Supreme Court Fails to Grant Certiorari in Monsanto Co. v. McFarling

    By Kevin E. Noonan --

Once recombinant cells were deemed to constitute patentable subject matter by the U.S. Supreme Court in Diamond v. Chakrabarty, fundamental properties of such cells began to pose new challenges to traditional patent law concepts.  One such property is that these cells were capable of replicating to produce copies of themselves.  Unlike mechanical devices that are governed by conventional distinctions between repairing a patented device and reconstructing it (see Aro Manufacturing Co., Inc. v. Convertible Top Replacement Co., Inc., 365 U.S. 336 (1961)), the nature of a recombinant cell is to produce more recombinant cells.  To paraphrase an old adage, if you give a man a recombinant cell (or, more typically, about 10,000,000 recombinant cells), you have given him recombinant cells forever.

This unique property of cells has raised some interesting legal questions.  For example, in Amgen v. Elanex Pharmaceuticals, an inventor at the defendant's licensor, the University of Washington, had produced a recombinant cell line producing human erythropoietin prior to the grant date of Amgen's patent (U.S. Patent No. 4,703,008) claiming EPO-producing recombinant cells (see 1996 U.S. Dist. LEXIS 22015 (W.D. Washington 1996)).  Large numbers of these cells were grown and frozen in liquid nitrogen and kept as a cell bank, also prior to Amgen's patent grant date.  One basis for Amgen's infringement action on this patent was that Elanex thawed vials of these cells, grew them in culture, and shipped aliquots of these cells to Canada.  Elanex took the position that the term "making" in the language of 35 U.S.C. § 271(a) defining infringement did not apply to these activities, since the recombinant cells were "made" (i.e., transformed with an EPO-encoding vector) prior to Amgen's patent, and its use of the frozen cells to "grow up" additional cells was merely the result of a "natural process" and thus non-infringing.  Amgen contended that the act of taking a frozen aliquot of recombinant cells, growing them and thus producing additional recombinant cells, was a "making" of these additional cells under the plain meaning of the statute.  The District Court decided that, in either case, Elanex undeniably "used" the frozen, infringing cells, and granted summary judgment to Amgen.

In other contexts, the question arises with relation to sales of a recombinant cell.  It is almost without question that the sale of a sample of a recombinant cell does not give the purchaser the right to make unlimited quantities of the recombinant cells and sell them to others, absent an express agreement permitting such sales.  And yet, recombinant cells cannot be "used" effectively without some cell growth and amplification.  These aspects need to be considered in recombinant cell purchasing agreements and licenses of the technology, and generally such considerations have been taken into account when cells and nucleic acid vectors are provided by vendors.  (It is commonplace, for example for such reagents to contain so-called "label licenses" prohibiting diagnostic use absent an additional license; this practice has been notorious with regard to the polymerase chain reaction, for example.)

The same issues arise with recombinant plants, particularly seeds.  This problem has arisen before, during the "green revolution" of the 1960's, when U.S. seed companies provided agricultural aid and assistance to third-world countries.  This "aid" included hybrid strains of common plants like corn, wheat, soybeans, and rice, which were developed to take advantage of the "hybrid vigor" found in the phenotype of these plants.  An additional feature of this aid was creation of a continuing customer stream, since the hybrid plants were typically infertile, requiring farmers to purchase new seed each growing season.  This feature of U.S. farm aid programs produced ill feeling and a backlash against such hybrid seed, despite the increased yields (at least several-fold) farmers would typically obtain over conventional seed (see John Seabrook, Annals of Agriculture, "Sowing for Apocalypse," The New Yorker, August 14, 2007).

The modern-day equivalent of this dispute is over genetically-modified crops.  A major case involving the limits of the restrictions a company can place on after-sale use of seed as a patented article is Monsanto Co. v. McFarling.  Specifically, the issue in the McFarling case is using seeds from recombinant plants to produce additional plants in one year from seed obtained the previous year.  Monsanto sells patented seeds to a variety of crop plants, including soybeans, that are resistant to Monsanto's Roundup® glyphosphate herbicide.  These sales are conditioned by an agreement, termed the "Technology Agreement" (signed in this case by the defendant) that requires purchasers to pay a one-time license fee of $6.50 per 50 lb. bag, and agreeing not to plant themselves, or supply to others, "saved" seeds, i.e., seeds produced from the originally purchased seeds.  Just like with the hybrid seeds sold during the "green revolution" a generation ago, this system ensured that farmers purchase and license Roundup Ready® soybean seeds each planting season.  Roundup Ready® seeds are sold at a cost of about $20 per bag.

As reported earlier this year on Patent Docs, the Federal Circuit affirmed a District Court finding that McFarling infringed Monsanto's U.S. Patent No. 5,352,605 over two growing seasons, with damages in the amount of $40 per bag.  The Court held that this amount was justified, despite it being higher than the liquidated damages provisions in the sales agreement, and affirmed a total jury award of $375,000 against McFarling, an individual farmer.

McFarling petitioned the Supreme Court for a writ of certiorari, being represented (as he was before the Federal Circuit) by patent academic Mark Lemley (at left) of Stanford.  The question was presented to the Court in two parts:

1.  In determining a "reasonable royalty" under the patent-damages statute, 35 U.S.C. § 284, may the factfinder award the patentee either:
    (a) a hypothetically negotiated royalty that vastly exceeds the established royalty charged in the marketplace, or
    (b) a royalty that includes damages to the patentee's third-party distributors and is intended to force the infringer to disgorge his profits-even though Congress eliminated the equitable disgorgement remedy in 1946?

2.  Do the doctrines of patent exhaustion and patent misuse permit the purchaser of a patented good to use that good and dispose of its products as it sees fit, absent a valid contract?

With regard to Question #2 of his Petition, McFarling argued that the infringing seed were a "natural product" of the seeds he had purchased, and that the doctrines of patent exhaustion and patent misuse precluded Monsanto from recovering for patent infringement.  (In the District Court, Monsanto had abandoned its breach-of-contract claims under the Technology Agreement, and the damage award was based solely on patent infringement liability.)  The Petition characterized replanting seeds as the "ordinary and expected use" of the patented seed product, and thus that a determination of infringement was contrary to settled principles of patent exhaustion (but see Rich, G.S., 6th Annual Conference on Intellectual Property Law and Policy, Fordham University, April 16, 1998, in Chisum et al., Principles of Patent Law: Cases and Materials, 2d Ed., New York: Foundation Press, 2001, pp. 1120-21).  Appealing to the Court's recent penchant for exercising its supervisory authority over the Federal Circuit's patent jurisprudence (see "Is It Time for the Supreme Court to Stop Flogging the Federal Circuit?"), the Petition argued that the McFarling decision "completes the Federal Circuit's decades-long effort to circumscribe this Court's patent exhaustion precedent."

In support, the Petition cites Adams v. Burke, 84 U.S. 453 (1873) and U.S. v. Univis Lens Co., 316 U.S. 241 (1942).  While certainly the lead cases in this area, their value as current precedent has been questioned, for example, by the authors of the Chisum volume, who opine that:

Readers of these cases must remember that Univis was written in the tumultuous legal environment of the post depression New Deal era during which intellectual property laws and other industrial practices were markedly affected by new and expanding antitrust doctrines.  The 1952 Patent Act revived contributory infringement, substantially narrowed patent misuse, and thereby statutorily overruled cases doctrinally related to Univis [citations omitted].  And it is likely that Univis would not be decided the same today.

The McFarling Petition relies most heavily on the Univis case, making the strained analogy between the seeds in Monsanto and the eyeglass lens blanks in Univis that were used by the purchaser to make eyeglasses.  And according to the Petition, "the self-replicating nature of the invention itself means that the exhaustion doctrine gives the buyer an implied license to grow more seeds by planting the purchased seeds in the ground."  The Petition fails, however, to cite any legal basis for such an "implied license," except insofar as it exists in the minds (and pens) of academic commentators.  The Petition would have the Court dismiss any restrictions on further use of the patented seed as a matter of patent law, and banish any restrictions to label licenses or other contractual limitations imposed on the sale of patented seed (or, presumably, any other "self-replicating" biological product where replication is a "natural result" of their use).

The Supreme Court's decision to let stand, without comment, the decision of the lower courts in the McFarling case is good news for biotechnology patent owners, who might have anticipated that the Court would take yet another opportunity to review (and presumably reject or modify) Federal Circuit precedent on this issue.  The decision, and the damages award, serves as necessary impediments to infringers who would rather have their lawyers craft clever legal arguments than abide by their agreements and respect patent rights.  It is true, as McFarling's Petition alleges, that the Federal Circuit has been engaged in a "decades-long effort," but that effort has been directed towards bringing consistency to U.S. patent law, often with variable and imperfect results.  But perhaps the Supreme Court's decision not to interfere with the decision in the McFarling case is an indication that, having reinforced its own primacy in this as in all matters of Federal law, the Supreme Court may be content to permit a (presumably) chastened Federal Circuit to get back to its Congressional mandate:  to establish the type of legal certainty to patent law needed by high technology businesses, and their investors, that has so greatly benefited the American economy over the past quarter century.

Comments

[anonymous]

Looks like Prof. Lemley may be representing the USPTO too:

"January 2, 2008 [216 Court Opinion or Order] ORDER for Pro hac vice of Mark Alan Lemley Filing fee $ 50, receipt number 100005674. Signed by Judge James C. Cacheris on 1/2/2008. (Attachments: # 1 Receipt)(rban, )"

from:

http://news.justia.com/cases/featured/virginia/vaedce/1:2007cv00846/221151/

[Kevin E. Noonan]

Well, since the Office based their nwe rules, in part, on Lemley's unsubstantiated theories about why continuations are "bad," it isn't much of a surprise, is it?

[mmm]

This is probably a good thing for biotech, but it may herald bad news for everyone else. How is this conditioned sale any different that what one might get if, for example, the major car manufactures (who presumably have patents over various parts of an automobile) condition sale of the car on a purchasers promise not to resell the car to a third party? Or a promise that you won't repair the various patent components of the car anywhere else but the dealership?

On this point, I think very clearly the doctrine is just plain wrong, especially in the context of "sales" to consumers.

[Kevin E. Noonan]

Dear mmm:

The reason for the long introduction before getting to the point (SCOTUS passing on the opportunity to overturn the CAFC) was to emphasize how the unique features of biotech inventions require traditional patent law concepts to adapt to this technology (which is better than trying to make the technology bend to the law). The reason for differential application of the repair/reconstruction doctrine to biotech inventions and automobiles is that automobiles don't self-replicate. There is nothing wrong with differential application of legal principles to technology, so long as there is a sound reason rooted in the purpose of patent law (exclusionary right for a limited time for inventions that satisfy the statutory requirements of patentability). After all, the written description requirement is applied very differently to recombinant DNA than it is to improved automotive components, as is the utility requirement (when was the last time a mechanical device that didn't purport to be a perpetual motion machine received a 101 rejection?).

For Monsanto, there is a need for customers to give them the benefit of the bargain and not try to free-ride on the technology. The seed could cost 10X as much, perhaps, to get to the same investment return, but then the rest of us wouldn't receive the benefit of the technology because fewer farmers could afford the seed in the first place. And, ultimately, if improved seed development doesn't return its investment, we won't have any. One thing you have to say for agribusiness, it does development more quickly than would occur in traditional breeding programs by individual farmers.

Thanks for the comment.

[EG]

Kevin,

You bring up an excellent point of distinction between McFarling and the LQ case currently before SCOTUS. What is surprising (and I'm not alone on this) is why SCOTUS didn't take McFarling on the "patent exhaustion" issue and consider it together with the LQ case to make clear this distinction that you've pointed out. But then again, SCOTUS is notorious for not trying to render order out of the chaos. Even when SCOTUS takes related cases, they don't necessarily give clear direction. Witness the 2 Ten Commandments cases which SCOTUS came to different conclusions on arguably a similar facts, and leaving one district court judge to mutter and grumble in one of the "pledge" cases:

This court would be less than candid if it did not acknowledge that it is relieved that, by virtue of the disposition above, it need not attempt to apply the Supreme Court’s recently articulated distinction between those governmental activities which endorse religion, and are thus prohibited, and those which acknowledge the Nation’s asserted religious heritage, and thus
are permitted. As last terms cases, McCreary County v. ACLU, 125 S.Ct. 2722, 2005 WL 1498988 (2005) and Van Orden v. Perry, 125 S.Ct. 2854, 2005 WL 1500276 (2005) demonstrate, the distinction is
utterly standardless, and ultimate resolution depends of the shifting, subjective sensibilities of any five members of the High Court, leaving those of us who work in the vineyard without
guidance.

In other words, we in the IP area are not alone in muttering and grumbling on why SCOTUS does (or doesn't) take action to give us working in the vineyard folk guidance.

[Kevin E. Noonan]

Dear EG:

Sometimes I think the Court likes the phonic similarities between SCOTUS and "inscrutable." I think the decision in the LG case may favor the defendants, and that the Court isn't ready to tackle the biotech implications at the same time. They know that by doing it this way, someone will come back someday and say "Isn't McFarling inconsistent with LG," and then they can explain with Solomonic wisdom how they in fact are completely consistent (or overrule one or the other and explain it that way).

I've always thought that patent law has an advantage that it is, ultimately, grounded in scientific reality in the way that religious disputes are not. Which is why I tend to stay away from them, and am willing to let the Court figure them out.

And I guess that District Court judge won't be getting an invitation to the SCOTUS Christmas (sorry, Holiday) Party this year.

Thanks for the comment.

[EG]

Kevin,

Thanks for the follow up comment. Actually, I enjoy dabbling with constitutional issues, like the establishment-free exercise clause (sorry, "separation of church and state" is a very dirty phrase in my book). The district court judge was ruling on the 9th Circuit pledge case (filed by Newdow, an atheist) as to the inclusion of "under God" and felt bound by prior 9th Circuit precedent to strike it down. But there's also a 4th Circuit case (filed by God-believing plaintiff, if you can imagine that) that says including "under God" in the pledge is perfectly constitutional, even citing SCOTUS majority, concurring and possibly even dissenting opinions that have repeatedly said (admittedly as dicta) that including phrases like "under God" in the pledge suffer no constitutional infirmity. It at least keeps my mind limber and hopefully allows me to avoid the unfortunate (and unfounded) stereotype that IP lawyers and patent attorneys in particular don't know (and don't care about) other areas of law.