Posts Tagged ‘Patent’

Why IP Assignment Agreements Matter, Supreme Edition

Thursday, July 14th, 2011

The Supreme Court schooled Stanford University in legal writing in Trustees of Stanford University v. Roche Molecular Systems, ruling that sloppy drafting of an intellectual property assignment agreement required Stanford to share ownership of an important patent for HIV detection technology.

As summarized in an earlier post, the Federal Circuit Court of Appeals dismissed Stanford’s patent infringement lawsuit against Roche because a poorly drafted intellectual property assignment agreement signed by one of Stanford’s researchers in effect made Roche a co-owner of the patent and thus immune from a patent infringement lawsuit. The Stanford agreement said that the researcher “agree[d] to assign,” his rights in any inventions, i.e. at some time in the future, but that was trumped by a later assignment that the researcher signed with Roche’s predecessor, but which was phrased in the present tense (“do[es] hereby assign”), to take immediate effect.

Before the Supreme Court, Stanford’s argument focused not on the language of the assignment agreement, but on the Bayh-Dole Act, which regulates intellectual property ownership and commercial exploitation of inventions created as part of a federally funded project. Stanford argued that its HIV research project was subject to Bayh-Dole, and that the law vested ownership of the invention directly in Stanford, so that the researcher had no rights to assign to Roche.

The Supreme Court disagreed, ruling that patent law had traditionally vested initial ownership of inventions in inventors, regardless of whether they invented on their employers’ payroll. (For that reason, most employers make sure to have their researchers sign assignment agreements that transfer ownership of all inventions upon creation to the employer.) The Court admitted that the Bayh-Dole Act was not a model of clarity on the issue of initial ownership of inventions, but ruled that a statute would need to directly and unambiguously vest ownership in the research organization to change the “inventor owns” rule, but Bayh-Dole had not.

Takeaway: as we said back in January, 2010: “A lot of folks DIY basic contracts like employment agreements by cutting and pasting poorly drafted templates from the Internet. A lot of other folks sign non-disclosure and similar basic agreements without a glance at the actual contents. This case shows why neither is a good idea.” If you are a federally funded research organization subject to the Bayh-Dole Act, it would be wise to review your IP assignment agreements for compliance with the Stanford decision.

What Is A Reasonable Royalty?

Thursday, January 27th, 2011

Did somebody say royalty?

What is a reasonable royalty rate for licensed intellectual property?

According to the Court of Appeals for the Federal Circuit, it is not 25%–at least not as a rule of thumb.

The U.S. Patent Act requires that damages in a successful patent infringement lawsuit equal the reasonable royalty that a licensee would pay a licensor in a hypothetical license negotiation at the time the infringement began.

In Uniloc USA, Inc. v. Microsoft Corp., Uniloc prevailed at trial in its patent infringement claim and was awarded damages of $388 million, based in part on its expert witness’s testimony that 25% of Microsoft’s expected profits on its Office software suite was a reasonable baseline from which to calculate patent royalties. The infringed invention was a product activation key designed to deter illegal software copying.

The 25% rule of thumb starts with the infringer’s gross profit margin (profits divided by nets sales), multiplies that by 25%, then multiplies the resulting royalty rate by the infringer’s net sales from the infringing products, to calculate the patent owner’s damages. For example, if the present value of net sales of an invention is $6, and the present value of manufacturing expenses is $4, the gross profit margin is 33.3% (6 – 4/ 6), and the 25% rule royalty rate would be one-quarter of that, or 8.3% of net sales. The initial royalty rate is often adjusted upwards or downwards, according to the 15 factors detailed in the 1970 case, Georgia-Pacific Corp. v. U.S. Plywood Corp.

On appeal, Uniloc argued that academic studies had proven that the 25% rule of thumb was supported by evidence that patent royalties negotiated in the real world averaged around 25% of profits.

The CAFC conceded that it had tolerated the 25% rule of thumb in cases where the parties had not contested it, but ultimately overturned Uniloc’s damages award on the grounds that to be admissible, a general theory must be sufficiently tied to the facts of the case, however Uniloc’s expert had not laid the necessary groundwork to introduce the 25% rule of thumb in that case.

More broadly, the CAFC said the 25% rule failed because: 1) it did not account for the importance of the patent to the product in which it was incorporated; 2) it did not account for the difference in market power and risk assumed by the parties; and 3) it is essentially arbitrary, and does not fit within the model of a hypothetical negotiation assumed to occur prior to a finding of infringement.

So what then is a “reasonable royalty” for licensed IP?

The CAFC endorsed three of the 15 Georgia-Pacific factors for calculating a reasonable patent royalty: looking at royalties paid or received in licenses for the patent or in comparable licenses, and looking at the portion of profit that is customarily allowed in the particular business for use of the invention or similar inventions. But even these must be tied to the facts of the particular case.

By way of reference, a frequently cited rule of thumb for calculating a fair trademark royalty rate is 10% to 25% of the licensee’s expected gross profit margin, depending on the type of goods, the size of the market, and the strength of the mark. In the same ballpark as patent law’s deposed 25% rule of thumb, but with more flexibility to allow calibration of the licensed IP’s actual contribution to the profitability of the product that incorporates it.

Licensor Recovery of Attorneys’ Fees in Bankruptcy

Thursday, November 18th, 2010

Photo Courtesy tristam sparks under the cc 2.0 license

The only thing worse for a licensor than losing money when its licensee files for bankruptcy is paying attorneys’ fees on top of that to stop the bleeding.

Two of the most common bankruptcy proceedings that licensor creditors get involved in are: 1) hearings related to the licensee’s attempt to assume an executory license agreement; and 2) lawsuits against the licensor to recover so-called preferential transfer payments from the licensee.

But can a clever licensor recover attorneys’ fees incurred in post-petition bankruptcy proceedings, if it had the foresight to include a well-drafted attorneys’ fee provision in its boilerplate license agreement?

Since a 2007 Supreme Court decision, the answer has been “maybe,” which was a big improvement over the previous answer of “almost never.”

Until 2007, there were two hurdles against a licensor creditor recovering its attorneys’ fees in a bankruptcy proceeding. The first was that many courts invalidated attorneys’ fee provisions to the extent that they applied to bankruptcy proceedings, arguing that the Bankruptcy Code had a general policy to invalidate contractual clauses that were triggered by bankruptcy. The second was that some courts interpreted the Bankruptcy Code to prohibit recovery of attorneys’ fees by unsecured creditors under any circumstances.

In 2007, the US Supreme Court removed the first hurdle in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., which held that the Bankruptcy Code did not contain a blanket prohibition on recovery of attorneys’ fees for bankruptcy related proceedings, as long as the attorneys’ fees provision is valid under state law.

But the Travelers case did not address the second hurdle, and there is currently a split among various courts whether unsecured creditors can recover attorneys’ fees even pursuant to a contractual provision valid under state law. So far, the Second Circuit, Ninth Circuit, and Sixth Circuit federal appeals courts have permitted such recovery, while the First Circuit and Eighth Circuit (in pre-Travelers opinions) have not.

Sigh, so confusing. What is a licensor to do? Well of course, put attorneys’ fee recovery language in your boilerplate license agreement. The worst that can happen is the court says no.

A starter attorneys’ fee provision might read as follows:

“If any legal action, arbitration, or other proceeding is brought under or in relation to this Agreement, including but not limited to any legal action, arbitration, or proceeding under the U.S. Bankruptcy Code, then in addition to any other relief to which the Licensor is entitled, if the Licensor is the successful or prevailing party, then the Licensor is also entitled to recover, and the Licensee shall pay, all: (a) reasonable attorneys’ fees of the Licensor; (b) court costs; and (c) expenses, even if not recoverable by law as court costs (including, without limitation, all fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings); incurred in that action, arbitration, or proceeding and all appellate proceedings. For purposes of this Section, the term ‘attorneys’ fees’ includes, without limitation, paralegal fees, investigative fees, expert witness fees, administrative costs, disbursements, and all other charges billed by the attorney to the Licensor.”

Adjust the above to be valid under the state law that governs the license agreement. Check whether that state law makes the provision reciprocal, by deeming that if an agreement grants one party the right to recover attorneys’ fees, then the other party is automatically entitled to recover its attorneys’ fees under like circumstances. Then cross your fingers.

Licensing and the Pharma Patent Cliff

Friday, October 22nd, 2010


Photo courtesy Dennis Barnes Photography

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic License.

Peering over the edge of a “patent cliff” that threatens to cut deeply into its profits, Big Pharma is considering modifying its current business model of in-house development of all-or-nothing blockbuster drugs towards a business model of in-licensing from biotech startups and university researchers.

The time and cost of developing new drugs from scratch is enormous– typically $2 billion per successful drug and 10 to 15 years from initial research to final regulatory approval.

But during the next five years, many top-selling blockbuster drugs will come off patent, and face severe price competition from generic versions, including: Pfizer’s Lipitor; Astra-Zeneca’s Seroquel; and Sanofi-Aventis’ and Bristol-Myers Squib’s Plavix. Between 2011 and 2014, four of Eli Lilly’s top five sellers will fall off the patent cliff: Zyprexa, Symbalta, Gemzar, and Evista. Estimates peg the total revenue loss to Big Pharma as high as $140 billion through 2016.

In response, analysts at Morgan Stanley are advocating a move away from the go-for-broke nature of the blockbuster business model, towards a Pharma 2.0 model of in-licensing from biotechs and academic researchers, who do all early-stage research and testing, and assume most of the risk. According to their analysis, the return on investment of in-licensed drugs is three times higher than drugs developed in-house.

And it appears that some of Big Pharma is listening. According to thepharmaletter.com, in 2009 the top 10 pharmaceutical companies entered into 12% more health-care focused licensing deals than the year before. Andrew Baum of Morgan Stanley estimates that large European pharmas will cut research spending by 40% in the next two years, and focus on licensing and acquisitions of promising drugs in development.

But for other pharmaceutical companies, the “Not Invented Here” syndrome still rules the day. Eli Lilly, which faces probably the most severe patent cliff among the major pharmas (above), has announced that it will meet the challenge mainly through cost cuts, job cuts, and modifications of existing product lines, rather than major new licensing or acquisition initiatives. It argues that slashing in-house research and development to boost return on investment is a short-term fix that would undermine Lilly’s long-term mission.

As we have argued in other contexts, while licensing may not always be appropriate as a complete replacement for in-house research and development, it is almost always appropriate as a complementary business model. When you are looking over the side of a cliff, Not Invented Here goeth before the fall.

Has Pay for Delay Seen Its Day?

Thursday, August 12th, 2010


Photo by Sage Ross, CC by-sa

What do you call it when a patent holder pays royalties to a possible infringer, and not the other way around?

In the pharmaceutical industry, it is called “reverse payment” or “pay for delay,” a practice in which the inventor of a patented drug pays the developer of a generic substitute not to produce until the patent is nearly expired.

The practice has withstood multiple court challenges, but is coming under increasing fire from the executive and legislative branches of the federal government as anti-competitive.

And a three judge panel of the influential federal Second Circuit Court of Appeals, which recently upheld a reverse payment arrangement, has even taken the unusual step of inviting the challengers to appeal their loss to the entire 10 judge circuit court panel.

The origins of pay for delay are in the Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act. Hatch-Waxman provides that when a developer of a patented drug applies to the Food and Drug Administration for permission to market it, the maker of a generic version of the drug may file a certification that the generic does not infringe the new drug’s patents, or that the new drug’s patents are invalid. The certification itself is deemed an infringement of the new drug’s patents, and sets the stage for the new drug’s inventor to sue the makers of the generic version for patent infringement.

The original logic of Hatch-Waxman was to encourage development of generics without undue cost to patented drugs by resolving infringement issues at an early stage, before either party had invested huge amounts of money in production and marketing. But it did not work out that way. Many innovators chose instead to pay the generics a “reverse payment” not to produce, usually until shortly before the new drug’s patents expire. Often payment to the generic is in the form of a percentage of sales on the patented drug, in effect, a “reverse royalty.”

Reverse payments have been widely criticized as an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.

The Federal Trade Commission estimates that pay for delay settlements cost consumers $3.5 billion per year because of the unavailability of cheaper generic drugs.

But pharmaceutical manufacturers reply that the agreements are reasonable commercial agreements to avoid the expense and uncertainty of litigation, especially where the prospective generic manufacturer has not risked significant market entry expenses or infringement damages, and has little to lose in filing a challenge.

And courts for the most part have agreed. The Eleventh Circuit and the Federal Circuit have upheld the practice, while the Sixth Circuit has held it unlawful.

Two of the biggest class-action antitrust challenges to pay for delay were lengthy class action lawsuits decided by the Second Circuit Court of Appeals.

In 2005, the Second Circuit upheld the practice in In Re Tamoxifen Citrate Antitrust Litigation, in which it ruled that reverse payment agreements do not violate antitrust laws, “[u]nless and until the patent is shown to have been procured by fraud, or a suit for its enforcement is shown to be objectively baseless,” or the settlement agreement extends the patent beyond its original scope.

In Re Ciprofloxacin Hydrochloride Antitrust Litigation challenged a settlement of a 1991 patent infringement lawsuit in which Bayer Corporation paid Barr Laboratories reverse payment royalties estimated at nearly $400 million not to manufacture a generic version of Bayer’s patented drug Cipro. A three-judge panel of the court ruled in April that in light of the circuit’s earlier ruling in the Tamoxifen case, it was compelled to dismiss the plaintiffs’ case, because they had not properly alleged that Bayer’s patent was procured by fraud, nor that the underlying patent lawsuit was objectively baseless.

But the appellate panel had significant reservations about the practice of reverse payments as a whole, and invited the plaintiffs to challenge the decision before an en banc hearing of the circuit’s 10 active judges. The plaintiffs accepted the panel’s invitation, and filed a petition for an en banc hearing, which was joined by briefs submitted by the Federal Trade Commission and the Department of Justice criticizing reverse payment settlements. A ruling on the petition is expected shortly.

Sentiment is also mounting against pay for delay in the legislative branch. Senator Orrin Hatch, who lent his name to the Hatch-Waxman Act, has criticized the practice as increasingly anti-competitive. A bill pending in the Senate would greatly curtail pay for delay by presuming that such agreements are anti-competitive, while permitting the parties to rebut that presumption in court. The bill is similar to a measure that has already passed the House of Representatives.

Pay for delay may have seen its day.

Update, 9/17/10: But maybe just not yet. The Second Circuit declined by 9-1 to rehear the Cipro case en banc, which means that pay for delay has withstood yet another legal challenge.

IP & Licensing Trends in Japan

Monday, August 9th, 2010

“It is often said that Japan wins at technology, but loses at business,” said Kimikazu Noumi, chairman of the Innovation Network Corp. of Japan (“INCJ”) at a recent press conference announcing INCJ’s initiative to monetize Japanese intellectual property assets in the life sciences.

This is a welcome reversal of a trend that we have previously noted, in which Japan has not effectively monetized its abundant intellectual property assets, through licensing and similar means.

INCJ is collecting billions of yen from Japanese public and private investors to launch the “Rising Sun Fund” to purchase dormant life sciences patents from universities and public research institutions, package them, and license them to domestic and foreign companies so they can develop new medicines and treatments without fear of infringement lawsuits. The initial areas of concentration will be embryonic stem cells; cancer; Alzheimer’s disease; and biomarkers.

According to the Japanese newspaper Asahi Shimbun, a main purchase target of the fund will be universities, because they use only an estimated 20% of their patents.

A Japanese version of the story from the same newspaper notes that the impetus for the fund was the 2007 arrival in Japan of the American bioventure fund, Intellectual Ventures, and its subsequent purchase of Japanese university research patents for relatively low license fees. The fund founders feared that the technologies would be developed overseas, and that Japan would not share in the fruits of medical innovations developed from patents developed at its own taxpayer-supported universities.

INCJ is expected to invest up to 1 billion yen (approximately $11.7 million), and several private companies, such as pharmaceutical heavyweight Takeda Pharmaceutical, are expected to invest millions of yen more.

On the other side of the coin, Japanese book publishers failure to license e-books has created a phenomenon known in Japan as 自炊 (jisui), or “cooking for oneself,” in which readers purchase hardcopy versions of books, slice out the pages with razor knives, and scan them into PDF form to read on their iPads. Japanese are avid book readers and big fans of compact technology, yet publishers have made only about 50,000 book titles available in e-book form, with few current best-sellers, compared to about 630,000 English language titles available for the Amazon Kindle.


How to Cook Your Own E-Books, Japanese Style

In fact, consumer demand is so great that new businesses have arisen to fill it– companies that will save readers the hassle of slicing and scanning by performing the service for about 200 yen per volume (approximately $2.38). The reader mails in the hard copy, the company e-mails back the digitized book. Between the service fee and the postage, the reader is probably paying a $4 or $5 premium (or 15 to 20 minutes of his time), over the hard copy price, to have his e-book.

It appears that the delay in making more e-book titles available through official channels is due to publishers’ fears that e-books will be sold at discounted prices relative to paper versions (as in the United States), thereby shrinking profits. But it appears that at least some Japanese readers want e-books so badly, they are willing to pay a premium over the hard copy price. It is a shame that publishers have not adapted their business model, and are leaving money on the table.

Update, 8/24/10: for a good survey of the jisui trend, see this article in the Mainichi Daily News (includes link to original Japanese article). It appears that competition in the jisui service bureau industry has pushed the price down to near 100 yen per volume.

Speaking of the iPad, the Washington Post recently ran an interesting article on how the iPad has become a hit with Japanese senior citizens who were not previously computer adept, because of its sleek design and intuitive, user friendly interface. The iPhone is also a smash hit in Japan– when I was in Osaka in late June, there were literally lines around the block of people waiting to purchase the iPhone 4. Many thought that Japanese would never become enthusiastic about a non-Japanese made electronic device, much less a smartphone, a product for which Japan has long had its own specialized, highly competitive market.

Why has Apple succeeded where so many others have failed? As noted in the link above, Japanese smartphones tend to be feature-centric, but somewhat clunky to navigate, while the Apple devices have been designed from the ground up to provide an elegant, seamless user interface among hardware, software, and abundant content. The usually compact size and sleek design of Apple devices also appeal to Japanese tastes.

History Ain’t Changed: Supreme Court Issues Anticlimactic Bilski Patent Decision

Friday, July 2nd, 2010

System for Walking a Snake, US Patent No. 6,490,999

Hat tip, http://www.ipwatchdog.com

It was anticipated as the case that would recalibrate patent law for the Information Age. The long wait inspired many references to Samuel Beckett’s Waiting for Godot. But when the Supreme Court finally handed down its opinion in Bilski v. Kappos on Monday, it appeared that the more appropriate reference was Pete Townshend’s “Won’t Get Fooled Again”: “But the world looks just the same/And history ain’t changed.”

As detailed in a prior post, the narrow issue in Bilski was whether a method of hedging risk in commodity futures transactions met the threshold patentability requirements as a “process” under Section 101 of the Patent Act, or whether it was ineligible as akin to a law of nature, natural phenomenon, or abstract idea. The broader issue was how close a nexus an invention must have to operations or effects in the physical world to meet the threshold requirements of Section 101.

Although the case was argued before the Supreme Court on November 9, the Court did not hand down its opinion until the last day of the term, generating intense speculation that the Court’s answer to the broader issue of the case would redefine the scope of allowable business method patents – patents on improved procedures for engaging in business transactions, such as Amazon’s “one-click” shopping cart – and that such a redefinition might also affect patent eligibility for software, advanced diagnostic medical techniques, data compression, and digital signal processing, and thus have a major impact on the future of innovation in the United States.

Except that the Court never decided the broader issue.

Instead, the Supreme Court justices issued three separate opinions, which agree on some points and disagree on others, with one justice joining portions of two different opinions. All agreed that the Bilski invention itself was non-patentable, but could not agree on a broader test for a patentable “process” that transcended the Bilski facts. (more…)

Startup Corner: Tips To Protect Your IP

Sunday, April 25th, 2010

Intellectual property and other intangible assets constitute 80% of the market capitalization of S&P 500 companies. Nowadays, it is as critical for companies to properly maintain their patents, copyrights, trademarks, and trade secrets as it is to maintain their plant and equipment.

Below is a quick checklist of eight items your company should follow to protect and preserve its IP.

1. Implement Intellectual Property Ownership Agreements

For most forms of intellectual property, the default rule is that whoever created it, owns it, so have all employees sign employment agreements and independent contractors sign service or consulting agreements that stipulate all intellectual property they create while working for your company is either a work made for hire, or if not, that the creator automatically assigns ownership of its IP to you as of the time of its creation. For similar reasons, on joint projects that could result in patentable inventions, have co-researchers sign agreements assigning ownership of all IP to your company, or if that is not possible, specifying the terms of co-ownership of any patents. Having these agreements in place will save you from a claim that someone else owns valuable IP that you paid for.

2. Put All Licenses and Assignments in Writing

You should not allow other parties to use your inventions, creative content, software, logos, confidential information, etc., nor should you use theirs, without a license agreement in place. If there is a dispute, then at best it would be hard to prove who was allowed to do what for how much money, and at worst, you may lose ownership of your IP in part or in whole. Furthermore, where ownership in patents, copyrights, or trademarks are transferred (an assignment), then often a signed writing is required to make it legally binding.

3. Preserve Confidentiality of Trade Secrets

Trade secrets are valuable commercial information or formulas that maintain their protected status only so long as their owner takes reasonable measures to preserve their confidentiality. Therefore, companies should implement policies that require employees to preserve confidentiality of confidential information, and follow good housekeeping procedures, including: placing “confidential” or “proprietary” stamps on documents; requiring employees to sign nondisclosure agreements; requiring password protection for all computer-stored trade secrets; restricting physical access to areas containing trade secret information and implementing sign-out log procedures; and conducting exit interviews with departing employees. And before release of any valuable confidential information to an outside party, require the recipient to sign a nondisclosure agreement that requires the recipient: 1) to take at least reasonable steps to maintain confidentiality of the information; and 2) to only utilize it for the purposes allowed in the agreement.

4. Register Important Copyrights

Original, creative works such as text, images, music, websites, and software come under copyright as soon as they are fixed in a tangible medium, but in order to get meaningful enforcement capability against infringement, registration with the US Copyright Office is advisable.

5. Register Important Trademarks

Words, logos, or jingles that identify your company’s goods and services often qualify as trademarks. Some degree of protection exists even without registration, under the doctrine of common law trademark. But as with copyrights, in order to receive the maximum degree of protection, registration with the US Patent and Trademark Office is advisable. Furthermore, purchase all domain names that your company is likely to use in the future, including common variations.

6. Challenge Infringing Uses of Your IP

Perform periodic Google and eBay searches to make sure that others are not misappropriating or abusing your company’s copyrights or trademarks. If evidence of infringement is found, consult with your attorney about the advisability of a cease and desist letter or even a lawsuit. Especially in the case of trademarks, ignorance is not bliss — it can lead to forfeit of your IP.

7. Use Copyright and Trademark Notices

Use standard copyright notices, such as “© 2010 Your Company, Inc. All Rights Reserved,” for text, graphics, music, software, websites, and other original creative content, and standard trademark notices, such as “® Your Company, Inc.” or “®” (for registered trademarks) or “™ Your Company, Inc.” or “™” (for common law trademarks) next to words or logos that identify your goods or services. Better yet, have your attorney work with your marketing people to draft comprehensive guidelines for proper use of copyright and trademark notices for all products, product packaging, and company communications. This shows the outside world that you are knowledgeable and vigilant about your intellectual property rights, and also eliminates an “innocent infringement” defense in enforcement litigation. Or as Ali G says when pitching his idea for an ice cream glove to a venture capitalist, “That’s a ©, which means you can’t nick it.”

8. Post Effective Rules for Your Website

Website Terms of Service and Privacy Policies are important means of limiting your company’s legal risk and earning your customers’ trust. Although technically not IP protection devices, they are critical legal safeguards, especially for companies that engage in e-commerce.

Patents in the Information Age: Bilski Preview

Friday, April 2nd, 2010

The Supreme Court’s imminent decision in the case of Bilski v. Kappos will recalibrate the definition of patentable subject matter for the Information Age, and is likely to be a landmark case in the history of intellectual property law.

35 USC Section 101 requires that as a threshold matter, for an invention to receive a patent, it must be, “… a new and useful process, machine, manufacture, or composition of matter…”

Courts have interpreted the Section 101 language to implicitly exclude laws of nature, natural phenomena, and abstract ideas, since they are basic tools of scientific and technological work over which no one should have a monopoly.

While that test worked well in an age when most inventions were or acted upon tangible items such as chemicals or machines, it does not work so well when many valuable innovations are intangibles like software, but not akin to laws of nature or abstract ideas.

The narrow issue at stake in Bilski is an application for a so-called business method patent proposing a series of steps to utilize futures contracts to reduce economic risk in fixed-price electric utility contracts.

The broader issue in Bilski is how close a nexus an invention must have to operations or effects in the physical world to meet the threshold requirements of Section 101.

The Court of Appeals for the Federal Circuit ruled in In re Bilski that under existing case law interpretations of Section 101, “processes” do not include “laws of nature, natural phenomenon, [or] abstract ideas,” but rather would need to: 1) be “tied to” a particular machine or apparatus; or 2) transform a particular physical article or substance into a different state or thing. It then ruled that the Bilski business method did not pass this test, because: 1) the application did not claim the invention was tied to a particular apparatus or machine; and 2) the invention did not transform any physical article to a different state or thing, but only manipulated abstract financial data and legal obligations.

It is unknown whether the Supreme Court will adopt the Federal Circuit’s formulation of the Section 101 test, but many observers believe that the Bilski business method will probably be held non-patentable whatever the ultimate test. (And, contrary to many media reports, the Court could easily deny the Bilski invention without undercutting the rationale of all existing business method patents.)

The more difficult task for the Supreme Court will be to set forth a formulation of the Section 101 test that while consistent with existing case law, also protects economically important innovations of the Information Age, such as software, that require great innovation and yield great economic benefits, but do not at their core operate in the physical, tangible world.

At oral argument before the Supreme Court, the attorney for the Patent and Trademark Office, which opposed the Bilski application, nevertheless asked the justices not to disturb existing patent protection for software and medical diagnostic procedures, but some justices appeared to be struggling with just where to draw the line in a way that respected prior case law without stifling future innovation.

The Licensing Law Blog will post a full analysis of the Bilski decision when it is released.

Who Owns Life, Part 2

Wednesday, March 31st, 2010


A federal judge has invalidated several of Myriad Genetic’s patents on two genes linked to breast and ovarian cancer, in a wide-ranging decision that undercuts the legal basis of potentially all genetic patents.

Approximately 20% of all human genes are patented.

In a 152 page decision delivered Monday, Federal District Court Judge Robert Sweet of the Southern District of New York invalidated portions of seven of Myriad’s patents on the genes BRCA1 and BRCA2 on the grounds that the genes are “products of nature,” and therefore not patentable subject matter under 35 USC Section 101.

Myriad had argued that it had created isolated, purified versions of the genes not found in the human body, so they qualified as “manufactures” or “compositions of matter” under Section 101, and were not products of nature.

Judge Sweet disagreed, ruling that, “purification of a product of nature, without more, cannot transform it into patentable subject matter. Rather, the purified product must possess ‘markedly different characteristics’ in order to satisfy the requirements of Section 101.” And the purified forms of the genes were not markedly different from the native forms, ruled the judge, if properly viewed from the perspective of the genes’ information conveying functions, rather than from mere chemical or structural differences– the purified forms are designed to have the same nucleotide sequences as the native genes in order to convey the same genetic information.

However, almost all prior applications for genetic patents claim to meet the Section 101 threshold precisely by identifying a purified form of a human gene. If this ruling survives on appeal, opponents of genetic patents are expected to use it as the basis to challenge thousands of other genetic patents.

The suit was brought by the American Civil Liberties Union on behalf of breast cancer patients and medical researchers, who claimed that Myriad’s patents made detection tests for the genes too expensive (more than $3,000 per test in the United Sates, versus $1,000 in Canada where the tests are not patent-protected), and inhibited further research into new cancer treatments and therapies.

Myriad issued a statement claiming that the decision will not have a great impact on its business, because it struck down portions of only seven of Myriad’s 23 patents on the two genes.

Furthermore, proponents of genetic patents say that Judge Sweet’s opinion badly misinterpreted both the nature of the patented genes, as well as prior case law, and will certainly be overturned on appeal by the patent specialist Court of Appeals for the Federal Circuit.

Judge Sweet’s decision could also be impacted by the Supreme Court’s imminent ruling in In Re Bilksi, which is widely anticipated to recalibrate the definition of “patentable subject matter” for the information age.

The Licensing Law Blog will soon post a preview of the issues at stake in Bilski.