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Three Tips For Managing Intellectual Property in Mergers and Acquisitions

Almost all mergers and acquisitions involve asset transfer. Traditionally, M&A due diligence focuses on tangible assets. As intellectual properties (IP) become increasingly important to the success of business ventures, thorough review of IP assets is also vital for a successful M&A. Corporations often make critical mistakes regarding intellectual property during M&As. Here are three simple tips that can help you avoid making such mistakes. 

1. Include IP Due Diligence in Your Planning

Not all M&A deals concern IP assets and not all M&A deals involve IP transactions. But most do. When you are planning for an M&A, don’t make IP due diligence an after-thought. If IP assets are involved, be sure to assemble a team to handle these issues just as you would a tax or accounting team! Get started early, because the IP due diligence process is often time consuming.

2. Do Your Homework

This may seem obvious and cliché but sometimes due diligence is overlooked because of its lack of appeal and glamour. In 1998, Volkswagen spent approximately three quarters of a billion dollars on Rolls Royce Motor Cars. It was not until after the deal was done that Volkswagen realized that while it owned all the rights to manufacture the vehicle, it did not have the right to put the name on it. Another little-known German car maker named BMW actually owned the rights to the Rolls Royce name. Volkswagen and BMW eventually came to an agreement, but it was only after one of the most public and most embarrassing cases of lack of due diligence came to light.

Use the 4W’s when dealing with IP assets: What, Who, When and Where.

What: Identify the relevant IP assets. Do you have trademark/trade dress, copyright, trade secrets or patents?

Who: Check who owns what rights to the IP assets. Like a mortgage  IP rights can be sliced and diced and then re-bundled in many different ways. Important rights can be lost if government registrations were not properly maintained.

When: Determine when the IP assets will expire, when government renewals will come due and what the corresponding costs will be.

Where: Ascertain where (on the globe) the IP assets are legally recognized and registered. Evaluate if there are gaps in market coverage and corresponding IP registrations worldwide.

3. Include the IP in the Overall Value

IP can dramatically alter the price and overall significance of an M&A deal. Investment bankers and other financial advisors have been known to push IP assets to the sidelines because the value of IP assets is a number that is hard to determine and the valuation process can slow down the buying process tremendously. It might take more time, but it will undoubtedly save headaches and heartbreak in the end. It can also help identify, early in the process, IP related pitfalls and roadblocks that could potentially wreck the deal.

These are three tips to get you started, but managing IP in a M&A deal can be a headache and it’s important to have the right partner on your side.  Please contact us if you have any questions.  We’d be happy to help!

Can States Take Out Patent Trolls Using the Eleventh Amendment?

Patent trolls continue to draw attention.  As Anthony Biller detailed in the July issue of E-Commerce Law & Policy, the White House recently announced a plan to reign in patent trolls.  The proposed reforms include, among others, giving federal district courts more discretion to award attorney’s fees to victims of frivolous patent litigation.  The audience for the Administration’s proposal is Washington.  Increasingly, however, the debate about patent trolls is moving into unfamiliar territory for patent law: state capitols.

Writing for Slate, Mark Koffsky suggests state governments take on patent trolls using the Eleventh Amendment.  The Eleventh Amendment bars claims for money damages against states in federal courts.  The article proposes that states use this immunity to broker the sale of products that infringe trolls’ patents.  A company that makes an infringing product would sell the product to a state and the state would resell it to consumers. The state would collect a fee on each sale and remit the remainer of the proceeds to the product maker.  In this model, since a state government sells the infringing product, the patent troll could not obtain damages from the seller because of the Eleventh Amendment.

While it is appealing on its face, this Eleventh Amendment attack would likely falter for at least two reasons.  First, as the article itself acknowledges, the Eleventh Amendment does not prevent a federal court from issuing an injunction ordering state officials to stop infringing a patent.  That would be a straightforward application of the famous stripping doctrine of Ex Parte Young, 209 U.S. 123 (1908).  The threat of prospective injunctive relief is a significant bargaining chip and the Eleventh Amendment does not take it off the table.

Second, and most importantly, the proposal overlooks the possibility that the underlying seller could be held liable for indirect patent infringement.  Under 35 U.S.C. § 271(b), “[w]hoever actively induces infringement of a patent shall be liable as an infringer.”  Selling a product to a state “patent protection exchange” knowing its resale to consumers constitutes infringement sounds like inducement.  This would extend liability to the underlying seller.

Even if the Eleventh Amendment could stop patent trolls cold, the relief might be temporary.  Congress can abrogate a state’s Eleventh Amendment immunity using its power to enforce the Fourteenth Amendment.  If states started engaging in a widespread pattern of patent infringement, Congress could pass a statute exposing states to financial liability.  There would likely be calls for such federal legislation if states struggle to distinguish conventional trolls from other patentees like academic institutions that are not actively commercializing patented technology.

Raleigh Among The World’s Most Innovative Cities

Forbes has once again recognized Raleigh as ranking among the most innovative cities, based on the number of patents issued per capita. You may recall our city rated a very respectable – though by some accounts, surprising – number three in the nation in May 2010. In July, Forbes cited a report from The Organization for Economic Cooperation and Development (OECD), which ranked Raleigh number 15 in the world for inventiveness.

Bested by such innovation giants as technology rich San Diego, which ranked number two at 8.95 patent applications for every 10,000 residents; and the number-one ranked Eindhoven in the Netherlands, which produced an astounding 22.6 patents for every 10,000 residents, Raleigh nevertheless received considerable recognition, producing 3.74 patent applications per 10,000 residents, and was in the elite group of the world’s top 15 cities that included only five other U.S. cities.

By analyzing a data point known as “patent intensity,” the OECD finds that patent applications serve as the most logical measure of a city’s innovation, and as anyone who has spent time in the Raleigh area can attest, the influence of world-class universities and the draw of the Research Triangle Park combine to attract some of the world’s most brilliant and inventive minds. Employment figures reflect an estimated 40,000 full-time knowledge workers are located in our region, which is known as the birthplace of such inventions as the Universal Product Code (UPC) technology as well as 3D ultrasound technology.

With more than 170 global companies, our area is home to some of the world’s most pioneering industries including biotechnology, nanotechnology, robotics, information technology, pharmaceutical science and clean technology. So it is no surprise to learn that when it comes to inventiveness, as well as the complex and ever-evolving field of patents and Intellectual Property, Raleigh continues to be a leading incubator for the ideas of the future.

At Coats and Bennett, we understand the importance of protecting and promoting this atmosphere of innovation, and we are committed to serving the interests of companies and individuals whose leadership, creativity, discipline and hard work deserve to be recognized and fairly compensated. We appreciate the privilege of living in an area recognized the world over for innovation, and we look forward to our city’s continued placement among the world’s leading patent producers.

Supreme Court Uses a Fundamental Rule to Resolve Myriad Complexities In Yesterday’s Gene Patent Holding

            Medical research heads into the realm of sci-fi as it begins predicting whether an individual might suffer from specific diseases based on their genetic code. At the same time, these advances in medical knowledge require billions in research from companies expecting to make a return on their investments. Can a company own the rights to an individual’s genetic code? Are you willing to sell the patent rights to your genetic code to extend your life?

            Myriad Genetics, Inc., a company based in Utah, obtained a number of patents based on their discovery of the BRCA1 and BRCA2 genes.  A recent U.S. Supreme Court case involves claims from three of those patents which in particular attempt to patent the isolated genes themselves. Yesterday’s Supreme Court ruling in Association for Molecular Pathology v. Myriad Genetics Inc. centered on a long standing rule of patentability; the exclusion of products of nature. In an opinion written by Justice Thomas the Supreme Court unanimously held that isolated, natural forms of DNA are unpatentable.

            It is estimated that the human body has 22,000 genes, basic fragments of DNA, packed into 23 pairs of chromosomes inherited from a person’s parents. Each gene is made of a sequence of millions of nucleotides. The nucleotides can be further divided into both exons (which code for amino acids) and introns (which do not code for amino acids). Different arrangements, of nucleotides in each gene correspond to different characteristics of the person. In addition to benign characteristics such as eye color, a person’s genetic code can indicate an increased risk of some diseases. Knowing that you are at a higher risk for certain diseases can provide the opportunity to take different preventative measures.

             Myriad obtained several patents on isolated forms of BRCA1 and BRCA2, two genes which may indicate an increased risk of breast and ovarian cancer. BRCA1 correlates to a 50-80% risk level of breast cancer, while BRCA2 correlates to a 20-50% risk of developing ovarian cancer. In addition to patenting the isolated BRCA1 and BRCA2 genes Myriad patented composite DNA (cDNA) versions. cDNA is essentially synthetically created DNA which contains only the exons that occur in DNA.

             Myriad discovered the precise location and sequence of the BRCA1 and BRCA2 genes and their correlation to a hereditary increase in women’s risk of developing breast and ovarian cancer. This discovery was not as easy as it sounds; BRCA1 is about 80,000 nucleotides long and is found on chromosome 17 which has approximately 80 million nucleotides. Knowledge of the gene’s precise location allowed Myriad to develop medical tests to determine if a patient’s BRCA1 and BRCA2 genes contained a mutation indicative of an increased risk.

             Isolation is necessary to conduct genetic testing, and after Myriad’s discovery other entities began providing genetic testing services to women. Upon discovering medical professionals and researchers isolating the BRCA1 and BRCA2 genes, Myriad began to assert their patents threatening prosecution against infringers. Petitioner Ostrer, a researcher at NYU School of medicine along with medical patients, advocacy groups and other doctors filed a lawsuit seeking a declaration that Myriad’s patents were invalid. The District Court Myriad denied a motion to dismiss based on a lack of standing and found that Myriad’s patents for both DNA and cDNA were invalid because they were products of nature. The Federal Circuit reversed but the Supreme Court in 2012 granted the petition for certiorari and vacated the judgment regarding standing and remanded the case.  On remand, the Federal Circuit determined that only Ostrer had standing and that Myriad’s patents for isolated DNA and cDNA were both patentable. The Supreme Court again granted certiorari.

            The Court expressed Myriad’s accomplishment as an important discovery, rather than an innovative creation. The Court felt that simply separating a gene from its surrounding genetic material was not an act of invention, therefore Myriad did not create a “new . . . composition of matter,” as required under 35 U.S.C. §101. Justice Thomas went on to write, “It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes. The location and order of the nucleotides existed in nature before Myriad found them. Nor did Myriad create or alter the genetic structure of DNA.”

             However, the Court used the same logic to determine that composite DNA (cDNA) may be patentable. Since cDNA is an exons-only molecule that is not naturally occurring, the Court felt Myriad had created a “new . . . composition of matter.” Although the petitioner argued that the nucleotide sequence of cDNA is dictated by nature, the Court believed that since it required a lab technician to exist, it was a new creation. By holding that cDNA may be patentable, the Court seems to have taken a middle ground.

            Several questions remain unanswered. Justice Thomas stressed in the opinion what was and was not implicated by the decision, resulting in a very narrow ruling. Perhaps the most important unanswered question is whether cDNA will survive the other objections to patentability raised by the petitioner. The most notable objection being that cDNA will not overcome the non-obvious standard. Finally, the Court did not review any methods for locating, manipulating, or testing genes, leaving several of Myriad’s patents intact.

            This case brought to the forefront the issue of bringing highly technical questions before the Supreme Court. In oral arguments the Court and attorneys alike seemed to struggle to grasp the finer points of Myriad’s claims, and resorted to countless analogies.  In his concurrence, Justice Scalia stated that he was unfamiliar with the finer points of microbiology and expressed his discomfort with joining the part of the opinion which detailed the science behind Myriad’s claims. However, he went on to affirm the judgment stating simply that “the portion of DNA isolated from its natural state sought to be patented is identical to that portion of the DNA in its natural state.”

             Justices across the bench raised concern during oral argument as to how a decision may impact research and development in technical fields like the biomedical industry. Although the decision appears to be a major blow to a company that believed it had a right to be the sole user and analyst of two human genes, Myriad has since released its own review of the opinion in which it highlights the Court’s support for cDNA patents. Many initial reports showed Myriad’s stock prices up as much as 12% in the first few hours after the decision but opened today down 12% from its opening price yesterday. Although the decision will provide access to BRAC1 and BRAC2 genes to many researchers and hopefully lower the costs for women seeking treatment advice, its effects on innovation in the field of biomedical research will take some time to determine.

For the full opinion: Association for Molecular Pathology v. Myriad Genetics.

Supreme Court to Decide Reverse Payment Settlement Agreements

The Supreme Court has agreed to review the legality of “reverse payment,” also known as “pay-to-delay,” settlements. These agreements, most commonly arising in the pharmaceutical industry, involve patent holders making payments to generic drug manufacturers in return for an agreement not to put competing generic drugs on the market during at least part of the term of a patent on a brand-name drug. The Federal Trade Commission (FTC) argues that such arrangements should be presumptively illegal as anti-competitive; many drug companies argue that they are legitimate settlement arrangements in patent litigation – an area of law in which many traditional anti-trust doctrines are inoperative – so long as they do not expand the patent-holder’s rights.

In 2000, Solvay Pharmaceuticals won US Food and Drug Administration (FDA) approval to sell AndroGel, a drug for the treatment of low testosterone in men. The FDA granted Solvay three years of market exclusivity. Solvay filed for a patent on AndroGel, which was granted in 2003, one month before its FDA market exclusivity expired (U.S. Patent No. 6,503,894). The patent would nominally grant Solvay the exclusive right to make and sell AndroGel in the U.S. until 2020. AndroGel was commercially successful, enjoying sales of $1.8 billion in the U.S. between 2000 and 2007.

After the ‘894 patent issued in 2003, Watson Pharmaceuticals file applications with the FDA for approval of generic versions of AndroGel, claiming Solvay’s patent was invalid or that their products would not infringe it. Based on this FDA application, Solvay sued Watson for patent infringement. The lawsuit triggered an automatic 30-month stay of FDA approval for sale of the generics. After this 30-month period expired, Solvay’s patent was the only thing preventing Watson from marketing a generic version of AndroGel. Before they did that, the parties settled the patent infringement lawsuit. Under the settlement agreement, Solvay agreed pay Watson up to $42 million per year for promotional services and backup manufacturing capacity, and Watson agreed not to market an AndroGel generic before 2015. When the parties presented the settlement agreement to the FTC for approval, it sued both parties to block it.

The FTC, applying traditional anti-trust doctrines, has long believed that reverse payment agreements should be presumed to be illegal restraints of trade under federal antitrust law. Their reasoning is that a company with market dominance, whose patent is probably invalid, is paying competitors to stay out of the market. This allows it continue to charge higher prices to consumers than a freely competitive market would set. The FTC would prefer the parties fully litigate the infringement issue, settling both the validity and infringement issues with certainty.

Solvay and Watson argue that the settlement agreement does not expand Solvay’s patent rights – indeed, it allows the marketing of generic drugs sooner than if Solvay enforced its patent for the full term. Rather than admission of invalidity or non-infringement, they argue that the payments under the settlement agreement reflect recognition of the risk of litigation, and terminate its ongoing costs and business distraction. These are common concerns which motivate many settlement agreements.

The district court dismissed the FTC’s case, and the Court of Appeals for the Eleventh Circuit affirmed that decision. In a 2011 case, involving the drug maker Merck, the Third Circuit came to the opposite conclusion, refusing to approve a reverse payment settlement agreement in a patent infringement lawsuit. The Supreme Court took the case to resolve this split in the circuits. Resolution of this question will have important repercussions for drug marketing and pricing, as well as patent infringement litigation. The Court will hear oral arguments March 26.

 

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