Medical Device Link.

Originally Published September 1999

REGULATIONS & LEGAL AFFAIRS

Strategic Patent Management

A strong patent portfolio can be the foundation of a successful company, but many firms are finding that defending their portfolio is an ongoing struggle.

Gale Holland

This May, DuPont Pharmaceuticals (Wilmington, DE) filed suit against Molecular Biosystems Inc. (MBI; San Diego) and its manufacturing partner, Mallinckrodt Inc. (St. Louis), over control of one of the most promising new innovations in medical ultrasound imaging. The suit claimed that MBI was infringing a patent that the chemical giant had licensed from ImaRx Pharmaceutical Corp. (Tucson, AZ) for contrast agents, gas-filled microbubbles that greatly enhance ultrasound readings. "Our goal in this action is to protect our intellectual property rights...and defend our substantial investment in this area," said Bill DeLorbe, executive vice president of DuPont Pharmaceuticals's medical imaging division.

Citing their own contrast-agent patents, MBI and Mallinckrodt immediately announced that they would defend aggressively against the lawsuit. "MBI firmly believes that the (ImaRx) patent is invalid," stated MBI's president and CEO Bobba Venkatadri.

Two industrial giants with sizeable investments in promising new technology clashing over patent claims: it's becoming a familiar plotline in the medical device industry. As technology grows more complex, a strong patent portfolio increasingly looms as the linchpin of a successful company. At the same time, the cost of obtaining and guarding patents is skyrocketing to the extent that small start-up companies can't afford to defend their rights and end up capitulating to royalty demands—or even going out of business.

"The cost of patent litigation can run into the tens of millions of dollars and more, depending on how far up in the system it goes," says Hans Feindt, an assay development manager at a small diagnostics company. "For a small company with sales only in the millions of dollars a year, that's just disaster."

Fighting to the Death

A patent is a license to run a limited monopoly, excluding others from making, selling, or exploiting an innovation for a period of time while the inventor develops, markets, and capitalizes on his or her ingenuity. It's no surprise that in the information age, the number of patent applications is on a steep upward curve. The U.S. Patent and Trademark Office reported 237,045 patent applications in 1997, the last full reporting period, an increase of 14.9% over the previous year. Some 122,977 patents were actually issued, also an increase, the office says.

The vast majority of applications go through without any conflict. According to the patent office, only 1% of all applications enter what is known as "interference proceedings" to resolve overlapping claims. But it's no surprise that conflicts erupt most often in the case of devices with the greatest market potential. In the DuPont-MBI battle, for example, contrast agents are expected to spark a minirevolution in ultrasound by extending its use to the diagnosis of cardiac blockages and liver and kidney tumors—conditions not easily detected by any existing imaging technology—a potential $2 billion global market annually.

Prior to the suit, MBI's cardiac contrast agent, Optison, had been making steady progress toward the market. Last October, in conjunction with Chugai Pharmaceuticals (Tokyo), the company announced that it was launching its clinical trials ahead of schedule in Japan, the world's second-largest ultrasound market. And just six days before DuPont filed suit, MBI announced an agreement with Mallinckrodt to manufacture the product. Optison is currently being used commercially in more than 1600 hospitals and cardiology group practices throughout the United States, Germany, Austria, Spain, and the United Kingdom.

Meanwhile, DuPont and ImaRx have also been racing to get their own contrast-agent technology to market. In December 1998, the Delaware-based chemical giant filed an application with FDA to develop Definity, an investigational ultrasound contrast agent with a potential for application in both abdominal and cardiac imaging. Other companies jockeying for position in the contrast-agent market include Sonus Imaging Pharmaceuticals Inc. (Bothell, WA), Alliance Pharmaceutical Corp. (San Diego), and Schering A.G. (Berlin). Competitive pressures undoubtedly influenced the two companies' decision to go to court.

"There is litigation when two competitors have put in millions to develop a product and the only way to recoup is to be the only one on the market," says Laurie Axford, a patent attorney with the firm of Fish & Richardson (San Diego). "They're willing to fight to the death."

A Byzantine Process

But why are there conflicting patents? Isn't that what the U.S. Patent and Trademark Office is there to prevent?

Theoretically yes; but in practice it's more complicated. Patents are issued for different aspects of products or ideas. The three main categories are composition of materials, manufacture, and machines. Within the patent, applicants list a number of claims describing technical nuances. Again, because of the increasing intricacies of new technologies, such claims can run into the hundreds on a single device.

Prosecution of a patent requires technical experts in the patent office to examine what is known as prior art, archival materials describing related patents issued previously. Although patent attorneys generally give the patent office good marks for its technical savvy, the organization is widely thought to be in need of reorganization and expansion.

"It's not unusual to have overlapping patents approved," says Evan Unger, president and CEO of ImaRx. "The patent office is understaffed, overworked, and probably underpaid. They don't have the same people in the same area all the time. The system is antiquated."

"Different examiners are examining different applications, and they rely on a patent office classification system that is variable," says patent attorney Debra Shekta. "They may search certain classes and subclasses and miss something else."

Even assuming examiners consult the right data, the byzantine structure of the patent process dating back to the Constitution almost guarantees confusion, some critics say. During an examination, a company can file repeated amendments, adding, dropping, or altering the language of the patent claims—all in an atmosphere of secrecy. Unique to the United States, patents remain confidential from the time of application until they are granted (in Europe and Japan, public disclosure comes 18 months after a request is filed).

"Companies file, and refile, and rerefile, and rererefile," says Axford. "You can end up with a family tree going back 10 to 12 generations."

"In some examining groups, examiners keep claims as in the original application, not as amended," says Shekta. "If a patent as originally filed had narrow claims, but during prosecution the claims became broader, the examiner would have no way of knowing until the patent was issued."

Another stalling tactic is the continuation application, which can be used to seek reconsideration based on new evidence or amendments. In the hands of a skilled lawyer or manager, these tools can be manipulated to keep an application bottled up in the patent office for 5, 10, or even 20 years.

"A company can choose when to file or withdraw; the system can be manipulated to a certain extent," Axford says. "Most important patents are very complicated, so a company can choose to have a single application with 600 claims or split it up into 50 applications. The company can file everything at once, or save some claims for later and others for even later.

"I always advise clients to leave an application open in the office, even though they've already gotten one or two patents issued," Axford continues. "It's a good strategy to use a continuation because if the competition does come up with something, the company has an opportunity to file claims that are narrowly focused. Let's say a company finds out there's a problem with the interpretation of a term in its claim. If it has second- or third-generation patent progeny, it can fix the problem by changing its claims."

Worldwide, MBI holds more than 60 patents protecting its Optison microsphere technology. The most recent, U.S. Patent No. 5,855,865, which was issued in February, describes methods for manufacturing protein microspheres with perfluorocarbon gases, MBI says.

For its part, DuPont insists that Patent No. 5,547,656, licensed from ImaRx, covers the composition of micro-spheres filled with perfluorocarbon gas—a more fundamental aspect than manufacture. According to ImaRx's Unger, who is the listed inventor on the patent, "Ours is the earliest patent to specifically describe and claim the broad use of perfluorocarbon gases in microspheres for medical imaging. . . . Composition of materials is the key patent."

MBI originally got FDA approval by submitting its product as a device, enabling the company to avoid the slower and more cumbersome approval process required for drugs. Although ImaRx successfully petitioned to have FDA redesignate Optison as a drug, ImaRx's Unger feels that MBI still got away with less intensive and rigorous clinical trials than might have been required.

Submarine Issues

Why delay a patent? Companies often choose not to patent technologies at all in order to keep them secret from competitors. Because of the nondisclosure clause in U.S. patent law, U.S. inventors can have their cake and eat it too: the protection of a patent application, plus a shield from nosey competitors. In some cases, companies can work the process so that their patent issues after the technology has matured, when it's clear which claims have the most market "juice." With increasing globalization, however, many patents are also being filed abroad, making U.S. secrecy a moot point.

Patents of this type are sometimes called "submarines"—applications that lie submerged in the patent process for years, only to surface after another company has started using the technology.

"You never know when the last patent has issued," says Axford. That's what many observers think happened two years ago when Becton Dickinson (Franklin Lakes, NJ) and Quidel (San Diego) got into a dispute over lateral-flow assays used in pregnancy and other "dipstick" tests. Relying on its rights under a patent known as the Campbell patent, which covers the use of colored particles in immunochromatographic assays, Becton Dickinson negotiated royalties from a number of companies.

Meanwhile, Quidel had developed a complex test, also using colored particles, that it thought got around the Campbell particle claim. Becton Dickinson sued, and in the midst of the dispute, a new patent (termed the Rosenstein patent) suddenly issued for Becton Dickinson. The new patent, which had been sitting idle in the patent office for years, was more in line with the types of lateral-flow devices produced today. Without admitting infringement, Quidel decided to cut its losses, signing a licensing agreement whose terms were not disclosed.

Skyrocketing Litigation

Even after it issues, a patent can be subject to reexamination. DuPont's suit was filed shortly after a reexamination requested by MBI ended in failure. According to ImaRx's Unger, the reexamination upheld all of his firm's patent claims.

Patent decisions can be appealed, first to the Board of Patent Appeals and Interferences and then to the Court of Appeals of the Federal Circuit. The law also allows parties to bring civil action in the U.S. District Court against the commissioner of the patent office and to sue one another for patent infringement, as DuPont did MBI.

In the past 15 years, there has been a shift to jury trials in patent infringement cases, lawyers say. The stakes are high, but the education and intellectual grasp of the average juror have not kept pace.

"I can't think of another area of the law more difficult for juries," says Axford. "What we counsel clients is that if the issue in dispute is technically driven, it's a crapshoot. You cannot guarantee success at the jury level."

With the increased use of technical jargon, patent claims often hinge on language that means one thing to practitioners and quite another to lay people. The circuit courts have been vague about setting standards, some legal experts say. And juries are famously hostile to accused infringers and cozy with inventors; the American romance with Ben Franklin and Thomas Edison dies hard.

The upshot has been an explosion in patent litigation and skyrocketing awards. Louis Rukeyser, host of the PBS television program Wall Street Week, has estimated that 10,000 patent infringement lawsuits clog the nation's court dockets each year. Of these, 80% are won by plaintiffs, with judgments reaching into the hundreds of millions of dollars in damages or royalties.

At times, companies plunge into product development against competing patents, gambling that they can make a significant profit before being shut down by the patent office or by court acion. "You're gambling it will never come to an interference or that if it does, you will have already made inroads into the market before it is declared," says David Sadewasser, ImaRx's intellectual property manager. "If you can keep your drug out there for seven to eight years, it's a good bet."

Reform and Resistance

Growing globalization has spurred moves to bring the U.S. patent system into conformity with the rest of the world. Settlement of the General Agreement on Tariffs and Trade (GATT) triggered one major shift. Before June 8, 1996, the effective term of a U.S. patent was 17 years from the date of issuance. Now the term is set at 20 years from the date of application. Some experts say this has begun to whittle away at the submarine patent problem.

In 1997, the Clinton administration backed a major overhaul of the patent system. With the support of such megacorporations as IBM, GE, and DuPont, the proposal had passed the House and was headed for the Senate when an unlikely coalition of 27 Nobel laureates and Republican conservatives stepped forward to fight it. The most controversial provision was a "prior use" exemption, which would have allowed companies to avoid paying patent royalties if they could prove that they'd already been using a technology or process before it was patented. One version of the bill would have also required publication of a patent application after 18 months if the inventor applied for both a U.S. and a foreign patent. The bill died in the face of its prestigious opposition.

Another legislative proposal would eliminate the "first- to-invent" patent system used in the United States. In most of the rest of the world, the touchstone is "first to file." Proponents of the change say that it would streamline the process and make it easier for small companies. But inventors and others say it would open the door for multinational corporations and foreign interests to steal ideas from small start-ups. So far, reform advocates have failed to muster enough support to get their ideas through Congress.

Despite some opposition to change among small inventors, small companies can get killed in the current system, experts say. Sometimes they underestimate the value of patent protection. "A younger company that is concerned about the excessive cost of research and development—and not sufficiently educated about the patent process—may have an insufficient appreciation of the value of patents, which do not provide an immediate return on investment," says Howard Bernstein, a patent attorney and partner in the firm of Sughrue, Mion, Zinn, Macpeak and Seas. "Money is hard to come by, and it is difficult to spend it on something you don't see generating an immediate benefit rather than on getting your product to the marketplace."

Other times, small companies are blown out of the water by a bigger company. Microprobe, a small Washington company, had had a DNA probe test for vaginitis Candida and other vaginal diseases on the market for about a year when Gen-Probe Inc. (San Diego) sued for infringement. Microprobe was unable to keep up with the costs of litigation, so it shut down and sold its test to Becton Dickinson.

Gen-Probe then turned around and licensed its patent, together with a limiting agreement, to Becton Dickinson. "Gen-Probe was willing to give Becton Dickinson a license because it viewed BD as able to generate more royalties and make the test a bigger success for them," says Axford. "Even if a company gets a patent, if it isn't of considerable size or doesn't have the ability to carry on patent infringement litigation, there's a high risk. You may not prevail even if you're right. The little guy usually ends up on the short end."

Other experts disagree, saying that small companies are as likely to sue multinationals as the other way around. In some cases, small companies can use their patents as leverage to negotiate lucrative cross-licensing agreements. "I don't believe that large companies are suing for patent infringement any more often than individual patentees or medium companies," says Bernstein, "or any more often than two medium-to-small companies sue one another."

The DuPont-MBI litigation is a case of what many experts regard as the biggest downfall in patent management: somebody failed to carry out a proper investigation. "They made a large investment—in the tens of millions of dollars—but they didn't do their homework," says Unger.

"You have to get good advice and not gamble on the front end," Axford says. "It's the nature of our commercialistic society. You need to have dominance in the market, and if you don't have a patent to protect your freedom to practice, someone else will have a blocking patent to keep you from entering the market at all."

Gale Holland is a freelance writer based in Southern California.

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