Transcript No Slide Title

Presentation for the
Patent Lawyers Club of Washington
CURRENT TOPICS IN
IP LICENSING AND LITIGATION
Presented by:
Walt Bratic & Shirley Webster
1600 Smith Street, Suite 4900, Houston, Texas, 77002
Telephone: (713) 332-0650 Fax: (713) 332-0660
September 8, 2003
1
Agenda
• Standard Setting
• Extracting Value from Intellectual
Property
• Research Tool Damages/Reach Through
Licensing
2
Why Standard Setting?




Consumers more likely to embrace new product (reluctance to
repeat VHS/Beta format problems)
Allows multi-company and multi-industry coordination of products
Efficiency in technological advancement as companies share the
risks and costs of new product development
Promotion of compatibility and interoperability among diverse and
rapidly changing systems and components ( high technology fields
such as information technology and telecommunications)
3
Anticompetition Risks of Standard Setting
• Standards that rely on IP may be argued to present
a danger to competition
• Inclusion of a patent in a standard can provide that
technology with market power that it previously
lacked
• Refusal to issue standard because only one or a
small number of manufacturers make product or
have essential patents covering product can also
limit competition
4
Examples of Standard Setting Organizations
Organization
Acronym
Product Area
International Organization for
Standardization
ISO
Umbrella organization for
numerous standard-setting
groups
American National Standards Institute
ANSI
Communications and telecom
technology
European Telecommunications Standards
ETSI
Communications and telecom
technology
International Telecommunications Union
ITU
Fax transmissions
and modem protocol
National Electric Manufacturers Association
NEMA
Electrical equipment
Joint Electron Device Engineering Council
JEDEC
Solid-State products
American Petroleum Institute
API
Oil field services equipment
and petroleum products
(umbrella organization for numerous standard-setting
groups)
5
Intellectual Property Rules and Standard Setting
Organizations




Most SSOs have well-developed policies governing the ownership of
intellectual property rights
The subject matter of those policies varies significantly from group to
group

Disclosure policies

Endorsement threshold

Licensing
Few organizations require a member to search either its own files or the
broader literature to identify relevant IP rights.
Most organizations permit members to own IP rights in a standard,
though they often discourage it, and impose conditions on the use of the
intellectual property
6
Disclosure Policies
• Virtually all groups have either an express or implied
obligation that members disclose intellectual property rights
of which they are aware
• Different groups employ different approaches to encourage
or require timely disclosures
– Scope of knowledge triggering the disclosure (search or inquiry
beyond the participant’s own awareness or not)
– Nature of the disclosed information (issued patents or also pending
patent application)
– Timing of disclosure (early in the process, shortly before balloting, or
other)
7
Endorsement Threshold


Most organizations permit members to own IP rights in a
standard, though they often discourage it, and impose
conditions on the use of the intellectual property
The most common condition is:
– Intellectual property rights be licensed on “reasonable
and nondiscriminatory” (RAND) terms
8
Licensing Policies
• Standard-setting organizations generally require that:
– Patent owners agree to license their patents to any user of the standard
on reasonable and nondiscriminatory terms:
– Or patent owners license their patents royalty – free
• Factors to consider in practice:
– To whom the licensing obligation extends
– License terms to which the commitment is made (RAND, free, other)
– To what patents does the obligation extend (issued patents or future
patents based on then – pending applications)
9
What’s Reasonable and Nondiscriminatory?
• Relatively few organizations give much
explanation of what “reasonable” and
“nondiscriminatory” means
• Not clear in practice
10
What’s Reasonable and Nondiscriminatory?
• Some Considerations:
– Should a “landmark patent” with which no standard could be created be
valued differently than a patent covering one of several technologies
competing for the standard?
– To what extent should additional volume of royalty-bearing products to
be made under the standard decrease the royalty rate?
– Should the identical royalty rate apply to all parties manufacturing
products under the standard?
– If not, what are the appropriate distinctions to make that will be
nondiscriminatory?
• Royalty base/volume, first to license, cross-licensing considerations, etc.
• To what extent do end users mandate the technical standards and
product specifications as opposed to suggest that they be used?
11
Implication of Diversity of IP Rules


Diversity of rules governing IP rights makes it
difficult for IP owners to know what rules will
govern their rights in practical considerations
Companies must investigate the by-laws of each
organization they join in order to understand the
implications of joining
12
FTC v. Dell Computer Corp.
Background Facts:


Dell was a member of the Video Electronics Standards
Association (VESA)
VESA members voted to approve the new VL-bus standard in
response to demand for faster graphics performance in 1992
•


As part of the approval, a Dell representative certified that he knew of
no patent, trademark or copyright that the bus design would violate
After the standard became successful, Dell began to assert patent
rights
FTC brought an action against Dell
- In re Dell Computers 931-0097 (F.T.C. 1996)
13
FTC v. Dell Computer Corp.
• Unfair competition under Sec. 5 of Federal Trade
Commission Act
– Dell’s failure to disclose patents as required by a
standard-setting group’s rules and later attempt to
enforce patent rights against users of a standard adopted
by the group found to be a violation.
– In re Dell Computers 931-0097 (F.T.C. 1996)
• Dell entered into a consent order agreeing not to seek
royalties, but the FTC stated, “the relief in this case should
not be read to impose a general duty to search … The order
should not be read to create a general rule that inadvertence
in the standard-setting process provides a basis for
enforcement action.”
14
Rambus v. Infineon
Background Facts:
•
•
•
•
•
•
Founded in 1990, Rambus develops and licenses memory technologies to
companies that manufacture semiconductor memory devices
In April 1990, Rambus filed U.S. Patent Application Serial No. 07/510,898
(‘898 application)
Rambus joined JEDEC Solid State Technology Association (JEDEC), a
standard – setting body associated with the Electronic Industries Alliance
(EIA), in February 1992
During Rambus’ membership, JEDEC adopted a standard for synchronous
dynamic random access memory (SDRAM), which was published in early
1993
In September 1993, Rambus disclosed its first issued RDRAM patent –
U.S. Patent No. 5,243,703 (‘703 Patent), a divisional of the ‘898
application to JEDEC during a committee meeting.
Rambus did not disclose any patent applications to JEDEC
15
Rambus v. Infineon
Background Facts - Continued:
•
•
•
•
•
•
Rambus withdrew from JEDEC in June 1996.
After leaving JEDEC, Rambus filed more divisional and continuation
applications based on the ‘898 application, and the applications ripened
into four patents between February 1997 and February 1999.
In December 1996, JEDEC began work on standard for double data rateSDRAM (DDR – SDRAM), the successor to SDRAM
JEDEC adopted and published the DDR – SDRAM standard in 2000
In late 2000, Rambus sued Infineon, a member of JEDEC, for patent
infringement.
Infineon alleged that Rambus committed fraud by not disclosing to JEDEC
its patents and patent applications “related to” the SDRAM and DDR –
SDRAM standards.
16
Rambus v. Infineon
U.S. District Court for the Eastern District of Virginia
2001:
– Rambus’ infringement claims were dismissed
– The jury later found Rambus liable for committing fraud
at JEDEC respecting both SDRAM and DDR-SDRAM
standards
– Infineon was awarded $3.5 million by jury (reduced by
Court to $350,000) in punitive damages
– At Rambus’ request of new trial, the court granted
Judgment as a Matter of Law (JOML) on the DDRSDRAM fraud verdict
- Rambus, Inc., v. Infineon, et al, 155 F. Supp. 2d 668; 2001 U.S. Dist. LEXIS 11870
17
Rambus v. Infineon
U.S. Court of Appeals For the Federal Circuit 2003:
– “The record does not show that JEDEC applied the disclosure
duty to a member’s plans or intentions. The patent policy
requires disclosure of certain ‘patents or pending patents’ – not
disclosure of a member’s intentions to file or amend patent
applications”
– “…there is a staggering lack of defining details in the
EIA/JEDEC patent policy… A policy that does not define
clearly what, when, how, and to whom the members must
disclose does not provide a firm basis for the disclosure duty
necessary for a fraud verdict.”
- Rambus,
Inc., v. Infineon, et al, 2003 U.S. App. LEXIS 8845 18
Rambus v. Infineon
Duty to Disclosure with respect to SDRAM Standard:
– “This court has examined the claims of the cited applications as well as the
relevant portions of the SDRAM standard… substantial evidence does not
support the finding that these applications had claims that read on the SDRAM
standard.”
– “The record shows at most that Rambus wanted to obtain claims covering the
SDRAM standard…Rambus thought it could cover the SDRAM standard and
tried to do so while a member of an open standards-setting committee. While
such actions impeach Rambus’s business ethics, the record does not contain
substantial evidence that Rambus breached its duty under the EIA/JEDEC
policy.”
– “Infineon bore the burden of providing the existence of a disclosure duty and a
breach of that duty by clear and convincing evidence. Infineon did not meet
that burden.”
- Rambus,
Inc., v. Infineon, et al, 2003 U.S. App. LEXIS 8845
19
Rambus v. Infineon
Duty to Disclosure with respect to DDR-SDRAM
Standard:
– JEDEC did not begin formal work on the DDR-SDRAM
standard until December 1996, three months after Rambus
formally withdrew from JEDEC
– “The disclosure duty, as defined by the EIA/JEDEC policy, did
not arise before legitimate proposals were directed to and
formal consideration began on the DDR-SDRAM standard.”
- Rambus,
Inc., v. Infineon, et al, 2003 U.S. App. LEXIS 8845
20
Rambus v. Infineon
U.S. Court of Appeals For the Federal Circuit
2003:
– The court vacates the grant of JMOL of
noninfringement
– No duty to disclose patents and applications
respecting either SDRAM or DDR-SDRAM
standard
Rambus, Inc., v. Infineon, et al, 2003 U.S. App. LEXIS 8845
21
Rambus – FTC Complaint
 FTC filed an antitrust suit against Rambus on June 18, 2002
 FTC challenges a pattern of anticompetitive acts and practices
undertaken by Rambus over the past decade through which Rambus
has engaged in unfair methods of competition related to DRAM
 FTC claimed that:
 Rambus’s anticompetitive scheme involved participating in JEDEC without
disclosing that Rambus had a patent and patent applications ultimately adopted
in the relevant standards. Once the standards became widely adopted,
Rambus proceeded to enforce its patents against companies manufacturing
memory products in compliance with the standard.
 This conduct has caused or threatened to cause substantial harm to
competition.
22
Unocal – FTC Complaint
 FTC issued an administrative complaint against Unocal for alleged
committing fraud in connection with regulatory proceedings before
the California Air Resources Board (CARB) regarding the
development of reformulated gasoline (RFG) on March 4, 2003
 FTC claimed that:
 In the 1990s, Unocal illegally acquired monopoly power in the technology
market for producing Phase 2 “summer-time” CARB gasoline by
misrepresenting that certain information was non-proprietary and in the public
domain, while at the same time, pursuing a patent that would enable it to
charge substantial royalties if the information were used by CARB.
 During the CARB rulemaking, Unocal misled industry groups that were
participating in the process with regard to its proprietary interests, and that its
conduct has resulted in anticompetitive effects in the downstream market for
RFG in California, to the detriment of the State’s consumers.
23
Lessons from Unocal
 For firms involved in standard-setting activity, it is very
critical to consider carefully any duty to disclose relevant
intellectual property positions.
 When participating in government rulemaking or similar
processes, firms should also consider whether their conduct
could potentially give rise to an exception to traditional
Noerr-Pennington immunity - government petitioning
activity has long been held immune from antitrust scrutiny
24
Agenda
• Standard Setting
• Extracting Value from Intellectual
Property
• Research Tool Damages/Reach Through
Licensing
25
IP Management Value Generating
Strategies
Internal
Supports
Long-term
Business
Objectives
Strategic protection
IP sharing within the company
IP inventory & mapping
IP awareness
Tax strategies
Cost-benefit analysis
Generates
Short-term
Cash Flow
External
Joint venture
Licensing-in
Cross licensing
Acquisition support
Litigation
Licensing-out
License investigation
IP sale/auction
26
IP Asset Management - The Process
What IP assets do I own?
What is the value of my IP assets?
(or, Which of my IP assets are valuable?)
How can I maximize the value of my IP assets?
IP Asset Management Implementation
27
IP Inventory and Patent Mapping
What IP assets do I own?
Future
Today
External
Internal

IP inventory and patent
mapping





IP strategic and business planning
Competitive technology assessments
Strategic protection processes and IP identification
IP management best practices
Corporate IP awareness


Licensing-in, cross-licensing and
technology acquisition
Mergers & acquisitions/ venture capital
28
Patent Mapping
Business Fit
Portfolio
Strength
Strategic
Non-strategic
High
 Protect
 Utilize
 Enforce
 License
 Sell
Low
 Develop
 Protect
 Donate
 Abandon
29
Competitive Assessment:
Competitive Mapping/ Citation Analysis
Company A
Pat. 4,639,817: Protective relay circuit
for detecting arcing faults on lowvoltage spot networks”
Company B
30
Implications of Competitive Assessments
 Are we boxing-in (i.e., surrounding) competitors? Are they
boxing us in, thereby limiting our freedom to operate?
 Do we have enough patents to obtain cross-licenses in key
technology areas?
 Are we doing a good job of making engineers aware of stateof-the-art developments?
 Who are our key inventors in key technology areas?
 Who are our competitors’ key inventors?
 Are we devoting enough resources to R&D and patenting
activities?
 Are there any key acquisition needs/opportunities?
31
IP Valuation Methods
What is the value of my IP assets?
(or, Which of my IP assets are valuable?)


Reasons for valuing IP
IP valuation methods
Reasons for Valuing IP Assets
 Management of IP assets
 Licensing, sale, and acquisition of IP
 Establishing equity contributions to a partnership or joint venture
 Corporate spin-off
 Merger and acquisition due diligence
 Financing collateral
 Reorganization / bankruptcy / loan workouts
 Intercompany transfer pricing
 Sale and license-back of IP to holding company
 Litigation / reasonable royalty
 Financial reporting
33
IP Valuation Methods
What is the value of my IP assets?
(or, Which of my IP assets are valuable?)


Reasons for valuing IP
IP valuation methods
Common Valuation Approaches for
Intellectual Property (IP)
Three
Theories
Practice
1. Cost
2. Market
Sets
Limits
Whatever you
can negotiate
3. Income
35
Cost Approach
• Value = Cost to replace or re-create the IP
• Theory: Licensee avoids these costs by licensing the IP
from others
• Costs may include:
–
–
–
–
–
–
–
R&D (labor and overhead)
Time to market delay
Testing and regulatory approval costs
Patent protection costs
Equipment and other capital investments
Opportunity costs of diverted resources
Risk reduction
36
Cost Approach
• Some observations…
– Does not reflect earnings potential!
– Often used when many substitutes are available
– Sometimes used for embryonic technology
– Don’t forget costs of delayed market entry
37
Market Approach
• Value = Arm’s-length price paid in comparable
transactions
• Theory: Licensees are not willing to pay more than
others have paid for similar IP
• What constitutes a “comparable” transaction?
– Nature of technology and IP protection
– Market size and characteristics (e.g., # of applications)
– Scope and status of patent protection
– Terms of the agreement (e.g., field of use restrictions)
– Other
38
Market Approach
• Some observations…
– By definition, IP is unique
– No two deals are exactly alike
– Difficult to compare deals with multiple forms of compensation
(e.g., equity, milestone payments, running royalties)
– Many “hidden” deal factors (e.g., strategic buyer “premiums”)
– Often used to establish “ballpark” values, especially for running
royalties
– Favored by tax authorities for deals with affiliates
39
Income Approach
• Value = Present value of the expected future
income stream
• Theory: Licensee willing to pay some portion
of its economic gain from using the IP
• Three parameters:
– Amount of the income stream
– Duration of the income stream
– Risk associated with the realization of the income
40
Income Approach
• Some observations…
– Most rigorous valuation method
– Exposes sensitive variables and potential deal breakers
– Often used in combination with probability analysis
(decision tree modeling)
– Poor assumptions lead to meaningless results
– Challenge is to apportion or isolate the income stream
related to IP
41
Income Approach:
Amount of the Income Stream
Revenue Drivers:
Market size
Market segmentation
Market growth rate
Market share
Product pricing
Less
Expense Drivers:
R&D requirements
Capital investment
Cost to manufacture
Operating expenses
Taxes rates
Ways to Apportion Total
Income:
Total
Income
 Royalty rates in comparable
transactions
 25% rule
 Excess earnings
 Other
42
Income Approach: Basic DCF Drivers
Income Attributable
to the IP
Duration
Market entry
Life cycle
Risk
(Discount Rate)
Market risk
Development risk (will it
work?)
Technology risk (will it be
adopted?)
Contingencies (e.g., FDA
approval)
NPV
43
Licensing out Planning, Strategies & Tactics
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
44
How Licensing Out Creates Value
Supports
Core
Business
• “Primes” underdeveloped markets for future entry
• Allows you to evaluate potential strategic partners
• Can establish your company’s technology as the
industry standard
• Generates value for markets in which you do not
have the manufacturing or marketing capacity to
compete
Stand-Alone
Cash
Generating
• Helps fund R&D while reducing competitors’ funds
available for R&D
• Allows you to avoid litigation
• Royalty revenues
45
Licensing Opportunity Identification
Process
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
46
License Agreement Review: Identification
of High Potential Candidates
License
Agreement
Terms
Payment
History - Trend
Analysis
“Expected”
Royalty
Payments
Market
Analytics
License
Agreement
Ranking
Review
Candidates
Financing
Opportunities
47
Investment Holding Companies
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
48
Investment Holding Company (IHC)
Basic Structure
The IHC creates state tax savings by
allowing operating units to recognize a
deduction for royalties, while the IHC
does not recognize income for the
royalty payments.
Parent
Company
Stock
Stock
IP Rights
Related
Operating
Units
Licenses
Royalties
IHC
Licenses
Royalties
Unrelated
Parties
49
Benefits of an IHC
•
•
•
•
•
•
•
•
•
•
Focused IP management function
Greater IP integration in corporate strategy
Tax savings
Competitive positioning
Top management focus and awareness
Centralization
Profit center evaluation
Increase development of transferable technology
Business function support from Board
Benefit of outside director(s)
50
Charitable Donations of IP
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
51
Charitable Donations: Key Revenue Ruling
Revenue Ruling 58-260:
“The fair market value of an undivided interest in a patent, which is contributed
by the owner of the patent to an organization described in section 170(C)
[charitable organizations] of the Internal Revenue Code of 1954, constitutes an
allowable deduction as a charitable contribution, to the extent provided in section
170, in the taxable year in which the property was donated.” (emphasis added)
52
Charitable Donations
Benefits & Considerations
• Benefits:
– Realize immediate tax deduction for the full market
value
– Benefit society
– Avoid patent fees for underutilized IP
– Strengthen research institute ties
• Considerations:
– Defense of fair market valuation of the property
– Identification of qualified donees
53
Licensing Investigation Services
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
54
Litigation Risk Analysis
How can I maximize the value of my IP assets?






Licensing-out planning, strategies & tactics
Licensing opportunity identification process
Investment holding companies
Charitable donations of IP
Licensing investigation services
Litigation risk analysis
55
Pre-litigation Risk Analysis
Why Do It?
• 90 to 95% of Disputes Are Settled Before
Trial
• The Stakes are High
– Staggering Judgments
– Attorney Fees & Costs
– Opportunity Cost of Diverted Company Resources
• Because Your Opponent Might
56
What Can Be Accomplished Through
Pre-litigation Risk Analysis
•
•
•
•
•
•
•
Estimate range of potential outcomes
Identify factors creating the most uncertainty (risk)
Focus resources (e.g., discovery) on most important issues
Aid in licensing / settlement negotiations
Force all participants to focus on “Big Picture”
Add objectivity to litigation decision making process
Define and build consensus on objectives (e.g., avoid,
pursue)
• Communicate in terms business executives can understand
57
IP Asset Management - Summary
What IP assets do I own?
What is the value of my IP assets?
(or, Which of my IP assets are valuable?)
How can I maximize the value of my IP assets?
IP Asset Management Implementation
58
Agenda
• Standard Setting
• Extracting Value from Intellectual
Property
• Research Tool Damages/Reach Through
Licensing
59
What is a Research Tool?
• Research Tools: All 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
laboratory equipment and machines
60
Research Tool Patent Licensing Options
• Lump Sum Payment
• Running Royalty
– Based on Product Sales (Reach Through)
– Based on R&D
• Royalties –patent licenses that “reach
through” their patent rights and attach to
discoveries made using research tools.
61
Research Tools are Valuable
Royalties Range:
• Research Reagents: 1-5%
• Diagnostic Products: 1-5%
• Therapeutic Products: 5-10%
• Vaccines: 5-10%
62
Should Reach Through Licenses be Allowed in
Calculating Patent Infringement Damages?
 Yes:
Statute does not adequately compensate
patent holders with claims to screening
tools because patentees could have
negotiated reach through licenses before
any infringing acts.
63
Should Reach Through Licenses be Allowed in
Calculating Patent Infringement Damages?
 No:
Licenses that include royalty terms based on
sales or use of unpatented items may be
reasonable if the parties agree to them as a
matter of convenience, but patentees who
unilaterally assert such terms with
anticompetitive effects risk rendering their
patents unenforceable for misuse.
64
Case Precedent: Infringement of
Research Patent Tools
• Few cases involving infringement of research
tools have been adjudicated by the courts
• Few have resulted in determination of judicial
remedies
65
The Johns Hopkins University, et al. v. Cellpro, Inc.
(CAFC August 11, 1998)
• Research Tool: Method for preparing a cell population
useful for stem cell transplantation that is enriched in
immature marrow cells and substantially free of mature
myeloid and lymphoid cells.
• Scope of Injunctive Relief:
– Third party customer that purchased research tool and used it to develop, but
not incorporate into, an end product may not be subject to injunction if outside
the court’s jurisdiction or was not made a party to the suit.
– Cellpro – District Court ordered the repatriation and destruction of six vials of
hybridoma cells that had been manufactured in the U.S. and shipped to Canada
before the patent had issued. Federal Circuit vacated because the cells were
non-infringing. Cells could be used in Canada to develop drugs that would not
be sold in the U.S.
66
SIBIA Neurosciences, Inc. v. Cadus Pharmaceutical
Corporation
(CAFC September 6, 2000)
• Research Tool: Screening method to identify compounds
that interact with cell surface proteins.
• District court jury awarded $18 Million based on
hypothetical license with four components:
– $5.0 Million: Up-Front License Fee
– $1.6 Million: 4% Equity Stake in Cadus as of March 1995
– $3.0 Million: Flat fee of $100K per molecular target validated for screening
against compounds (30 estimated based projection at hypothetical negotiation);
and
– $8.7 Million: SIBIA’s share of royalty payments from drugs that may
eventually go to market
• Appeal – Cadus appealed validity and future damages on
basis it was speculative. Court invalidated patent and did
not rule on damage issue.
67
Ajinomoto Company v. Archer-Daniels -Midland
(CAFC October 3, 2000)
• Research Tool: Process for preparation of
genetically modified bacterial strains to enhance
production of amino acids, specifically threonine.
– District court awarded reasonable royalties by applying a fixed
per unit royalty rate of $1.23 per kilogram (based on production
cost savings) of threonine produced by the infringer.
– Reach-through was deemed likely under a hypothetical license at
time of first infringement. Prior licenses support and both
experts agreed, but differed on rate.
– Appeal – Neither party challenged reach through license.
68
Bayer A.G. v. Housey Pharms., Inc.
(Delaware , District Court Oct. 22, 2002)
• Licensee “provided no evidence that defendant has impermissibly
‘conditioned’ its licenses upon royalty provisions covering
unpatented products and activities.”
• If the license agreement is for the “convenience of the parties in
measuring the value of the license, then the agreement cannot
constitute patent misuse.”
• Conditioning depends on “the voluntariness of the licensee’s
agreement to the royalty provisions.”
• Time shifting of payments is not a per se violation:
– “The royalties to be paid after the expiration of the patent are for the use of the subject
invention prior to the expiration of the patent. Royalties are collected based on later
pharmaceutical sales, but the royalties are being accrued as the invention is practiced
during the research phase.”
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Integra Lifesciences I, et al. v. Merck KGaA, et al.
(CAFC, June 6, 2003)
• The CAFC noted that:
– the change in the hypothetical negotiation date from 1994 to 1995
could result in drastically different values of a hypothetical
license;
– “...comparisons to other licenses are inherently suspect because
economic and scientific risks vary greatly...”
– Integra obtained the patents-in-suit from a co-plaintiff, Telios
Pharmaceuticals, in 1996. The Court used this transaction, which
included all products, patents and know-how, to question the
damage award which was to compensate for only some of Telios’
patents.
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Integra Lifesciences I, et al. v. Merck KGaA, et al.
(CAFC, June 6, 2003)
• The CAFC provided a list of other factors for the trial court
to consider on remand, including:
– The point of placement of the research tool in the drug
development process (e.g., identification of a drug candidate
during screening v. confirming a recognized drug candidate’s
safely or efficacy)
– Potential for royalty stacking with reach through licenses
– Impact on the hypothetical negotiation of both the time at which
Merck used the research tool in its drug development process and
the potential impact of stacking royalties may play a role in
crafting the hypothetical license between Integra and Merck
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Research Tool Patent Infringement Damages
• Where Are We Now?
– Recent cases demonstrate courts willing to consider “reach
through” licenses
– Lost profit damages unlikely damages remedy
– Reasonable Royalties – Industry norms may guide scope of
damages (past licenses; comparable licenses)
– Industry willing to consider “reach through” licenses if research
tools lead to significant drug discovery
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Potential Issues with Awarding Reach Through Royalties
for Research Tool Patent Infringement Damages
•
May discourage some researchers from using research tools
– may deter R&D investment
– Can create “thicket” of rights to navigate in new drug discovery efforts
•
May result in expensive “stacking” of royalties for use of numerous research tools
in drug research
•
Exclusive licenses may hinder new drug discovery
•
Rigid policies of reach through licensing by research tool patentees
•
May result in patent misuse
•
However, patent owners with research tools having narrow ranges of use may be
able to argue for reach through royalties, because of contribution of tools to
discovery process (foreseeability).
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Presentation for the
Patent Lawyers Club of Washington
Presented by:
Walt Bratic & Shirley Webster
1600 Smith Street, Suite 4900, Houston, Texas, 77002
Telephone: (713) 332-0650 Fax: (713) 332-0660
September 8, 2003
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