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

2 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?

3 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

4 Under What Circumstances Should A License Be Sought? General considerations Research tool patents

5 General Considerations Evaluate strength of defenses Consider litigation burdens of proof –Patentee must prove infringement by preponderance –Accused infringer must prove invalidity by clear and convincing evidence Jury v. Judge Venue –General trend away from reading limitations into the claims –Overbroad claims at risk for lack of description/enabl ement (e.g., U. of Rochester v. Searle) –Patent can cover improvements even though not specifically disclosed (DeKalb) –General trend away from reading limitations into the claims –Overbroad claims at risk for lack of description/enabl ement (e.g., U. of Rochester v. Searle) –Patent can cover improvements even though not specifically disclosed (DeKalb)

6 General Considerations Damages award: –To “compensate”, not punish infringer –Cannot award infringer’s profits –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. §§ ; Nike, Inc. v. Wal-Mart Stores, Inc., 138 F.3d 1437, 1442 (Fed. Cir. 1998) Section 283 only provides injunction to prevent remedy future infringement so would not cover drug products resulting from tool use if tool use over

7 General Considerations Injunction Litigation fees/expenses* At risk Average Costs $25 million $4 million Diversion of human resources * AIPLA 2003 Report of the Economic Survey

8 Research Tool Patents What are research tools? When are research tool patents infringed? What special considerations apply to licensing of research tools?

9 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 (December 23, 1999)

10 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)

11 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

12 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)

13 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).

14 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 (S.D.N.Y. 11/28/01)

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 15 Integra LifeSciences I, Ltd. v. Merck KGaA, 331 F.3d 860 (Fed. Cir. 2003)

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 16

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) 17

“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” Madey was prof. And lab director; Duke removed him but continued to use some of his equipment

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 19

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 20

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) 21

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? 22

Special Considerations Applying To Licensing Of Research Tools Licensing government-funded research tools Compensation issues Patent misuse 23

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 (December 23, 1999) 24

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 25

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 26

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 27

Compensation For Use Of Research Tools: Infringement Damages Lost profits not generally applicable, e.g. –patentee does not usually sell a competing product –availability of non-infringing alternative Established royalty often unavailable in rapidly- changing 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) 28 even if compete, difficult to show but for because speculative at time of infringement and tool may not be for drug discovery

Compensation For Use Of Research Tools: Infringement Damages RR 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 Georgia-Pacific Corp v. U.S. Plywood Corp., 318 F. Supp (S.D.N.Y. 1970) 29 even if compete, difficult to show but for because speculative at time of infringement and tool may not be for drug discovery

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) 30

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 31

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 Maize- Products 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, (Fed. Cir. 1983); Ajinomoto Co. v. Archer-Daniels-Midland Co., 1998 WL (D. Del. 3/13/98), aff’d 228 F.3d 1338 (Fed. Cir. 2000). 32

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- Daniels-Midland Co., 1998 WL (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. Heubllin, Inc., 716 F.2d 1550 (Fed. Cir. 1983). 33

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 (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, (Fed. Cir. 1983) 34

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 NIH- funded 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? 35

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 36

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) 37

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 38

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? 39

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 Bayer AG v. Housey Pharmaceuticals Inc., 228 F. Supp.2d 467 (D. Del. 2002) 40

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, (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 41

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 42

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 43

44 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)

45 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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