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special to the national law journal Stephen B. Maebius, Richard J. Warburg and Harold C. Wegner are partners in the intellectual property department of Foley & Lardner. Maebius, in the firm’s Washington office, focuses on biotechnology, pharmaceutical and nanotechnology clients. Warburg, in the San Diego office, focuses on the biotechnology, pharmaceutical and chemical industries. Wegner, also in the Washington office, focuses on the pharmaceutical industry and is the former director of the intellectual property law program and professor of law at George Washington University Law School. The biotechnology industry has been given new life, and the drug pipeline can keep flowing. In a case of first impression closely watched by the biotechnology and pharmaceutical industries, the U.S. Court of Appeals for the Federal Circuit held on June 6, in Integra Lifesciences I Ltd. v. Merck KGaA, nos. 02-1052, 02-1065, 2003 U.S. App. Lexis 11335 (Fed. Cir. June 6, 2003), that preclinical use of a patented research tool for drug discovery is patent infringement and is not protected under the “safe harbor” of § 271(e)(1) of the Patent Code, 35 U.S.C. 271(e)(1). After a series of cases which steadily expanded § 271(e)(1), this is the first Federal Circuit opinion to rein in significantly the scope of the exception to infringement. The subsection provides, in relevant part: “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 (other than a new animal drug or veterinary biological product . . . which is primarily manufactured using recombinant DNA, recombinant RNA, hybridoma technology, or other processes involving site specific genetic manipulation techniques) 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 or veterinary biological products.” The case arose when Integra, the holder of rights under a patent covering peptides (known as RGD peptides that incorporate a sequence of three defined amino acids) useful in drug research, could not convince Merck to take a license on its terms after Integra discovered that Merck had used the peptide at one stage during the development of a new drug. After finding that § 271(e)(1) did not protect Merck’s activities in seeking to develop the new drug absent a license, a San Diego jury awarded Integra $15 million in damages. In affirming the ruling, the Federal Circuit observed: “As noted, the text of § 271(e)(1) limits the exemption ‘solely’ to activities ‘reasonably related to the development and submission of information’ to the [Food and Drug Administration (FDA)]. Moreover, the context of this safe harbor keys its use to facilitating expedited approval of patented pioneer drugs already on the market. Extending § 271(e)(1) to embrace new drug development activities would ignore its language and context with respect to the 1984 Act in an attempt to exonerate infringing uses only potentially related to information for FDA approval. Moreover, such an extension would not confine the scope of § 271(e)(1) to de minimis encroachment on the rights of the patentee. For example, expansion of § 271(e)(1) to include the Scripps-Merck activities would effectively vitiate the exclusive rights of patentees owning biotechnology tool patents. After all, patented tools often facilitate general research to identify candidate drugs, as well as downstream safety-related experiments on those new drugs. Because the downstream clinical testing for FDA approval falls within the safe harbor, these patented tools would only supply some commercial benefit to the inventor when applied to general research. Thus, exaggerating § 271(e)(1) out of context would swallow the whole benefit of the Patent Act for some categories of biotechnological inventions. Needless to say, the 1984 Act was meant to reverse the effects of Roche [v. Bolar, 572 F. Supp. 255 (E.D.N.Y. 1983)] under limited circumstances, not to deprive entire categories of inventions of patent protection.” 2003 U.S. App. Lexis 11335, at 17-19. This decision is critical to biotech companies that rely upon the early research-tool patents to survive. Prior district court decisions in Delaware and New York had encouraged companies to ignore such patents in the past, or at least heavily discount them, as long as they were working on the development of new drugs. See Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer Inc., No. 95 Civ. 8833, 2001 U.S. Dist. Lexis 19361 (S.D.N.Y. Nov. 27, 2001); Nexell Therapeutics Inc. v. Amcell Corp., 199 F. Supp. 2d 197 (D. Del. 2002). This Federal Circuit decision makes clear that while the development of generic drugs is within the exemption, anything beyond that will be suspect and is probably an infringing activity. This means that companies that rely upon such technologies for their survival can now command respect for such patents and hope to encourage investors to be equally respectful. However, the Federal Circuit vacated and remanded the $15 million damages award delivered by the jury in the district court case. According to the Federal Circuit, the uncertainty that exists at the time the infringement occurred about whether a useful drug could be developed should have been factored into the damages calculation. Specifically, the Federal Circuit determined that the damages analysis was flawed because the jury failed to conduct a reasonable royalty analysis using a hypothetical negotiation that occurred at the time of infringement; instead the damages calculation appeared to have been mistakenly influenced by hindsight knowledge of a valuable drug candidate that had emerged later in the process after the infringement occurred. In the court’s words: “The first step in a reasonable royalty calculation is to ascertain the date on which the hypothetical negotiation in advance of infringement would have occurred. The correct determination of this date is essential for properly assessing damages. The value of a hypothetical license negotiated in 1994 could be drastically different from one undertaken in 1995 due to the more nascent state of the RGD peptide research in 1994. Indeed, factoring in the rapid development of biotechnological arts, a year can make a great difference in economic risks and rewards. In any event, the record is not clear on the hypothetical negotiation date.” 2003 U.S. App. Lexis 11335, at 25-26. As a result of this aspect of the decision, companies that need licenses under such research-tool patents may be emboldened to push for them at lower costs. Without the in terrorem effect of being able to assert the value of a blockbuster drug in hindsight during litigation to heighten the damages calculation, research-tool patent holders may be forced to accept lower valuations during licensing negotiations. Trying to use an injunction to prevent the research use from occurring may be difficult because companies do not normally publicize their drug discovery strategies, so the infringement may not be discovered until it is too late. Often, a screening with a research tool is only performed once to identify a drug candidate and, thereafter, the research tool need not ever be used again during the development of that drug, making it impossible to use the threat of injunction after the drug candidate is already identified to force higher terms. The offshore-research factor There is also the possibility that a company might simply move the research offshore to avoid the need for a license. The United Kingdom, Germany, Japan, Korea and many others expressly recognize an experimental-use exception in their statutory law. However, if there is no way to perform the work necessary to find the new drug overseas, then a company may well have to pay the price asked by the research-tool patent holder. In addition, as of press time, another important decision affecting enforceability of research-tool patents against offshore users, Bayer v. Housey, 169 F. Supp. 2d 328 (D. Del. 2001), is still to be decided by the Federal Circuit. The Housey case involves a patent covering a research-tool screening method, in which the “product” of the screening method is information about potential drug candidates. Housey asserted that 35 U.S.C. 271(g), a law designed to stop unauthorized importation into the United States of products manufactured by a process patented in the United States, should be applied to screening-method research-tool patents as well as traditional manufacturing processes. The lower court disagreed, reasoning that “the asserted method claims of the [Housey] patents describe processes for recognizing substances with the potential for development into pharmaceuticals. These processes of identification and generation of data are not steps in the manufacture of final drug products. Thus, § 271(g) is not applicable to the process claims in the [Housey] patents and [Housey's] infringement claim under Section 271(g) is dismissed.” Id. at 331. If the Federal Circuit affirms the lower court, then the existence of a screening-method patent will not block the offshore research strategy. Thus, the outcome of Housey, together with the Integra opinion, will have important consequences for claim drafting strategies of research-tool patent holders. The debate about striking the proper balance between innovation and competition, whether through a legislated exemption like § 271(e) or through the common law research use exemption, is far from over, and uncertainties remain. One uncertainty relates to precisely how narrow the safe harbor of § 271(e) is in the wake of Integra. Although the decision refers to “pre-clinical” activities (i.e., tests that occur before testing in human beings) as being outside the safe harbor, the Federal Circuit did not provide a bright-line test for determining the point at which experimentation becomes so related to FDA approval that the safe harbor will apply, leaving it for future cases to spell this out. Another area that is still not completely settled is the common law “research use” exemption. On June 27, the U.S. Supreme Court denied certiorari in Madey v. Duke University, 307 F.3d 1351 (Fed. Cir. 2002), a case involving the question of whether a university has immunity to infringement under the common law research use exemption to infringement. John M.J. Madey, a former Duke employee, sued Duke for patent infringement when it continued to use a patented laser technology after his departure, a patent that he had acquired on his own and that he owned independently of the university. The court, in holding that Duke was not exempt from infringement, stated that “[t]he correct focus should not be on the non-profit status of Duke but on the legitimate business Duke is involved in and whether or not the use was solely for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry.” Id. at 1362. Despite the narrow construction given to the research use exemption by the Madey court, the common law research use exemption to infringement figured prominently in Judge Pauline Newman’s concurrence-in-part and dissent-in-part in the Integra case, in which she concluded that “the basic research here performed was within the common law research exemption, and the development shielded by § 271(e)(1) took up where the research exemption left off. Thus the accused activities were either exempt from or immune from infringement.” 2003 U.S. App. Lexis 11335, at 50-51. Newman further remarked: “The subject matter of patents may be studied in order to understand it, or to improve upon it, or to find a new use for it, or to modify or ‘design around’ it. Were such research subject to prohibition by the patentee the advancement of technology would stop, for the first patentee in the field could bar not only patent-protected competition, but all research that might lead to such competition, as well as barring improvement or challenge or avoidance of patented technology. Today’s accelerated technological advance is based in large part on knowledge of the details of patented inventions and how they are made . . . .Prohibition of research into such knowledge cannot be squared with the framework of the patent law.” Id. at 41. Duke’s certiorari petition, now denied, was joined by an amicus curiae effort by the Association of American Medical Colleges-along with five national associations, 25 universities and research institutes and a Ralph Nader organization, Public Citizen Inc. The Consumer Project on Technology and Public Knowledge also filed a brief. Yale’s vice president for public policy, Jon Soderstrom, summarized the holding of the Federal Circuit as one where it “ruled that the research exemption to patent infringement liability does not apply to research performed in universities.” And there is still the question of whether certiorari or a rehearing will be granted in Integra itself. At least for the time being, biotechnology companies that have invested enormous sums of money into the discovery of research tools can breathe a little easier knowing that their research-tool patents can be enforced after Integra.

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