The Significance of Quanta for Biotechnology

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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