
has:
“impermissibly broadened the scope of
the patent grant with anticompetitive
effect”
C.R. Bard, Inc. v. M3 Sys., Inc. 157 F.3d 1340, 1372 (Fed. Cir. 1998)
• Renders patent unenforceable until
misuse purged Id.
• Exceptions to misuse under 35 U.S.C. §
271(d), e.g., refusal to license
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Patent Misuse
• Is it patent misuse to require in a
research tool patent license:
– reach through royalties based on
sales of unpatented downstream
products?
– royalties beyond expiration of
research tool patent?
– payment of royalties during period
licensee challenges patent validity?
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Patent Misuse: Bayer v. Housey
• Housey entered into over 30 licenses of
its patented technology
• Two types of licenses entered
into/offered:
– reach through running royalty on
sales of drug products discovered
using invention
– lump sum royalty based on
licensee’s R&D budget
• Housey offered Bayer both options and
Bayer declined both
• District Court held no patent misuse
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Bayer AG v. Housey Pharmaceuticals Inc., 228 F. Supp.2d 467 (D. Del. 2002)
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Patent Misuse: Bayer v. Housey
Reach through royalties on unpatented goods:
• Misuse can arise where licensor “conditions” grant
of license on payment of royalties that do not use
the teaching of the patent
• If license agreement is for convenience of the
parties in measuring the value of the license, then
the agreement does not constitute patent misuse
See also Engel Indus. Inc. v. The Lockformer Co., 96 F.3d 1398, 1408-09 (Fed. Cir. 1996)
• No evidence Housey “conditioned” the license on
payment of reach through royalty: Bayer never
counter-offered with another type of license, so
Housey did not reject it
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Patent Misuse: Bayer v. Housey
Post-expiration royalties:
• At least one Housey licensee obliged to pay
royalties until 10 yrs after last to expire licensed
Housey patent
• Plaintiff argued post-patent expiration royalties
were per se misuse under Brulotte v. Thys Co.,
379 U.S. 29 (1964)
• Court said, under Brulotte, misuse applies where
royalties are accrued after patent expiration
• Here, post-expiation royalties were accrued for
use of patented invention before expiration
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Patent Misuse: Bayer v. Housey
Payment of royalties during patent validity challenge:
• At least one Housey license allowed Housey to
terminate if licensee contested patent validity but, if
not, required licensee to continue paying royalties
during a validity challenge
• District Court stated requirement to pay royalties
during a validity challenge was unenforceable under
Lear, Inc. v. Adkins, 395 U.S. 653 (1969)
• BUT, District Court held inclusion of unenforceable
provision in license agreement did not constitute
patent misuse
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Will a license always get you out of
trouble?
• Explain motivation and expectations
clearly in preamble (don’t expect to rely
on extrinsic evidence of intent)
E.g., American Cyanamid Co. v. Fermenta Animal Health Co., 54 F.3d 177 (3d.
Cir. 1995)
• Carefully define “improvements” (since
technology may be rapidly changing)
and who owns them
• Define field of use in a way that will not
become outdated based on changing
technology (e.g., define based on
medical condition)
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Will a license always get you out of
trouble?
• Consider effect of agreeing to reach
through royalty on future licensing
negotiations/damages awards
• Consider creative solutions to stacking
problems, e.g., rate reductions
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Thank You
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