In 2005, the Supreme Court decided Merck KGaA v. Integra Lifesciences, substantially expanding the ability of drug companies to use patented compounds in drug research without fear of infringement. The case began in 1996, when Integra sued Merck over research Merck was funding on certain compounds for the prevention of angiogenesis. The research was primarily aimed at developing new drugs for fighting cancer. One of the compounds investigated was the RGD peptide, on which Integra held 5 patents that Merck had not licensed (negotiations were apparently attempted unsuccessfully). The District Court jury found that Merck had indeed infringed Integra’s patents, awarding Integra a $15 million judgment. Merck was displeased and appealed, but the Federal Circuit upheld much of the lower court’s decision, although they ordered the District Court to lower the damage award (it would eventually fall to $6.375 million). Still unsatisfied, Merck appealed again and its persistence paid off; the Supreme Court not only granted certiorari, but also unanimously reversed the lower court. Why did Merck’s luck change so dramatically?

The case turns on a special exemption from patent infringement liability, the FDA safe harbor (35 U.S.C. § 271(e)(1)), which allows unlicensed use of most patented inventions so long as that use is “reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs.” If Merck could show that its use of Integra’s patented RGD peptide was “reasonably related” to information it submitted to the FDA, its experiments would appear protected under the safe harbor.

The problem with the safe harbor argument was that Merck’s experiments with the RGD peptide were primarily aimed at discovering the best compound to submit as a new drug. The experiments did not directly produce data that was submitted to the FDA and the RGD peptide was not the ultimate subject of Merck’s submissions. Instead, the experiments merely helped Merck to identify the best candidates for a new drug application. Both the District Court and the Federal Circuit held that such experimentation fell definitively outside the safe harbor. Judge Rader of the Federal Circuit went so far as to say in his majority opinion that, “The FDA has no interest in the hunt for drugs that may or may not later undergo clinical testing for FDA approval.” The lower courts both took a very narrow view of § 271(e)(1), limiting its protection only to experiments on compounds ultimately submitted to the FDA and apparently only successful experiments at that.

The Supreme Court refused to constrain the safe harbor’s protections so severely. In an opinion focusing on statutory construction, Justice Scalia laid out a rough two-part test for § 271(e)(1) protection: first, the experiments have to be performed after the biological process being targeted was understood (otherwise the work is too basic to be “reasonably related”) and second, the experiments, if successful, must produce the sort of data that could be appropriately submitted to the FDA. This test represents a more nuanced view of the scientific process than the lower courts took. It also gives much broader scope to the safe harbor. While both the District Court and the Federal Circuit apparently categorically excluded all failed experiments from safe harbor protection, the Supreme Court recognized that the nature of scientific experimentation includes failure. The decision is likely to allow pharmaceutical companies to investigate new drugs more thoroughly without the expense and complication of patent licensing. Not only can licensing be costly for the drug companies, negotiations are complicated processes that often fail (as in fact happened with the RGD peptide) and a failed license negotiation without the safe harbor could doom research on a new drug.

We may have more to thank for this research-friendly holding than the strength of Merck’s legal arguments alone. There is good reason to believe this wasn’t really a fair fight. Whereas drug research and the FDA safe harbor cut to core of Merck’s business as a drug company, Integra’s interest in the field appears much more tenuous. In fact, Integra’s own company profile describes the firm as a “medical device company […] specializing in surgical implants and medical instruments.” The RGD peptides were apparently somewhat useful for achieving better implantation of medical devices, but the patents in question did not seem to be particularly important assets for Integra. Moreover, Merck’s application of the compounds to cancer drugs is entirely outside of Integra’s targeted market. Perhaps Integra, weary after almost a decade of costly litigation, felt that its principal business interests weren’t at stake in the case and didn’t pursue it as aggressively as a company that depends on patent licensing for survival might have. Of course, the outcome might not have changed no matter how hard Integra had tried, but the asymmetric motivations of the participants provides an interesting backdrop to the legal analysis.

Merck v. Integra leaves open two major questions about the future of biotechnology patents specifically and the patent research exemption in general. First, the Supreme Court explicitly refused to decide whether the FDA safe harbor also extended to the use of patented “research tools” in clinical research. Some have nevertheless read the opinion as an indication that research tools likely fall under the safe harbor, a devastating result for companies holding research tool patents. Other commentators are less sure, and uncertainty over whether the safe harbor covers research tool patents remains a major worry for many biotech companies. Second, the expansion of the § 271(e)(1) research exemption begs the question of whether the courts will consider expanding the generally applicable but much narrower common law research exemption. The EFF filed an amicus brief arguing that Merck was an opportunity to do just that, but the Court declined to take advantage. Nevertheless, as cases that tackle the common law research exemption more squarely come before the courts, Merck might be seen as the beginning of a trend toward a more liberal view of research involving patented inventions.

      

The first iPhone patent issued in 1985

One of the purposes of patents is to allow the patent owner to restrict access to the market by competitors. This allows the patent owner to protect their initial investment in the product, which would include research and development costs. However, I can’t help but wonder whether the advantages conferred by patents are beginning to lean in favor of producers at the expense of consumers (much like copyrights in my opinion). 

A good example of this imbalance is the spat between the iPhone and the Palm Pre. By the time the iPhone was released, Apple had developed an army of over 200 patents to protect its development. Two years later, and after millions of iPhones had been sold, Palm develops the Pre and receives amazing hype around the product. Critics praised it and dubbed it the new iPhone killer while investors agreed and sent Palm shares up 100% in the next two days. 

Apple of course didn’t, and mentioned the possibility of pursuing legal action against anyone that invaded on their IP. When asked about competitors such as the Palm Pre and Google Android phones, Apple’s COO responded with:

“We are watching the landscape. We like competition, as long as they don’t rip off our IP, and if they do, we’re going to go after anybody that does … I don’t want to talk about any specific company. I’m just making a general statement that we think competition is good; it makes it us all better. And we’re ready to suit up and go against anyone. However, we will not stand for having our IP ripped off and we’ll use whatever weapons we have at our disposal [to make sure that doesn't happen]. I don’t know that I can be more clear than that.”

While I don’t know the details of Apple’s patents and any of Palm’s potential infringements upon them, I do think that this sounds a bit fishy. There must be something wrong if a company issues 200 patents to protect their product. It sounds a bit like spamming the patent office with applications to have a monopoly on as broad an area as possible. There is also something fishy if a product that is potentially better (better network, better camera, better web integration, copy/paste) can be sued and prevented from being released because it infringes on one of those 200 patents. To be fair, it has been claimed by some critics that the Palm Pre is nothing more than an iPhone copycat, and after looking at some pictures of the Pre, it’s hard to argue with that claim. At the same time, it also appears that Apple has simply exploited patents better than Palm by applying for tons of patents to prevent any form of competition. This isn’t a patent on a business method, but it’s a business method of patenting anything and everything before others beat you to it. As TechDirt argues, it is debatable whether the iPhone even needs patents, since the incentives to produce a product like the iPhone are the profits and marketshare gains that Apple receives from it. Even if Palm could copy the iPhone, they’d be two years behind Apple.

In a similar vein, opening up patents to business methods and software continues the trend of increasing imbalance between patent owners and consumers, and in the spamming practices that many businesses currently engage in. As noted by Mayer in his dissent, business method patents have no legal precedent and no economic justification. Business owners do not need stronger incentive to innovate in business methods, as the incentive to profit from it is large enough.

As a result of the imbalance, we see similar races to patent anything and everything in business methods. The one-click article mentions the advantages that Amazon gained by patenting one-click online shopping. Mayer also notes some equally troubling business method patents currently in place, from absurd patents such as Patent 6,368,227, a method for swinging on a swing suspended from a tree branch, to patents with more serious consequences, such as Patent 6,119,099, a method for inducing fast food customers to order more food.

It’s very easy to see why current patent law needs a nerf. Although this now seems a bit of a moot point, ask yourself 40 years ago: Would the U.S. be the same if Ford had patented the method of specialization in automobile production?