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European Pharmaceutical Contractor

Patent Policing

Bruce C Haas and Christopher Beckman at Fitzpatrick, Cella, Harper & Scinto investigate patent enforcement in the midst of the global economic crisis

Intellectual property (IP) procurement and enforcement have gained greater prominence in the midst of the global economic downturn. Large and small companies alike are more aware of the value that can be derived from IP. In the most recently released figures, both international and EPO patent filings grew to new heights, with many originating countries, including China, Korea and Sweden, seeing doubledigit growth rates. Emerging economies in Asia and the Middle East are beginning to demonstrate more appreciation for IP by increased enforcement.

But the trend of increased IP procurement and enforcement has not been without opposition. In fact, some commentators question whether the resulting innovation is worth the associated legal costs. Others complain that the required legal processes to protect innovation are too slow and cannot keep pace with industry needs. Ultimately, the consumer pays for these added costs, and there is some question as to whether the consumer is getting sufficient added value to justify them. These concerns have existed for decades, but have recently taken on more importance as consumers and companies struggle to remain competitive in today’s tough economic environment.

One area where patent enforcement is often questioned is the pharmaceutical industry. Innovator pharmaceutical companies struggle to maintain exclusivity for their patented drugs, while generic drug companies try to enter the market before patent protection has expired. In the US, virtually every major patented commercial drug product now gets challenged. An increase in pharmaceutical patent challenges has also been observed in Europe. The public and healthcare providers want innovation, but they also want low-cost options. In trying to achieve these competing goals, both government regulation and oversight in the US has mounted. For example, the Drug Price Competition and Patent Term Restoration Act (also known as the ‘Hatch-Waxman Act’) has spawned a steady stream of patent challenges. The Act implicates policies of several government agencies, including the US Patent and Trademark Office, FDA, and even the Federal Trade Commission (FTC). Indeed, the FTC seems particularly intent on overseeing, or at least considering, every settlement of a patent dispute involving generic drug challenges to innovator patents. The Preserve Access to Affordable Generics Act, currently under consideration by the US Senate, seeks additional oversight for such settlements.

Companies marketing drug products in the EU are not immune to similar oversights. The European Commission recently conducted investigations of European drug companies, searching for evidence of possible anticompetitive delay of generic drug entries. The European Federation of Pharmaceutical Industries and Associations issued a response stating that the commission had failed to substantiate its initial allegation “that patenting strategies dampened innovation or delayed generic entry illegitimately” (1).

Unfortunately, such active regulatory oversight and intervention adds additional costs for everyone, including the consumer. It may also discourage innovation due to the increased costs. The regulatory frameworks emerging throughout the world may be placing a premium on lifecycle management and patent portfolio management, while discouraging technological innovation. The possible comprehensive revision to the US healthcare system still under debate, along with the Preserve Access to Affordable Generics Act and the Pathway for Biosimilars Act (which will likely expand Hatch-Waxman to the still nascent field of follow-on biologics), is likely to continue to drive increased regulatory pressure in 2010 and beyond.

In the midst of the regulatory complications, pharmaceutical patent litigation increases each year. The reason is simple: the markets allow, and indeed require, unusual vigilance and challenge under the regulatory frameworks that have been created. As the financial stakes continue to rise, the number of enforcement activities will also rise.

In addition to increased regulatory oversight, the US courts have also recently taken a more active role in shaping IP issues. In KSR v Teleflex, the US Supreme Court scaled back from the traditional ‘teaching, suggestion or motivation’ obviousness standard, making it less certain, and arguably more difficult, to obtain and defend a patent (2). The very nature of patentable subject matter, including whether certain methods should be protected at all, was considered in In re Bilsky. The Bilsky Court requires that any such method be tied to a machine or apparatus, or transform an article, to be patentable (3). Two recent Federal Circuit cases test the application of this new limiting rule in the context of pharmaceutical methods, such as medical diagnostics (4). The Court in Classen v Biogen affirmed the extension of Bilsky to invalidate a patent for a risk assessment process for vaccinations. In contrast, Prometheus Lab v Mayo Collaborative Services determined that a disease treatment method passed the transformation test of Bilsky because it transforms the human body.

Despite this increasingly complex and dynamic international IP landscape, tremendous business opportunities for IP revenue continue to be lost each year. According to Harvard Business Review, each year US companies fail to capitalise on patent assets worth over $1 trillion. In these tough economic times, it is even more important for companies in all industries to continually monitor and improve their IP management and enforcement strategies to capture that revenue and remain competitive. This is especially important in IP-intensive industries with heavy R&D, such as pharmaceuticals. The development of a good IP enforcement strategy is no longer merely a way to take advantage of an exciting paradigm shift, it may be a matter of survival.

METHODS OF PATENT ENFORCEMENT AND PORTFOLIO VALUATION

The first step in establishing an effective patent enforcement strategy is a sensible valuation of the patent rights, taking into account the uncertainty of future value. This inquiry must extend beyond an assessment of potential damages for litigation claims. Valuation approaches differ depending on whether the patent covers a product with annual revenue in the hundreds of millions of Euros, or a product with no current sales, a declining market and several competitive options. Patents with less proven value may make better licensing candidates. In contrast, litigation is more typical for blockbuster drug patents because competitors in these markets are seldom inclined to share the market if exclusivity is possible.

Predicting value and forecasting the potential of any IP is never an exact science. However, in assigning value to any patent, the patentee should consider:

  • The role of the patent in the patentee’s core business
  • The costs and benefits of the patent to the patentee’s competition and other third parties
  • The costs and benefits of maintaining exclusivity versus sharing the patented technology
  • The stage of the market and patent lifecycle

Only after the patent or patent portfolio has been evaluated can the owner rationally consider the enforcement options – primarily licensing or litigation.

LICENSING

Licensing usually represents a compromise of the ultimate value of a patent because it requires the patent owner to share its IP with another company. Nonetheless, in the past five years, pharmaceutical companies have increased their licensing activities in light of decreased R&D productivity. Datamonitor estimates that the top 20 pharmaceutical companies will derive $100 billion in licensing revenue in 2010 – roughly twice the figure of 2002 (5).

Licensing options may be particularly useful for start-up organisations seeking to grow, both because of the relatively low immediate costs, and also because licensing often represents acceptance of the value of a patent by others in an industry. Licensing revenue provides a predictable stream of income, while litigation is expensive and unpredictable. Licensing in the pharmaceutical industry can include arrangements such as co-promotion agreements, co-marketing agreements, supply agreements and joint-development agreements. The exact structure of any cooperative licensing arrangement can vary widely depending on the creativity of the parties.

By some estimates, during the 1990s annual patent licensing revenue in the US increased from approximately $15 billion to over $100 billion. According to Deloitte, worldwide patent licensing revenues totalled approximately $500 billion in 2007 (6). Licensing revenue in the pharmaceutical industry has also grown tremendously in recent years. According to Datamonitor, by 2004 the top 20 pharmaceutical companies were already yielding $63 billion in annual licensing revenue, representing almost 20 per cent of their total revenue (7).

In recent years, a trend of defensive patent portfolio development has also emerged, with more and more companies pursuing technologies ordinarily considered to be outside their core business. Licensing is the natural option for such technologies because other companies with operations in those technological areas may be better situated to manufacture or market the licensed products or processes. Aside from realising a new revenue stream from such a license, such arrangements can build long-term relationships with complementary businesses.

However, where the patented technology is within the patentee’s core operations, sharing technology with competitors (even for a reasonable royalty) may be counterproductive. Disadvantages associated with licensing include:

  • Loss of some control over the technology’s implementation
  • Lack of control of manufacturers, leading to inefficiencies and reduced profits or, even worse, harm to the reputation of the technology

To reduce these risks, a company may enter non-exclusive licenses, perform careful background investigations of potential licensees, and police the performance of its licensees.

Although generally more amicable, licensing negotiations still present many unexpected risks normally associated with litigation, and may ultimately lead to litigation as well. To take just one example, in 2006, Sun Microsystems Inc unsuccessfully attempted to license software technology to Network Appliance Inc. Network Appliance responded with a patent infringement suit against Sun in late 2007 based on its own patent portfolio. As this example illustrates, the nature of the potential licensing partner must be carefully evaluated prior to entering into negotiations. Some companies may take being approached by a would-be licensor as an opportunity to launch a pre-emptive declaratory judgment action.

Some Examples of Licensing Success

Texas Instruments was an early success story in realising the value of its patent portfolio with a licensing programme. This computer hardware company extracted hundreds of millions of dollars from a large, ageing patent portfolio in the 1990s. Owing to its uniquely assertive programme, it was the first company to yield over $1 billion from licensing revenue of a patent portfolio. More recently, IBM has generated over $1 billion per year licensing and customdeveloping patents (7).

LITIGATION

In contrast to licensing, patent infringement litigation often represents a more uncompromising approach to enforcement. By litigating, the patentee seeks to recover the entire value (or more) of its patented technology while maintaining exclusive control. The rewards associated with successful litigation are therefore potentially huge. However, in most cases, the costs and risks associated with patent litigation are greater than those associated with a well-crafted licensing programme. Patent litigation is a serious undertaking and should be conducted carefully by specialised, experienced counsel. In the wrong hands or under the wrong circumstances, patent litigation can destroy those who initiate it, leaving the intended target unscathed.

There may also be important public relations and goodwill fallout from vigorous litigation. Even sophisticated corporations and their legal teams have suffered crippling, unexpected losses. These unpredictable backfire risks include losing proprietary trade secrets in discovery, facing counterclaims from a defendant’s competing patent portfolio and sanctions for alleged litigation misconduct.

In many respects, the benefits and risks of litigation are the mirror image of licensing. Whereas licensing is often the best option for a start-up business looking for acceptance of new technologies, with low up-front costs and a revenue stream, litigation is typically the best option for an established technology with a solid revenue stream and balance sheet where control is essential. Litigation seeks to exclude competitors that might tarnish the patented invention and take part of the established market. Litigation provides notice that patent rights will be enforced vigorously, reducing the risk of future infringement and increasing bargaining power in future licensing negotiations. Litigation also provides for greater certainty with respect to ending a competitor’s infringing activity. Litigation against wilful infringers in the US may provide for treble damages, attorneys’ fees (in exceptional cases) and interest.

Some Examples of Litigation Success

There are many examples of cases where patent litigation has driven significant business success. For example, Polaroid’s effective litigation to enforce its instant camera patents resulted in an award of almost $1 billion and is credited with shutting down competitor Kodak’s instant camera operations. In NTP Inc v Research in Motion Ltd, the plaintiff obtained a $612.5 million settlement following a complex litigation history (9). An initial damages judgment of $23.1 million was raised to $53.7 million after the plaintiff established wilful infringement. A looming injunction threatened to halt the defendant’s multibillion dollar BlackBerry handheld email device operations, leading to the stratospheric settlement. More recently, in June of 2009, Johnson & Johnson obtained a $1.67 billion award against Abbott Laboratories in patent infringement litigation targeting Abbott’s blockbuster anti-inflammatory drug, Humira®. This was the largest patent award in US history.

CONCLUSION

Sound patent enforcement strategy is more important than ever as the global recession continues. IP has continued its rise in prominence during this economic downturn in the midst of stricter, more dynamic regulatory oversight and legal standards. The decision as to whether to litigate or license requires tempered consideration of all the relevant factors – some of which defy precise evaluation. Although licensing provides greater short-term certainty and litigation provides greater ultimate certainty, each option represents a compromise of risks and rewards not suitable to every circumstance. Eternal vigilance and flexibility are key to every successful patent enforcement strategy.

References

  1. Traynor I, Big Pharma ‘Delaying’ Cheaper Drugs, www.guardian.co.uk/global/2009/jul/ 08/business-pharmaceticalseuropeancommission, 8 July 2009
  2. KSR v Teleflex, 550 US 398, 2007
  3. 545 F.3d 949 (Fed Cir 2008) (en banc), cert granted, No. 08 964, US, 1 June 2009
  4. Classen Immunotherapies, Inc v Biogen, 304 F Appendix 866 (Fed Cir 2008); Prometheus Lab, Inc v Mayo Collaborative Services, 581 F.3d 1336 (Fed Cir 2009)
  5. Can Licensing Cure Big Pharma’s Ills? Pharmaceutical Field, http://www.pharmafield.co.uk/, Issue ID: 40, Article ID: 315
  6. Deloitte, Intellectual Asset Management, July 2009, http://www.deloitte.com/
  7. Datamonitor, Licensing Strategies: Trends in the Top 20 Pharmaceutical Companies’ Activity, October 2005
  8. LeVine S, IBM May Not Be the Patent King After All, Businessweek, 13 January 2010
  9. Number 3:01CF767 (EDVA) (settled 3 March, 2006)

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Bruce C Haas has been a partner at Fitzpatrick, Cella, Harper & Scinto since 1989 and focuses his practice on complex patent litigation. He has served as lead trial counsel in patent infringement litigations involving pharmaceuticals and mechanical devices. Bruce’s practice has involved many diverse technologies, including high strength fibres, aerospace materials, automotive parts, plastic container manufacturing, pharmaceuticals and electrochemical devices. In addition to litigation, Bruce has wide experience in patent arbitration, patent evaluations and opinion work in fields as diverse as mechanical pumping devices to advanced composite materials.

Christopher Beckman’s practice presently focuses on patent litigation in the chemical and pharmaceutical arts. Prior to his time with Fitzpatrick, Christopher served as a judicial clerk at the Supreme and Appellate Courts of the State of Connecticut and practiced as a litigator with a leading general practice and IP law firm. His prior experience includes patent litigation in a wide range of technologies, as well as copyright, trademark and government investigations work.

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