Patent Docs

Obama Administration Solicits Public Help in Preventing Foreign Trade Secret Theft

By Josh Rich --

On Tuesday, the U.S. Intellectual Property Enforcement Coordinator, Victoria Espinel, published a notice in the Federal Register "requesting any recommendations for legislative changes that would enhance enforcement against, or reduce the risk of, the misappropriation of trade secrets for the benefit of foreign competitors or foreign governments."  78 Fed. Reg. 16875 (Mar. 19, 2013).  Submissions are due by April 22, 2013.  The request for public submissions is one of the first steps in the implementation of the "Administration Strategy on Mitigating the Theft of U.S. Trade Secrets," issued on February 20, 2013 (see ""Obama Administration Reports on Efforts to Prevent Trade Secret Misappropriation").

The Administration Strategy is a five-pronged approach, coordinated by the U.S. IP Enforcement Coordinator and involving many of the executive branch departments.

First, the strategy calls for the White House to focus diplomatic efforts to protect trade secrets overseas.  Although the Administration Strategy does not expressly identify any specific countries on which it is focused, the examples of misappropriation of trade secrets for the benefit of foreign companies and countries are almost exclusively Chinese.  Consistent with this focus on China, National Security Advisor Tom Donilon later said that reports of cyber theft of confidential business information from entities in China were occurring "on a very large scale" and that the Chinese government "should take serious steps to investigate and put a stop to these activities" ("US calls for 'serious' action by China to stop cybertheft," The Washington Post, March 11, 2013).  However, a private U.S.-based cybersecurity firm had previously issued a report identifying the Chinese government (specifically, a military unit based in Shanghai) as being one of the causes of Chinese cyberattacks (see Mandiant Intelligence Center Report).  Thus, while the Strategy calls for sustained and coordinated international engagement with trading partners, such as China, it may be difficult for the Federal agencies charged with doing so (including the Departments of Commerce, Defense, Homeland Security, Justice, State, and Treasury, and the U.S. Trade Representative) to make much headway.  The Administration may find more success in the Department and PTO working with other countries through Intellectual Property Rights (IPR) working groups to fashion rules and policies to discourage trade secret theft.  The Strategy also calls for domestic law enforcement agencies to leverage international law enforcement cooperative agreements and arrangements to pursue investigations both in the U.S. and abroad.

Second, the Strategy calls for the U.S. IP Coordinator to promote voluntary best practices by private industry to protect trade secrets.  While the IP Enforcement Coordinator will work with the Departments of Justice and State (among other agencies) to encourage companies and industry groups to develop and implement voluntary best practices, the Administration Strategy expressly indicates that those best practices must be consistent with antitrust laws.  Among the areas in which the Strategy suggests focus are R&D compartmentalization, information security, physical security, and human resources policies.  But the Strategy makes it clear that compliance with best practices must be voluntary, and any identified best practices may not be suitable for all companies.

Third, the Strategy calls for the enhancement of domestic law enforcement operations.  Spearheaded by the Attorney General's Task Force on Intellectual Property and the FBI, the Department of Justice is making the investigation and prosecution of corporate and state-sponsored trade secret theft a higher priority.  The Office of the Director of National Intelligence will also coordinate the sharing of intelligence among the intelligence and law enforcement communities in order to monitor foreign government activity and prevent international trade secret misappropriation, and will also work with the private sector to warn of potential threats.

Fourth, the Strategy calls for the Administration to improve domestic legislation.  This is the prong to which the U.S. IP Coordinator's Federal Register notice is directed, and one area where there has been concrete (although incremental) progress in recent months.  The Strategy highlighted two acts passed at the conclusion of the last Congress.  First, the "Theft of Trade Secrets Clarification Act of 2012" was intended to reverse the outcome of cases like United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), in which the defendant stole the source code for a proprietary high-frequency trading system from his former employer to provide it to a new employer, but was acquitted because the source code was intended to remain secret and therefore not "related to or included in a product that is produced for or placed in interstate or foreign commerce."  That Act modified the Economic Espionage Act (EEA) to make it cover trade secrets "related to a product or service used in or intended for use in interstate or foreign commerce."  Second, the "Foreign and Economic Espionage Penalty Act of 2012" did exactly that: increased potential sentences and fines for violations of the EEA.  The U.S. IP Enforcement Coordinator is charged with coordinating an initial review of existing Federal laws within 120 days of the release of the Administration Strategy, by June 20, 2013.

Finally, the Strategy calls for various departments in the Administration to increase efforts to develop public awareness and engage in stakeholder outreach.  For example, the FBI and Department of Commerce are to continue and expand their efforts to inform the public about the threat and cost of trade secret misappropriation, using existing public awareness programs.  In addition, the PTO will include discussion of the economic implications of trade secret misappropriation in its "road show" events.

All in all, the Administration Strategy suggests a greater focus on protection of trade secrets against foreign misappropriation, as well as a more coordinated effort than in the past.  But the next steps, both in discussions with China and shaping of Federal legislation, may be critical in determining whether that effort provides greater security for domestic companies.  We will continue to monitor developments and will report back on suggested legislative changes.

Obama Administration Reports on Efforts to Prevent Trade Secret Misappropriation

By Kevin E. Noonan --

The Obama Administration issued a Report earlier this month, entitled "Administration Strategy on Mitigating the Theft of U.S. Trade Secrets," that sets forth its efforts to prevent trade secret misappropriation.  The Report involves the Departments of Commerce, Defense, Homeland Security, Justice, State, Treasury, Director of National Intelligence, and the Executive Office of the President, and the U.S. Trade Representative (USTR) in the effort.  The Obama Administration, as evidenced by this document, recognizes the contributions made to the economy by intellectual property, but also that some of that creativity cannot be captured by traditional intellectual property tools such as patents, copyrights, and trademarks.  In this regard the Report cites increases in trade secret theft and industrial espionage, citing The Office of the National Counterintelligence Executive (ONCIX), "Foreign Spies Stealing US Economic Secrets In Cyberspace", November 2011, at 1.  These efforts at trade secret misappropriation take the form of recruitment of former employees by foreign corporation and governments as well as "cyber" attacks on "electronic repositories" of trade secrets.  All these activities harm the U.S. economy and national security, according to the preamble of the Report.

The Administration enunciates a policy in protecting trade secrets to prevent foreign corporations or governments "to gain an unfair economic edge" from trade secret misappropriation.  The Report sets forth 5 "Strategy Action Items":

1.    Focus Diplomatic Efforts to Protect Trade Secrets Overseas

The Report indicates that the Obama Administration intends to "continue to apply sustained and coordinated diplomatic pressure" on other governments to discourage trade secret theft.  This will be done by directing a "sustained, consistent and coordinated message from all appropriate agencies to foreign governments" and by pressuring governments to "take steps to strengthen their enforcement against trade secret theft."  Trade secret theft by governments will be raised "at the most senior levels" of the Administration, including officials from the "Departments of Commerce, Defense, Justice, Homeland Security, State, Treasury and the U.S. Trade Representative."  This pressure will be diplomatic, through representatives from the Department of State, as well as through attempts at coalition building by representatives from the Department of Commerce and the USTR.  The Administration will also implement trade secret protection protocols at U.S. Embassies in countries "known to present high-­risk conditions for trade secret theft" particularly through their IPR Working Groups.

Under this Action Item are included "Trade Policy Tools" directed towards "increase[ing] international enforcement against trade secret theft to minimize unfair competition against U.S. companies."  These include:

•    Deeper cooperation with trading partners that share U.S. interests with the objective of promoting enhanced trade secret and other intellectual property protection in ways that are consistent with U.S. approaches and helpful in curbing trade in goods and services containing stolen trade secrets;

•    Targeting weaknesses in trade secret protection through enhanced use of the annual Special 301 process, including the Special 301 Report, action plans and related tools to gather and, where appropriate, act upon information about the adequacy and effectiveness of trade secret protection by U.S. trading partners;

•    Seeking, through USTR­-led trade negotiations such as the Trans Pacific Partnership, new provisions on trade secret protections requiring parties to make available remedies similar to those provided for in U.S. law; and

•    Continuing to raise trade secret protections as a priority issue in all appropriate bilateral, regional, and multilateral trade discussions and appropriate trade and IP-­related forums, including the Trade-­Related Aspects of Intellectual Property Rights Council and the Asia­ Pacific Economic Cooperation, informed by interagency and stakeholder input regarding partners and issues of concern.

Also included in this Action Item are efforts to increase international law enforcement cooperation, international training and capacity-building, and involvement of international organizations (the counterparts of the U.S. Departments that sponsored this Report).

2.    Promote Voluntary Best Practices by Private Industry to Protect Trade Secrets

Some of the responsibility for increased protections for trade secrets depend on efforts by private companies.  The Administration contends that companies "need to consider whether their approaches to protecting trade secrets keeps pace with technology and the evolving techniques to acquire trade secrets enabled by technology."  Under this Action Item, the Report commits the Administration to "help facilitate efforts by organizations and companies to develop industry led best practices to protect trade secrets," in an effort led by the U.S. Intellectual Property Enforcement Coordinator (IPEC).  The Report, in a caveat that could bring the whole effort to naught, qualifies the scope of such voluntary, coordinated efforts by private companies, limits the scope of these practices to those "consistent with [U.S] antitrust laws.  Suggestions for such "best practices" include:

•    Research and development compartmentalization;

•    Information security policies;

•    Physical security policies; and

•    Human Resources policies.

And the Administration's efforts will be qualified by the statement that "it should be emphasized that such guidelines are intended solely to offer suggestions to assist businesses in safeguarding information they wish to keep secret and are not designed to be a minimum standard of protection."

3.    Enhance Domestic Law Enforcement Operations

These efforts are led by the FBI, which in 2011 "increased the number of trade secret theft investigations by 29 percent from 2010" as a result of the Attorney General's Task Force on Intellectual Property.  These efforts are a "top priority" at the Bureau, according to the Report, with the FBI "expanding its efforts to fight computer intrusions that involve the theft of trade secrets by individual, corporate, and nation­state cyber hackers."  This Action Item also notes that the Office of the Director of National Intelligence is involved in coordinating the efforts of "the intelligence community" in assisting private companies in resisting trade secret theft.  The Office of the National Counterintelligence Executive (ONCIX) will share "threat warnings" and increase awareness in the private sector using (unspecified) "counterintelligence tradecraft procedures tailored to the private sector."  The regional scope of these efforts are illustrated in the following map:

Several "national outreach organizations, including the Domestic Security Alliance Council, the National Security Business Alliance Council, and InfraGard" will also be involved with the FBI in "local, regional and national efforts" intended to "reach a broad swath of companies in multiple sectors such as information technology, communications, aeronautics, engineering, energy, financial services, and consumer retail."

Enforcement of U.S. trade secret laws will be facilitated through training by the FBI and the DOJ of prosecutors and investigators, targeting "domestic law enforcement officers, prosecutors, and international partners."  The Department of Defense also has a role in this effort, and "will collect, analyze and report on threat information to cleared industries that support Department of Defense programs and the missions of other U.S. government departments and agencies" and will "deliver security training and education on counterintelligence."

4.    Improve Domestic Legislation

The Report cites several legislative initiatives, including:

•    Public Law112-236—The Theft of Trade Secrets Clarification Act of 2012 (S. 3642), closed a loophole in the Economic Espionage Act that had allowed the theft of valuable trade secret source code.  This legislation was introduced by Senate Judiciary Chairman Senator Patrick Leahy in response to the Second Circuit decision in United States v. Aleynikov, 676 F.3d 71 (2d Cir. 2012), which overturned a verdict that found that the defendant violated 18 U.S.C. § 1832(a) by stealing proprietary computer code, a trade secret, from his employer.  This legislation was in line with the overall IPEC objective of protecting trade secrets from misappropriation.

•    Public Law 112-269—The Foreign and Economic Espionage Penalty Enhancement Act of 2012 (H.R. 6029/S. 678), bolstered criminal penalties for economic espionage and directed the Sentencing commission to consider increasing offense levels for trade secret crimes.  Its passage is an important step in ensuring that penalties are commensurate with the eco­nomic harm inflicted on trade secret owners.  The passage of this legislation could not have been achieved without the efforts of former House of Representatives Judiciary Chairman Representative Lamar Smith and retired Senator Herb Kohl.

5.    Public Awareness and Stakeholder Outreach

The report concludes by listing efforts by the Department of Commerce, the U.S. Patent and Trademark Office and the FBI to increase public awareness of trade secret theft.  The Report also sets out websites having additional information, including:

•    Department of Commerce STOPfakes.gov IPR training module includes an introduction to trade secrets (available here).

•    Special 301 Report released by the U.S. Trade Representative summarizes troubling trends involving trade secrets and forced technology transfer (available here).

•    The Department of State (available here).

•    DOJ National Security Division (available here).

•    DOJ Criminal Division - Computer Crimes and Intellectual Property Section (available here).

•    FBI Counterintelligence Division (available here).

•    National Intellectual Property Rights Coordination Center (available here).

•    The Office of the National Counterintelligence Executive (available here).

•    The Department of Defense – Defense Security Service (available here).

•    Create.org study that includes recommendations for companies operating in foreign coun­tries to mitigate the risk of trade secret theft (available here).

•    The World Intellectual Property Organization (WIPO) has more trade secret information specifically designed for small and medium-­sized enterprises (available here).

Sprinkled throughout the Report are specific instances of trade secret misappropriation, limited (of course) to those instances detected or thwarted, including:

1.    Theft of Ford Motor Company Trade Secrets

In April 2011, Yu Xiang Dong was sentenced to 70 months in federal prison for theft of trade secrets and economic espionage.  Yu was a former Ford Motor Company employee who resigned to work at Beijing Automotive Company.  He copied 4,000 Ford documents onto an external hard drive, which he took to China.  Ford valued the loss of the trade secrets at $50 million dollars.

2.    Theft of DuPont Trade Secrets

Hong Meng was a research chemist for DuPont.  He was involved in researching Organic Light Emitting Diodes (OLED).  DuPont's OLED research efforts resulted in the development of a breakthrough and proprietary chemical process for OLED displays.  Mr. Meng stole trade secret compounds and passed them to a Chinese university.  He was caught by the FBI and prosecuted by the U.S. Attorney's Office for the District of Delaware and was sentenced to 14 months in federal prison.  DuPont valued the loss of the trade secrets at $400 million dollars.

3.    Theft of General Motors Trade Secrets

On November 30, 2012, a Federal jury in Detroit found Shanshan Du, a former General Motors (GM) engineer, and her husband, Yu Qin, both found guilty of stealing GM trade secrets related to hybrid vehicle technology worth $40 million.  Du and Qin tried to pass the trade secrets to Chinese automaker Chery Automobile Company.

4.    Theft of Cargill and Dow Chemical Trade Secrets

In October 2011, Kexue Huang, a former employee of both Cargill and Dow Chemical passed trade secret information to a Chinese university that was developing organic pesticides on behalf of China's government.  Financial losses to both companies from his criminal acts exceed $7 million.  In December 2011, after many months of hard work by FBI agents, CCIPS prosecutors and the U.S. Attorneys' Offices in Indiana and Minnesota, Huang was sentenced to 87 months in prison -- the strongest sentence possible.

5.    Theft of Valspar Trade Secrets

David Yen Lee worked for Valspar, an Indiana paint company.  He stole trade secrets from Valspar and tried to pass them to Nippon Paint in China.  Mr. Lee purchased a plane ticket to China, but was caught by the FBI before he could leave the U.S.  On December 8, 2010, Mr. Lee was sentenced to 18 months in prison.  Valspar valued the trade secrets between $7 and $20 million.

6.    Theft of Motorola Trade Secrets

In November 2011, Customs and Border Protection officers at Chicago's O'Hare Airport stopped Hanjuan Jin, a former Motorola software engineer, while she was allegedly carrying 1,000 sensitive Motorola documents, $30,000 in cash, and a one­way ticket to China.  Jin was in the process of traveling to China to turn over stolen trade secret information relating to mobile telecommunications to Kai Sun News Technology Co., also known as SunKaisens, and to the Chinese military.

7.    Theft of Goldman Sachs Trade Secret

Goldman Sachs spent $500 million dollars developing computer source code to support its high frequency trading program.  Sergey Aleynikov, a Goldman Sachs computer programmer, resigned from his job to work for a competitor, and on his final day of employment transferred this extremely valuable proprietary computer code to an external computer server.  Mr. Aleynikov had also transferred thousands of proprietary computer code files to his home computers.  Mr. Aleynikov was investigated by the FBI and prosecuted by the U.S. Attorney's Office of the Southern District of New York.  He was sentenced to 97 months in Federal prison.  In February 2012, his conviction was overturned by the Second Circuit based on the court's interpretation of the Economic Espionage Act.  This loophole was fixed when President Obama signed Public Law 112­236 The Theft of Trade Secrets Clarification Act of 2012 (S. 3642) on December 28, 2012.

The Obama Administration's record on intellectual property policy is spotty at best, including as it does the Department of Justice's benighted position of the patent-eligibility of isolated human DNA and the laughable "magic microscope," as well as comments as recently as last week illustrating that the President has at best an uninformed opinion on intellectual property issues (see video of comments).  But the Report is replete with precatory admonitions on the value of intellectual property, including statements by the President that:

Our single greatest asset is the innovation and the ingenuity and creativity of the American people.  It is essential to our prosperity and it will only become more so in this century.

We cannot look back years from now and wonder why we did nothing in the face of real threats to our security and our economy.

The proof of this particular pudding will be whether the Administration follows through on the aims and goals set forth in the Report.

President Obama Names 2012 National Medal of Science and National Medal of Technology and Innovation Recipients

By Kevin E. Noonan --

Last Friday, the White House released the names of the 2012 recipients of the National Medal of Science and the National Medal of Technology and Innovation.  In the press release, the President said he was "proud to honor these inspiring American innovators" and that:

They represent the ingenuity and imagination that has long made this country great -- and they remind us of the enormous impact a few good ideas can have when these creative qualities are unleashed in an entrepreneurial environment.

The recipients and a brief note of their areas of study or achievements are as follows:

National Medal of Science

Allen Bard – chemistry, electrochemistry
Sallie Chisholm – oceanography, study of Prochlorococcus
Sidney Drell – theoretical physics, arms control
Sandra Faber – astronomy and astrophysics, black holes
Sylvester Gates – theoretical physics, supersymmetry
Solomon Golomb – mathematics, electrical engineering, Tetris
John Goodenough – solid state physics; mechanical engineering, lithium batteries
Frederick Hawthorne – inorganic chemistry; boron hydrides
Leroy Hood – molecular biologist; automated DNA sequencing, oligo synthesis
Barry Mazur – mathematics, topology
Lucy Shapiro – developmental biology, Caulobacter
Anne Treisman – cognitive psychology, integration theory of attention

National Medal of Technology and Innovation

Frances Arnold – chemical engineering, directed protein evolution
George Carruthers – physics, UV cameras for NASA lunar missions
Robert Langer – engineer, polymeric and microscale drug delivery
Norman McCombs – mechanical engineering, pressure swing absorption systems
Gholam Peyman – retinal surgeon, LASIK eye surgery
Art Rosenfeld – physicist, fluorescent lamps
Jan Vilcek­ – physician, cytokines (TNF and interferon)

Sadly, most of these men and women are unknown to most Americans.  Perhaps this honor will change that somewhat.

Happy Holidays from Patent Docs

The authors and contributors of Patent Docs wish their readers and families a Happy Holidays.  Publication of Patent Docs will resume on December 26th.

ABA Journal Announces 2012 Blawg 100

Patent Docs Makes List for First Time

The ABA Journal has announced its annual list of the 100 best legal blogs -- or blawgs -- following a nomination process that began in August.  The 100 blogs selected for the 2012 list have been divided into fifteen categories:  News/Analysis, Trial Practice, Business of Law, Niche, For Fun, IP Law, Careers/Law Schools, Labor & Employment, Criminal, Justice, Torts, Legal Technology, Courts, Corporate, and Legal Research/Writing.  Five of the Blawg 100 were selected in the IP Law category, including Patent Docs, which was selected to the Blawg 100 for the first time.  The other blogs selected to the IP Law category were IPWatchdog; Hollywood, Esq., Patently-O, and Rebecca Tushnet's 43(B)log.

An alphabetical list of the 2012 Blawg 100 can be found here and a list of the top blawgs sorted by category can be found here.  In announcing the 2012 Blawg 100, ABA Journal Editor and Publisher Allen Pusey noted that "[e]ach year, our choices become tougher," adding that "[b]logging has become such a staple of professional communication that keeping up with our own directory of more than 3,500 blogs by lawyers, judges, law professors or even law students is more formidable than it's ever been."

Now that the ABA Journal has selected its Blawg 100 for 2012, it is asking readers to choose their favorites from among the top 100.  In order to vote for your favorites, you will first have to register here (registration is free).  Voting will conclude on December 21.

In addition to releasing its 6th annual Blawg 100, the ABA Journal announced its inaugural Blawg 100 Hall of Fame, featuring law blogs the ABA Journal "can't imagine not making our favorites list each year."  The inaugural list of ten blawgs, which includes Patently-O, can be found here.

We would like to thank our readers for nominating Patent Docs for the Blawg 100, and we would like to thank the ABA Journal for making Patent Docs a 2012 Blawg 100 honoree.

Happy Thanksgiving from Patent Docs

The authors and contributors of Patent Docs wish their readers and families a Happy Thanksgiving.  Publication of Patent Docs will resume on November 23rd.

Groups Petition for NIH Exercise of March-in Rights over Abbott Laboratories' Norvir®

By Kevin E. Noonan --

Since 1980, the Bayh-Dole Act has encouraged, facilitated, and required universities and other recipients of Federal grant money to license inventions resulting from funded research for commercialization.  While this has been one of the bedrocks upon which the biotechnology industry was built, and has enabled almost every research university to obtain patent protection on its technologies (instead of watching them be stolen by corporations foreign and domestic), it has never avoided opposition by "public interest" groups who believe that universities should not be engaged in profit-making ventures or that the U.S. citizenry should not have to pay businesses for inventions the public has already paid for.  Of course, this argument ignores the relative financial contributions of the parties:  while the Federally funded invention is the sine qua non of the commercial technology it is rarely enough, and (particularly in the pharmaceutical and biotechnology industries) the cost of research is vastly outweighed by the cost of development.

However, these concerns, as well as the concern that a company could license university and other Federally funded inventions and then suppress them motivated (in part) a section of the law that gave the government "march-in" rights.  These rights, and the conditions triggering their exercise, are set forth in 35 U.S.C. § 203:

35 USC § 203 - March-in rights

(a) With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such—

(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;
(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees;
(3) action is necessary to meet requirements for public use specified by Federal regulations and such requirements are not reasonably satisfied by the contractor, assignee, or licensees; or
(4) action is necessary because the agreement required by section 204 has not been obtained or waived or because a licensee of the exclusive right to use or sell any subject invention in the United States is in breach of its agreement obtained pursuant to section 204.

(b) A determination pursuant to this section or section 202 (b)(4) shall not be subject to chapter 71 of title 41. An administrative appeals procedure shall be established by regulations promulgated in accordance with section 206. Additionally, any contractor, inventor, assignee, or exclusive licensee adversely affected by a determination under this section may, at any time within sixty days after the determination is issued, file a petition in the United States Court of Federal Claims, which shall have jurisdiction to determine the appeal on the record and to affirm, reverse, remand or modify, as appropriate, the determination of the Federal agency. In cases described in paragraphs (1) and (3) of subsection (a), the agency's determination shall be held in abeyance pending the exhaustion of appeals or petitions filed under the preceding sentence.

Regulations on how these rights can be petitioned for exercise by the relevant Federal agencies (such as the National Institutes of Health) have been promulgated:

37 C.F.R. § 401.6 Exercise of march-in rights.

(a) The following procedures shall govern the exercise of the march-in rights of the agencies set forth in 35 U.S.C. 203 and paragraph (j) of the clause at § 401.14.

(b) Whenever an agency receives information that it believes might warrant the exercise of march-in rights, before initiating any march-in proceeding, it shall notify the contractor in writing of the information and request informal written or oral comments from the contractor as well as information relevant to the matter. In the absence of any comments from the contractor within 30 days, the agency may, at its discretion, proceed with the procedures below. If a comment is received within 30 days, or later if the agency has not initiated the procedures below, then the agency shall, within 60 days after it receives the comment, either initiate the procedures below or notify the contractor, in writing, that it will not pursue march-in rights on the basis of the available information.

(c) A march-in proceeding shall be initiated by the issuance of a written notice by the agency to the contractor and its assignee or exclusive licensee, as applicable and if known to the agency, stating that the agency is considering the exercise of march-in rights. The notice shall state the reasons for the proposed march-in in terms sufficient to put the contractor on notice of the facts upon which the action would be based and shall specify the field or fields of use in which the agency is considering requiring licensing. The notice shall advise the contractor (assignee or exclusive licensee) of its rights, as set forth in this section and in any supplemental agency regulations. The determination to exercise march-in rights shall be made by the head of the agency or his or her designee.

(d) Within 30 days after the receipt of the written notice of march-in, the contractor (assignee or exclusive licensee) may submit in person, in writing, or through a representative, information or argument in opposition to the proposed march-in, including any additional specific information which raises a genuine dispute over the material facts upon which the march-in is based. If the information presented raises a genuine dispute over the material facts, the head of the agency or designee shall undertake or refer the matter to another official for fact-finding.

(e) Fact-finding shall be conducted in accordance with the procedures established by the agency. Such procedures shall be as informal as practicable and be consistent with principles of fundamental fairness. The procedures should afford the contractor the opportunity to appear with counsel, submit documentary evidence, present witnesses and confront such persons as the agency may present. A transcribed record shall be made and shall be available at cost to the contractor upon request. The requirement for a transcribed record may be waived by mutual agreement of the contractor and the agency. Any portion of the march-in proceeding, including a fact-finding hearing that involves testimony or evidence relating to the utilization or efforts at obtaining utilization that are being made by the contractor, its assignee, or licensees shall be closed to the public, including potential licensees. In accordance with 35 U.S.C. 202(c)(5), agencies shall not disclose any such information obtained during a march-in proceeding to persons outside the government except when such release is authorized by the contractor (assignee or licensee).

(f) The official conducting the fact-finding shall prepare or adopt written findings of fact and transmit them to the head of the agency or designee promptly after the conclusion of the fact-finding proceeding along with a recommended determination. A copy of the findings of fact shall be sent to the contractor (assignee or exclusive licensee) by registered or certified mail. The contractor (assignee or exclusive licensee) and agency representatives will be given 30 days to submit written arguments to the head of the agency or designee; and, upon request by the con- tractor oral arguments will be held before the agency head or designee that will make the final determination.

(g) In cases in which fact-finding has been conducted, the head of the agency or designee shall base his or her determination on the facts found, together with any other information and written or oral arguments submitted by the contractor (assignee or exclusive licensee) and agency representatives, and any other information in the administrative record. The consistency of the exercise of march-in rights with the policy and objectives of 35 U.S.C. 200 shall also be considered. In cases referred for fact-finding, the head of the agency or designee may reject only those facts that have been found to be clearly erroneous, but must explicitly state the rejection and indicate the basis for the contrary finding. Written notice of the determination whether march-in rights will be exercised shall be made by the head of the agency or designee and sent to the contractor (assignee of exclusive licensee) by certified or registered mail within 90 days after the completion of fact-finding or 90 days after oral arguments, whichever is later, or the proceedings will be deemed to have been terminated and thereafter no march-in based on the facts and reasons upon which the proceeding was initiated may be exercised.

(h) An agency may, at any time, terminate a march-in proceeding if it is satisfied that it does not wish to exercise march-in rights.

(i) The procedures of this part shall also apply to the exercise of march-in rights against inventors receiving title to subject inventions under 35 U.S.C. 202(d) and, for that purpose, the term ''contractor'' as used in this section shall be deemed to include the inventor.

(j) An agency determination unfavorable to the contractor (assignee or exclusive licensee) shall be held in abeyance pending the exhaustion of appeals or petitions filed under 35 U.S.C. 203(2).

(k) For purposes of this section the term exclusive licensee includes a partially exclusive licensee.

(l) Agencies are authorized to issue supplemental procedures not inconsistent with this part for the conduct of march-in proceedings.

Last Thursday, four groups (the American Medical Students Association (AMSA), Knowledge Ecology International (KEI), U.S. Public Interest Research Group (PIRG), and the Universities Allied for Essential Medicines (UAEM)) filed a petition with the NIH requesting the agency to exercise these march-in rights over the anti-AIDS drug ritonavir, exclusively sold by Abbott Laboratories.  This is but the fifth petition filed under the law, and none of them have been successful.  Before discussing the latest petition it will be helpful to review the circumstances and histories of the other petitions, all to the NIH, to discern the agency's reasoning for refusing to march-in in those instances.

The first petition was by the start-up company CellPro, which produced a device (the Ceprate SC) for segregating hematopoietic stem cells from mixtures of cells containing not only stem cells but, most importantly, leukemia, lymphoma, and other blood cancer cells, thus enabling autologous reimplantation of hematopoietic stem cells in patients whose bone marrow had been irradiated to treat such cancers.  (The CellPro story, not surprisingly, told not dispassionately by the company founder, Rick Murdock, in Patient No. 1: A True Story of How One CEO Tool on Cancer and Big Business in the Fight of His Life, New York: Crown Publishers 2000) CellPro was sued by Baxter International and Johns Hopkins University, licensee and owner, respectively, of patents (U.S. Patent Nos. 4,965,680; 5,130,144; 5,035,994; and 4,965,204) directed to monoclonal antibodies specific for antigens uniquely expressed on the stem cell surface.  After losing in the district court, CellPro faced an injunction that, while permitting the company to stay on the market until Baxter could get FDA approval on a competing device, was subject to a 100% (later reduced to 60%) royalty on its "incremental profits."  CellPro petitioned Donna Shalala, Secretary of Health and Human Services in the Clinton administration, alleging that Baxter and Hopkins had failed the provisions of § 203(a)(1) and (2), for not having obtained FDA approval for its competing device in development and for obtaining an injunction that would remove the Ceprate SC device from the marketplace.  The petition was supported in public hearings by testimony (written and oral) by physicians attesting to the use and benefits of the device, and the negative medical consequences that would ensue if the NIH did not grant CellPro's march-in petition.

Nonetheless, the NIH (headed at the time by Nobel Laureate Harold Varmus) refused to exercise its march-in rights.  In its refusal, the agency stated that it had considered whether Baxter had failed to commercialize and decided it had not failed, based on the totality of their development and regulatory approval activities but disregarding the fact that those activities did not result in a commercial, FDA-approved product.  With regard to whether there was an "unmet public health or safety need," the agency again decided not to exercise the rights, based on the "considerable debate among scientists and clinicians" regarding whether the function of the Ceprate device (immunoselection of [hematopoietic] stem cells prior to [bone marrow] implantation) was beneficial.  Thus, the agency decided it was "premature" for either CellPro or Baxter to claim clinical benefit (although this was presumably at least one basis for FDA approval).  Baxter's agreement to permit CellPro to remain on the market (albeit under draconian royalty terms) was also a factor, and that CellPro did not introduce sufficient evidence that Baxter could not satisfy the medical need in the face of Baxter's averments that they could satisfy the market (including replacing any Ceprate devices removed from the market).  The agency also enunciated something close to a philosophy about attempts to have it exercise march-in rights under circumstances of a dispute between private parties:  the agency was wary of:

Forced attempts to influence the marketplace for the benefit of a single company, particularly when such actions may have far-reaching repercussions on many companies' and investors' future willingness to invest in federally funded medical technologies.  The patent system, with its resultant predictability for investment and commercial development, is the means chosen by Congress for ensuring the development and dissemination of new and useful technologies.  It has proven to be an effective means for the development of health care technologies.  In exercising its authorities under the Bayh-Dole Act, NIH is mindful of the broader public health implications of a march-in proceeding, including the potential loss of new health care products yet to be developed from federally funded research.

Finally, however, the agency reserved the right to "monitor the situation" to determine if the factual grounds for its decision proved true.

In 2004 a group called Essential Inventions filed a petition based not on private interests but on what it characterized as the "public interest" for lower prices on the HIV protease inhibitor ritonavir, sold by Abbott as Norvir® (the same drug that is the subject of the latest petition).  The factual basis for the petition was that Abbott had increased the price of the drug by ~400%.  In this case, there was no university party involved; Abbott had been funded by research monies from the Reagan administration in an effort to develop more effective anti-AIDS drugs.  The patents at issue (U.S. Patent Nos. 5,541,206; 5,635,523; 5,648,497; 5,674,882; 5,846,987; 5,886,036) were the same patents that are the subject of the current petition, as was the basis in the statute:  that the requirement for licensing on "reasonable terms" ("upon terms that are reasonable under the circumstances") was violated by Abbott's pricing for Norvir®.  (It should be noted that this portion of the statute would appear to refer to the licensing terms between the "contractor" and the licensee and not to be related to the price the licensed drugs are sold for.)  This argument is supported by a 2001 law review article by Arno & Davis (Peter S. Arno & Michael H. Davis, Why Don't We Enforce Existing Drug Price Controls? The Unrecognized and Unenforced Reasonable Pricing Requirements Imposed upon Patents Derived in Whole or in Part from Federally Funded Research, 75 Tulane L. Rev. 631, 660-661 (2001)), that argued that the legislative history and "purpose" of the Bayh-Dole Act indicated that price was part of the "reasonable terms" requirement.  The petitioners suggested a smorgasbord of remedies, including a 5% royalty, calculated on generic price; a requirement that "every manufacturer " contribute to R&D Funds for AIDS; that the NIH adopt the "Commonwealth" model of open licensing; and that these licenses include the right to distribute worldwide (disregarding that the NIH had no authority to countenance patent infringement in other countries).  The NIH held public hearings and received written and oral testimony from a "variety of groups and individuals representing universities, the AIDS community, pharmaceutical interests, drafters of the Bayh-Dole Act, and other interested parties."  Again, despite these arguments (including arguments that Abbott's pricing was preventing state government agencies from providing Norvir® to patients), the NIH again refused to exercise its march-in rights, saying:

[T]he issue of the cost or pricing of drugs that include inventive technologies made using Federal funds is one which has attracted the attention of Congress in several contexts that are much broader than the one at hand.  In addition, because the market dynamics for all products developed pursuant to licensing rights under the Bayh-Dole Act could be altered if prices on such products were directed in any way by NIH, the NIH agrees with the public testimony that suggested that the extraordinary remedy of march-in is not an appropriate means of controlling prices.  The issue of drug pricing has global implications and, thus, is appropriately left for Congress to address legislatively.

(Interestingly, as a result of this petition, Abbott agreed to exempt governmental purchasers, both Federal and state, from the price increase, a circumstance raised in the most recent petition.)

Essential Inventions filed another petition in 2005, this time involving Pfizer's glaucoma drug Xalatan®.  The grounds for this petition were also drug price but here the actual costs ($64/4-6 week supply) were much less than the costs for Norvir® (up to ~$14,000/year).  In this case, the drug was developed by researcher at Columbia University (owner of U.S. Patent No. 4,359,353) and licensed exclusively to Pfizer; the NIH noted that there were other patents owned by Pfizer that relate to the drug but are not covered by march-in rights.  Petitioners compared the cost of the drug in the U.S. with costs in Canada and several European countries (and disregarded the fact that the comparison is with countries having government-subsidized medical systems).  The petitioners proposed substantially the same terms for licensing under the exercise of the NIH's march-in rights for this drug as they had for Norvir® and the NIH refused to exercise the rights for essentially the same reasons (repeating verbatim its opinion that controlling drug prices was something best left to Congress).

The most recent petition where the NIH has made a determination arose under circumstances where the exclusive licensee, Genzyme, developed manufacturing difficulties that severely reduced the availability of its licensed drug for treating Fabray's disease, Fabrazyme®.  The petition was filed on behalf of three patients (Joseph M. Carik, Anita Hochendoner, and Anita Bova) and alleged as the basis for exercise of march-in rights that Genzyme could not adequately satisfy the public health need for the drug.  Here, the drug, agalsidase beta, was developed at Mt. Sinai School of Medicine (owner of U.S. Patent No. 5,356,804) and exclusively licensed to Genzyme.  The petitioner requested an "open" license (citing such licenses granted by IBM as part of computer standard setting and by Microsoft as part of the settlement of the government's antitrust action against that company), and also wanted any such license to extend to commercial "know-how" including recombinant cell lines expressing the drug.  The NIH once again refused to exercise its march-in rights, in this case on the grounds that permitting other licensees under march-in would not solve the problem, due to the time needed (for clinical studies and regulatory approval) to get the drug to market (see "HHS Denies Request to Exercise Bayh-Dole 'March-in' Rights for Fabrazyme").  The agency also cited the diligence exhibited by Genzyme in addressing the problem and planning to have full production sufficient to satisfy the patient population within about 24 months from when the manufacturing difficulties arose.  The agency also noted that there were "at least 5 other companies worldwide [] engaged in commercial development of alternative treatments" that would not need to license Mt. Sinai's patents to enter the marketplace.

In the latest petition, the allegations again involve the cost of Abbott's Norvir® to U.S. patients.  In view of the agreement following the 2004 petition that has Abbott selling the drug to state and Federal government agencies at reduced cost (i.e., not subject to the ~400% price increase), the petition focuses on the impact of these costs on private parties.  In this regard the petitioners argue that, in view of the financial crisis, these high[er] drug costs were "undermining the international competitiveness of [U.S.] employers" and harming the economy (leaving unsaid the hope for a different outcome from a different administration).  The economic aspect of the argument is accented by a quotation from a speech by President Obama to the AMA on June 15, 2009, where he said, inter alia, that the cost of health care "is a threat to our economy."  Specifically, the petition argues that:

While at one point in time the U.S. economy was so healthy and dominant it could ignore such concerns [regarding the effects of higher drug costs on the economy], this is no longer the case.  The U.S. economy as a whole is now smaller than the combined economy of the members of the European Union.  Between 1970 and 2011, the U.S. share of the global GDP declined from 35 percent to 22 percent, and the U.S. share of high-income country GDP has declined from 45 percent to less than 34 percent.

With the current financial crisis, U.S. unemployment is at high levels, our share of global GDP has shrunk sharply since 2000, and we no longer can afford the luxury of paying more for drugs invented on NIH grants than do our trading partners in other high income countries.

The petition asks for two specific remedies to be imposed "without prejudice to" further march-in rights in response to "anticompetitive, abusive or unfair practices" by a licensee.  These remedies are:

• A ceiling on prices for U.S. residents, to be imposed when US prices for a drug are higher than 7 of 10 comparison countries, among "high income" countries as determined by the World Bank, or prices for U.S. residents, when are 10% higher than the median price in those countries (these circumstances would be "presumptively not reasonable" under the statute); and

• Licenses specific for use of a patented invention in the development of a "dependent" technology, such as a co-formulation of a patented drug with another drug.

In addition, the petition requests imposition of "open" licensing for the drug under the agency's march-in rights provisions.  Petitioners suggest two additional "legal mechanisms" for achieving these ends:  royalty-free government licenses (involving participation by the government in drug distribution, etc.) and the grant of government licenses to third parties.

In addition to the public health and unreasonable licensing grounds asserted in the petition, petitioners further argue that the Americans with Disabilities Act (as it has been interpreted by the Equal Employment Opportunities Commission) and the PPACA (the "healthcare law") impose requirements on employers that implicate the provisions of § 203(a)(3) that allow the agency to exercise march-in rights to permit compliance with Federal regulations.  The petitioners clearly are using this case as a stalking horse for a more extensive assault on drug prices, noting that there are several other drugs that they believe should be subject to the price ceiling and open licensing, including sitagliptin (Januvia®) and Tobrex® (ophthalmic tobramycin).  Finally, the petition asserts the policy rationale that "[t]he failure to grant a single march-in request in more than 30 years has sent a signal to the patent holder that the NIH will permit almost anything, no matter how abusive that action is to the public that paid for the research."

Under the relevant regulations, the agency has 60 days to make a decision, which would occur after the election and may provide a Christmas present for the petitioners.  One fact is clear:  consumers of technology, not producers, are motivated to exercise the relevant provisions in the law to influence government to provide extra-agency regulation of the drug marketplace and to essentially chose the economic "winners" and "losers" in so doing.  It is well to remember how famously government control of markets failed during the major part of the last century, during a time when the West was experiencing technological and economic rejuvenation after a century of world warfare.  In a particular instance there may be a justification for the government to use its march-in rights to protect the public health, such as an epidemic or natural disaster, or when a company harms the public health by preventing commercialization of technology (something truly contrary to the "purpose" of the Bayh-Dole Act).  Prudence suggests, however, that government regulation of drug prices should occur only under circumstance where there is government regulation of everything else, and that that eventuality should arise sparingly and rare.

ABA Journal Accepting Nominations for 6th Annual Blawg 100

The ABA Journal has begun work on its 6th annual list of the 100 best legal blogs (or blawgs) and has announced that it is seeking the advice of its readers, via the ABAJournal.com website, on which blawgs and practice areas to include on this year's Blawg 100.  Readers interested in nominating a particular blog or practice area should use the blawg 100 amici form provided on the ABA Journal website.  Additional information about the Blawg 100 can also be found on the blawg 100 amici form.  The form requires that anyone making a nomination provide a name, employer or law school, city, and e-mail address.  The ABA Journal requires this information in order to discourage:

• Blawggers who nominate their own blawgs or nominate blawgs to which they have previously contributed posts.
• Wives and husbands who nominate their spouses' blawgs.
• Employees of law firms who nominate blawgs written by their co-workers.
• Public relations professionals in the employ of lawyers or law firms who nominate their clients' blawgs.
• Pairs of blawggers who have clearly entered into a gentlemen's agreement to nominate each other.

The ABA Journal, however, welcomes comments from readers who do not fall into the above categories.

Nominations must be submitted no later than Friday, September 7.

Happy Holidays from Patent Docs

The authors and contributors of Patent Docs wish their readers and families a Happy Holidays.  Publication of Patent Docs will resume on December 26th.

Happy Thanksgiving from Patent Docs

The authors and contributors of Patent Docs wish their readers and families a Happy Thanksgiving.  Publication of Patent Docs will resume on November 25th.

Nomination Period for ABA Blawg 100 Closes September 9th

Last month, the ABA Journal began work on its 5th annual list of the 100 best legal blogs (or blawgs) and announced that it is seeking the advice of its readers, via the ABAJournal.com website, on which blawgs and practice areas to include on this year's Blawg 100.  Readers interested in nominating a particular blog or practice area should use the blawg 100 amici form provided on the ABA Journal website.  Additional information about the Blawg 100 can also be found on the blawg 100 amici form.  The form requires that anyone making a nomination provide a name, employer or law school, city, and e-mail address.  The nomination period for the ABA Blawg 100 closes on Friday, September 9th.

ABA Journal Accepting Nominations for 5th Annual Blawg 100

Last week, the ABA Journal began work on its 5th annual list of the 100 best legal blogs (or blawgs) and announced that it is seeking the advice of its readers, via the ABAJournal.com website, on which blawgs and practice areas to include on this year's Blawg 100.  Readers interested in nominating a particular blog or practice area should use the blawg 100 amici form provided on the ABA Journal website.  Additional information about the Blawg 100 can also be found on the blawg 100 amici form.  The form requires that anyone making a nomination provide a name, employer or law school, city, and e-mail address.  Nominations must be submitted no later than Friday, September 9.

Congressional News Briefs

By James DeGiulio --

H.R. 2015 Introduced in House to Improve System of Federally Funded Research

On May 26, Rep. Chaka Fattah (D-PA) (at right) introduced The American Discoveries - American Jobs Commission Act of 2011 (H.R. 2015), which is designed to stimulate American job growth, advance federal research and development efforts, and support the training of future scientists.  The federal government spends nearly $130 billion annually on research and development.  This federal funding often leads to marketable innovations, but the government does not have a mechanism to benefit financially from these successes.  Rep. Fattah contends the federal government should be given the same opportunities as the academic and the private sectors, which derive royalties from intellectual property rights and can reinvest these generated funds for additional research.

The bill will establish a commission to study and recommend improvements to the existing system of federally funded research.  The new commission will weigh the benefits of collecting royalties from government subsidized research that leads to the commercialization of products.  The collected royalties would be reinvested in federal agencies in order to fund future research projects.  In addition to evaluating a new system of royalties, the commission will also confirm that products developed with federal research funds are manufactured in the United States.  This would not only produce jobs but guarantee broader benefits from initial investments.

H.R. 2015 has been referred to the House Committee on Science, Space, and Technology.

House Forms Affordable Medicines Caucus to Promote Use of Generic Drugs and Biosimilars

On May 12, Reps. Jo Ann Emerson (R-MO) (at right) and Peter Welch (D-VT) (below) founded the Congressional Affordable Medicines Caucus, with the goal of facilitating future legislation that leads to the wider use of generic drugs, including follow-on biologics.  The lawmakers have started recruiting additional members and will craft a caucus agenda when the initial member drive is finished.

The primary goals of the new caucus are slowing the expansion in health care spending and promoting the need to work across party lines to solve problems.  The caucus intends to lobby the Food and Drug Administration for an expansion in funding for the Office of Generic Drugs.  Congress' recent focus on federal deficit reduction could provide a window of opportunity for drug importation to gain more traction.  The caucus may decide to support importing less expensive drugs from outside the U.S. to reduce health care costs, noting the substantial premium that Americans pay for pharmaceuticals compared with the rest of the world.  The caucus founders are hopeful that the new group can generate support for its proposed generic drug policies, which have faced stiff opposition from strong lobbying by brand pharmaceutical companies, which oppose importation on patient safety grounds.

The Generic Pharmaceutical Association (GPhA) applauded the creation of the new caucus, according to a press release issued by the industry group last month.  In particular, the GPhA supports the caucus' stated goals of increasing the utilization of generic drugs for Medicare and Medicaid, programs which currently fail to effectively take advantage of the savings offered by generic drugs.  The Centers for Medicare and Medicaid Services has estimated that as little as a 2% increase in generic utilization by Medicaid would save the program more than $1.3 billion.  A 5% increase could save nearly $3.3 billion.

Supreme Court Increases Disclosure Burdens on Pharma Companies

By Kevin E. Noonan --

As it has done in other areas of the law recently (such as Bell Atlantic Corp. v. Twombly), the Supreme Court on Tuesday addressed the requirements for pleadings sufficient to survive a motion to dismiss a complaint for securities law violations, in Matrixx Initiatives Inc. v. Siracusano.  The Court's decision provides a reasoned basis for where it decided to draw the line for such pleadings.  However, by engaging in its penchant for "totality of the circumstances" analyses, its decision did little to clarify the behaviors pharmaceutical companies should exhibit to avoid the kinds of liability that Matrixx will be put at risk at trial.

The case involved Zicam Cold Remedy, an over-the-counter zinc gluconate formulation used to combat the common cold that was responsible for about 70% of the company's sales.  During the relevant time period, Matrixx was alleged to have become aware from several sources of a serious side effect of using Zicam, specifically anosmia or loss of the sense of smell.  In 1999, a customer service representative was told by the neurological director of the Smell & Taste Treatment and Research Foundation, Ltd. that a "cluster of patients" had suffered from anosmia after using Zicam to treat their cold symptoms (and including an individual who did not have a cold when she used the product).  Three years later, the company's Vice President for Research and Development contacted a scientist, Dr. Miriam Linschoten, at the University of Colorado Health Sciences Center after receiving a complaint about Zicam-induced anosmia, and the scientist recounted the results of "previous studies linking zinc sulfate [a different zinc-containing compound] to loss of smell."  This scientist followed up with abstracts from these studies, dating from the 1930's and 1980's that "confirmed '[z]inc's toxicity.'"  And about a year later, one of Dr. Linschoten's colleagues, Dr. Jafek, "observed 10 patients suffering from anosmia after Zicam use," and together these scientists prepared a poster for presentation at a meeting of the American Rhinologic Society.  Upon hearing of these plans, the company warned the scientists that they did not have permission to use the Matrixx company name or the names of the company's products (Zicam) and the scientists deleted this information from their poster presentation.  Shortly thereafter, two patients sued Matrixx in a products liability lawsuit based on Zicam-related anosmia; this number had increased to nine patients and four lawsuits by the end of the relevant time period in this case.

According to plaintiff/respondent investors, Matrixx reacted to these events with a series of public statements that were misleading and amounted to securities fraud.  These statements related in large part to the company's financial prospects, including estimates that "revenues 'would be up in excess of 50%'" as well as similar predictions regarding share earnings for investors.  Later, the company increased its rosy forecast to have revenues increasing by 80%.  The company acknowledged the products liability suits in required SEC filings (Form 10-Q) but did not disclose that such suits had already been filed.  In addition, the company responded to a Dow Jones Newswires story relating to reports of anosmia as a consequence of Zicam use (and the concomitant drop in share price by almost 12%) by releasing a statement that the company believed the allegations that Zicam use caused anosmia were "completely unfounded and misleading," further stating that:

In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or di­minished olfactory function (sense of smell).  Rather, the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established in two double-blind, placebo­controlled, randomized clinical trials.  In fact, in nei­ther study were there any reports of anosmia related to the use of this compound.  The overall incidence of adverse events associated with zinc gluconate was extremely low, with no statistically significant difference between the adverse event rates for the treated and placebo subsets.

A multitude of environmental and biologic influences are known to affect the sense of smell.  Chief among them is the common cold.  As a result, the population most likely to use cold remedy products is already at increased risk of developing anosmia.  Other common causes of olfactory dysfunction include age, nasal and sinus infections, head trauma, ana­tomical obstructions, and environmental irritants.

These statements resulted in an almost complete rebound of Matrixx's share price.  The share price plummeted even further, however, (by over one-quarter of their value) when Good Morning America aired a segment highlighting Dr. Jafek's research results relating Zicam use to anosmia and disclosing the existence of four product liability lawsuits.  Matrixx persisted in its public statements that the link between Zicam use and anosmia was without merit, and filed documents (SEC Form 8-K) that it had convened a scientific panel that had concluded that there was "insufficient scientific evidence" that Zicam affected sense of smell in users.  These statements formed the basis of plaintiff/respondents' complaint.

Plaintiff/respondents brought a class action lawsuit for securities fraud under Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, codified at 17 C.F.R. § 240.10b.5, for actions and statements by the company made between October 22, 2003 and February 6, 2004, which were allegedly misleading based on Matrixx's knowledge of the adverse events.  The District Court dismissed, based on a failure of plaintiffs to allege a "statistically significant correlation between [Zicam use] and anosmia," which made the failure to disclose the University of Colorado study insufficient to be a material omission.  The District Court also held that plaintiffs did not plead scienter with sufficient specificity.  The Ninth Circuit reversed, holding that the District Court erred in requiring statistical significance and that Matrixx's actions constituted a "strong inference of scienter."  The Supreme Court granted certiorari and affirmed the District Court.

Writing for a unanimous Court, Justice Sotomayor started with the language of the statute, that Section 10(b), Securities and Exchange Act and SEC Rule 10b-5 made it unlawful for "any person" to "make any untrue statement of a material fact or to omit to state a material fact necessary . . . to make the statements . . . not misleading."  The standard for prevailing in a complaint for securities fraud under the statute is "'(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation,'" citing Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 552 U. S. 148, 157 (2008).  Here, Matrixx had alleged that plaintiff/respondents had not plead the material misrepresentation/omission element and the scienter element, both based on the failure to allege that Matrixx had statistically significant evidence linking Zicam use with anosmia.

The Court categorically rejected the view that a material misrepresentation/omission required this level of scientific evidence.  Citing Basic Inc. v. Levinson, 485 U. S. 224, 236 (1988), the materiality requirement can be satisfied "when there is "'a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.'"  The intention, according to the Court's opinion, was to enunciate a standard that would not encourage a company to "bury the shareholders in an avalanche of trivial information," which would presumably be just as harmful to an investor as a failure to disclose.  The Court cited Basic for the proposition that materiality, which is an inherently fact-specific element, should not be decided on the basis of any "single fact or occurrence," because that approach would be "necessarily [] overinclusive or underinclusive."  The Court characterized Matrixx's position as requiring a "bright-line rule" for materiality in securities fraud actions relating to adverse event reports for pharmaceuticals, i.e., to require statistically significant evidence thereof before a disclosure requirement was triggered under the securities laws.  Behind this position was the idea that "reasonable investors would not consider such [adverse event] reports relevant unless they are statistically significant," because otherwise such "anecdotal" reports could not "'reflect a scientifically reliable basis for inferring a potential causal link between product use and adverse event."

The Court in rejecting this argument asserted that under such a bright-line standard information that "would otherwise be considered significant to the trading decision of a reasonable investor" would be "artificially exclude[ed]," because such a standard "rests on the premise that statistical significance is the only reliable indication of causation."  "This premise is flawed," according to the Court, because there are "multiple factors" that medical researchers use to assess causation (citing the government's amicus curiae brief).  In some cases, statistically significant data is simply not available, such as when an adverse event is "subtle or rare," the Court states, citing an amicus brief from the Medical Researchers, or "ethical concerns" may preclude the kinds of clinical studies necessary to establish statistical significance.  The Court noted a plethora of other "relevant factors" for assessing adverse events, including "the strength of the association between the drug and the adverse effects; a temporal relationship between exposure and the adverse event; consistency across studies; biological plausibility; consideration of alternative explanations; specificity (i.e., whether the specific chemical is associated with the specific disease); the dose-response relationship; and the clinical and pathological characteristics of the event," citing defendant/petitioners and an amicus brief for the Consumer Healthcare Products Assn. et al.; these are also factors that the FDA takes into account before "taking action against pharmaceutical products" according to the Court, citing the FDA Guidance for Industry: Good Pharmacovigilance Practices and Pharmacoepidemiologic Assessment 18 (2005).  Further citing FDA standards, the opinion noted that the Agency frequently takes action (such as requiring warning labels) "as soon as there is reasonable evidence of an association of a serious hazard with a drug" without requiring that causation has been established.  Indeed, in this case the FDA issued a warning letter (in 2009) that "[a] significant and growing body of evidence substantiates that the Zicam Cold Remedy intranasal products may pose a serious risk to consumers who use them" based on evidence of 130 adverse event reports of anosmia as well as scientific journal articles.

In view of the fact that "medical professionals and regulators act on the basis of [scientific] evidence of causation that is not statistically significant," the Court asserted that it "stands to reason" that the reasonable investor might also be able to do so.  Thus, the question of the materiality of such information, and whether it needs to be disclosed under the securities laws is "fact-specific" and requires an assessment of "the source, content and context of the reports" -- in other words, the totality of the circumstances surrounding the evidence of adverse events (designated in Basic and cited here with approval as the "total mix" standard).  The opinion noted that it does not intend to interpret the securities laws as "creating an affirmative duty to disclose any and all material information," including adverse event information but only that information that is necessary to make statements not misleading.  "Even with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market."

Here, the Court held that plaintiff/respondents had adequately plead materiality based on the totality of the circumstances surrounding Matrixx's statements (noting in Footnote 10 that this conclusion "accords with the views of the SEC" as evidenced by the Commission's amicus brief).

The opinion turns but briefly to the question of whether plaintiff/respondents adequately plead the scienter element, noting that Matrixx argued "in summary fashion" that the absence of statistical significance was sufficient to defeat this prong of the required pleading.  The Court disagreed, stating that the inference that Matrixx acted "recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions" to Zicam administration.  The Court noted the company's actions both to investigate the alleged connection between Zicam and anosmia and to suppress this information, as well as its statements "suggested that studies had confirmed that Zicam does not cause anosmia when, in fact, it had not conducted any studies relating to anosmia and the scientific evidence at that time, according to the panel of scientists, was insufficient to determine whether Zicam did or did not cause anosmia."  The totality of these circumstances (or "[t]hese allegations 'taken collectively'") was enough for the Court to conclude that plaintiff/respondent's allegations of scienter in their pleadings were sufficient to withstand a motion to dismiss (but "[w]hether respondents can ultimately prove their allegations and establish scienter is an altogether different question").

While not an unreasonable conclusion, the Court's decision imposes additional and unpredictable burdens on pharmaceutical companies even under conditions that may on their face appear less egregious than in this case.  With regard to materiality, the "totality of the circumstances" standard replaces a scientific basis for assessing the significance of adverse events with a court's ex post facto view of what should or should not have been disclosed.  There are certainly instances where the circumstances will make such a determination readily apparent, but there will also be others where some objective standard is not only necessary but also responsible if drugs are to timely come to market.  While not discounting the deleterious consequences of some adverse events, it is not possible for any pharmaceutical to have no adverse events; the standard must take into account the frequency and severity of such adverse events in balancing the relative good with harm for any particular drug.  Statistical significance is one but not the only standard, as the Court rightly concludes, but it has the advantage of being an objective basis that can be successfully used to distinguish from the merely anecdotal.  It is foolish not to recognize that courts by necessity act well after the fact, and it is perhaps easier to assess the "totality of the circumstances" from their viewpoint.  This decision does not reach the merits, but it does illustrate that eschewing scientific standards for judicial second-guessing can be fraught with unforeseen and unnecessary dangers for pharmaceutical companies and their customers alike.

Happy Holidays from Patent Docs

The authors and contributors of Patent Docs wish their readers and families a Happy Holidays.  Publication of Patent Docs will resume on December 26th.

HHS Denies Request to Exercise Bayh-Dole "March-in" Rights for Fabrazyme

By James DeGiulio --

On August 2, patients with the rare Fabry disease petitioned the Department of Health and Human Services to exercise the "march-in" powers under the federal Bayh-Dole Act, and issue an open license to use patents needed to manufacture Genzyme's enzyme replacement drug Fabrazyme (see "Genzyme's Manufacturing Issues with Fabrazyme Prompt Patients to Petition HHS Secretary to Exercise Bayh-Dole "March-in" Rights").  Not surprisingly, in a letter to the patients' attorney C. Allen Black, Jr., the NIH denied the petitioners' request.  Despite recognizing the situation as grave, the NIH found there is no manufacturer situated to readily acquire FDA approval to manufacture Fabrazyme even under a march-in license.

Genzyme, which produces Fabrazyme under an exclusive license from Mount Sinai Medical Center, has been unable to produce enough drug to treat the U.S. Fabry disease market since 2009 due to various manufacturing issues.  Initially, Genzyme's bioreactors were contaminated by a virus, and later, vials for injection were produced containing foreign contaminates.  Once the supply got so low that patients were rationed to only 30% of the recommended dosage and no newly diagnosed patients were eligible for therapy, the petition was brought by Fabry patients who asked HHS to grant an open license to U.S. Patent Nos. 5,356,804 and 5,580,757.

Francis Collins, the Director of the NIH, signed off on the determination opinion in the Fabrazyme case.  The opinion presents a primer on the process for bringing a biological product to market, which requires "substantial time, effort, and resources, irrespective of any patent rights."  A manufacturer must procure clinical materials, gather preclinical data, and ensure safety before FDA will approve an Investigational New Drug Application to authorize beginning clinical trials.  Following sufficient clinical trials, the Biologic License Application must be approved by the FDA, whose review can take ten months at minimum (six with priority status).  In light of the regulatory hurdles that another manufacturer would have to overcome even with a license to the Genzyme patents, the NIH determined that exercising march-in rights at this time would not address the lack of Fabrazyme supply because it would simply take too much time for FDA approval.  Further, Genzyme has indicated that it expects the production of Fabrazyme to be back to full levels in the first half of 2011, which should address the shortage.  The NIH has agreed to monitor the situation, and has requested that Mount Sinai provide monthly reports on Genzyme's manufacturing process, and will reconsider its opinion upon receiving any unfavorable updates.

Mount Sinai has also agreed with the NIH not to seek injunctions against any infringers of the Fabrazyme patents.  Nonetheless, the petitioners plan to appeal the NIH decision and argue that the HHS approved the FDA rules that block companies from manufacturing the drug in a timely manner under Bayh-Dole, even thought the HHS controls the FDA and the NIH.  If history is any indication, there may be something to the irony of their argument.  This month marks the 30th anniversary of the Bayh-Dole Act, and the march-in provision has yet to be exercised in the three decades of the legislation's existence.

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U.S. Patent No. 6,708,440: Turkey Decoy

    By Christopher P. Singer --

In the spirit of the Thanksgiving holiday, we take a closer look at U.S. Patent No. 6,708,440, entitled "Turkey Decoy" (which is admittedly outside our usual biotech/pharma focus).  The '440 patent addresses a problem that has long-plagued the turkey hunting arts, specifically that prior turkey decoys were not laterally mobile and did allow for "movement of the tail to include outward fanning . . . or movement of the wings and/or back."  The result is striking; as described in claim 1, we seem to be one Cyberdyne Systems neural net CPU away from another James Cameron box office smash.

Claim 1:  A turkey decoy, comprising:
    a flexible skin covering at least a portion of said turkey decoy;
    a robotic frame for supporting said at least a portion of said turkey decoy, said robotic frame further, comprising:
        1) a mobile carriage mounting to a mobile base for traversing over the ground surface;
        2) at least one post having a vertical axis projecting upwardly from said mobile carriage;
        3) a central frame member supported on said least one post defining a body;
        4) a neck supporting frame portion mounting on said central frame member projecting from a first end thereof;
        5) a tail supporting frame portion pivotally secured to said central frame member projecting from a second end thereof said tail supporting frame portion defining a tail of said turkey decoy including at least a pair of tail members moveable relative to one another for selectively varying the width of said tail of said turkey decoy;
        6) a first pair of moveable arms mounted on said central frame member for supporting a pair of wing defining portions of said turkey decoy;
        7) at least one remotely actuated motor for driving said mobile base;
        8) a second remotely actuated motor in cooperative engagement with said tail supporting frame for moving said tail up and down and/or for moving said at least a pair of tail members relative to one another; and
        9) a third remotely actuated motor for rotating said body of said turkey decoy about the vertical axis of said at least one post; and
        10) said remotely actuated motors being powered by at least one battery mounting on said mobile carriage and being controlled by an RF receiver mounted thereon in communication with a remotely located hand held RF transmitter.

The Figures are particularly "chilling" --

                                        Delectable poultry?

Or a lethal fowl that "can't be bargained with, it can't be reasoned with. It doesn't feel pity or remorse or fear and it absolutely will not stop, ever, until you are dead!!"

Have a Happy and Safe Thanksgiving weekend! -- The Patent Docs.

Modeling a Zombie Infection Outbreak

    By Andrew Williams --

As many children and partygoers prepare to dress up as the undead for trick-or-treating fun or Halloween-themed parties, the scientific community is taking the potential of a Zombie attack more seriously.  A group of mathematicians at the University of Ottawa and Carleton University (also in Ottawa) have prepared a paper for the up-coming book "Infectious Disease Modelling Research Progress," in which they have not only introduced and refined a basic model for zombie infections, they derive conditions under which Zombie eradication can occur.  Dr. Robert Smith? (below), who is an assistant professor in the Department of Mathematics and Statistics and on the Faculty of Medicine, who should not to be confused with the lead singer of the The Cure, compares the modeling of a zombie attack to the modeling any new disease.  "We refined the model again and again to say . . . here's how you would tackle an unfamiliar disease," explains Dr. Smith? (see "The zombies are fictional: the science is real").  And, in case you were wondering, the question mark is not a typographical error -- according to records in Australia, it is actually part of Dr. Smith?'s name (see "Welcome to the homepage of Robert Smith?").

For those who are not familiar, a zombie is defined as "a reanimated human corpse that feeds on living human flesh" (see Munz, P., et al., "When Zombies Attack!: Mathematical Modelling of an Outbreak of Zombie Infection," in Infections Disease Modelling Research Progress (Tchuenche and Chiyaka, eds., 133 (2009)), citing Brooks, Max, 2003 "The Zombie Survival Guide – Complete Protection from the Living Dead" (Three Rivers Press, pp. 2-23)).  Dr. Smith? and colleagues chose to model their zombies after the slow moving and cannibalistic undead of classical pop-culture, rather than the faster moving and smarter zombies of recent films (id. at 134-35).  The basic model includes three classes, Susceptible, Zombie, and Removed (those that have died, either through attack or natural causes) (id. at 135).  New zombies can only result from (1) the resurrected humans from the Removed class, or (2) members of the Susceptible class that have lost an encounter with a zombie (id.).  In addition, members of the Zombie class can only be moved to the Removed class by decapitation or destroying the brain of the zombie (id.).  The basic model, therefore, looks like this:

where δ is the rate of Susceptibles that become deceased through natural causes, ζ is the rate of humans in the Removed class that resurrect and become zombies, β is the rate of Susceptibles that become Zombies through an encounter with a zombie, π is the birth rate, and α is the rate of Zombies that are destroyed (id. at 135-36).  Of course, this model had to subsequently be revised to include a latent class of infected individuals, because as everyone knows, there is an approximately 24-hour period between a human getting bit by a zombie and succumbing to the wound (id. at 137).  The other models also took into account the effect of a partial quarantine of zombies, the possibility of the quick development of a zombie cure, and the results of impulsive eradication (id. at 140-46).

The researchers conclude that "a zombie outbreak is likely to lead to the collapse of civilization, unless it is dealt with quickly" (id. at 146).  They found that even though it may be possible to eradicate the infection with aggressive quarantine, it is likely that only sufficiently frequent attacks with increasing force will result in eradication (id.).  And this is only if the timescale of the outbreak is short -- if the timescale increases, human births and deaths would provide the zombies with a limitless supply of new bodies (id.).  Therefore, the researchers warn, "if zombies arrive, we must act quickly and decisively to eradicate them before they eradicate us" (id.).  Dr. Smith? and his colleagues do recognize that a zombie attack is unrealistic, but the scenarios that they provide are instructive to help develop mathematical models for unusual infectious disease outbreaks (id.).  Their work helps demonstrate how mathematical modeling can be used to respond to a wide variety of "biological" challenges.  Regardless, I, for one, will sleep better tonight knowing that Dr. Smith? and others are on the forefront of both infectious disease modeling, as well as zombie eradication.

A copy of Dr. Smith?'s report can be found here, and the book can be pre-ordered here.