Supreme Court Will Determine The Scope Of The "FDA Exemption" From Patent Infringement In Merck v. Integra

Wednesday, June 1, 2005 - 01:00
Steve Z. Szczepanski

I. Introduction

Should all or any of the research done to identify drug candidates and to test them for potential clinical trials be exempt from patent infringement under 35 U.S.C.§ 271(e)(1) (the "FDA exemption")? The Supreme Court has granted a writ of certiorari to review a decision by the Federal Circuit in Integra v. Merck on the scope of the FDA exemption. In Integra, the Federal Circuit held that the FDA exemption from patent infringement was not applicable to pre-clinical trial experiments which were conducted by the Scripps clinic on behalf of Merck. Merck argues that the Federal Circuit's interpretation of the exemption is too narrow and that pre-clinical trials should also be exempt because they are part of the FDA approval procedure. The issue is of significant importance to the drug and biotechnology industries. Nineteen amicus briefs were filed by a diverse group of amici ranging from the government, pharmaceutical companies, biotech companies, intellectual property law professors, and universities to the AARP. Nine briefs representing views of 15 amici favor Merck's position. Five briefs representing views of 20 amici favor Integra's position. Five briefs favored neither side.

If the Supreme Court reverses and holds that the pre-clinical trial experiments are within the FDA exemption, "tool patents" (i.e., patents on inventions that help to identify drug candidates) will become worthless because drug companies using such "tool patents" will be able to practice them without paying royalties. If, on the other hand, the Supreme Court affirms the Federal Circuit decision, drug companies using "tool patents" will have to pay royalties or refrain from practicing such patents. According to the briefs filed by Merck and the amici favoring its position, affirmance of the Federal Circuit's decision will have a devastating impact on drug candidate research. According to briefs filed by Integra and the amici favoring its position, a reversal would undermine investment in biotech companies and cause a decline in the development of tools for drug research. This decline would, in turn, have a detrimental long term effect on development of new drugs.

The thesis of this paper is that the Supreme Court should affirm the Federal Circuit's decision and construe the FDA exemption as being limited to uses whose purpose is exclusively directed to gathering the data necessary to obtain FDA approval.

II. The "FDA Exemption" To Patent Infringement - 35 U.S.C. 271(e)(1)

The outcome of the case hinges on the interpretation of § 271(e)(1) of the patent statute - the "FDA exemption." This section of the statute provides that making, using, offering to sell, selling or importing a patented invention is not an infringement if such activities are performed "solely for uses reasonably related to the development and submission of information under a Federal Law." Id.

The "FDA exemption" was enacted by Congress as part of the 1984 Act which sought to eliminate unfair distortions at both ends of the patent term caused by regulatory approvals. Eli Lilly & Co. v. Medtronic, Inc., 496 U.S. 661, 670 (1990). At the beginning of the patent term, a patentee for an invention which had to be approved by the FDA before it could be commercialized was often delayed in deriving benefits from the patent. Upon expiration of the patent, a competitor's entry into the market was delayed because it could not start the research necessary for FDA approval until the patent expired. To remedy the front-end distortion, Congress established a patent-term extension for patents relating to products which were subject to pre-marketing regulatory delays. To remedy the back-end distortion, Congress enacted the "FDA exemption" to give competitors immunity from patent infringement for "activities necessary to obtain regulatory approval" carried out prior to the expiration of the patent. Eli Lilly, 496 U.S. at 671.

II. The Facts Of The Merck Case

Integra owns patents directed to a peptide sequence. Merck entered into a development agreement with the Scripps clinic to identify potential drug candidates using the peptide sequence patented by Integra. The drug candidates included the peptide sequence covered by Integra's patents.

The experiments conducted by Scripps scientists in connection with the Merck agreement produced several candidates for potential clinical trials. Since Scripps' experiments used the patented peptides and were for commercial rather than scientific purposes, Integra offered a license to Merck under its peptide patents. The proposed license provided for Merck to fund Integra's research. When Merck refused to take the license, Integra sued Merck for patent infringement.

III. History Of The Litigation

The issue submitted to the jury was whether the Scripps' research activities carried out on behalf of Merck were "solely reasonably related" to obtaining the FDA approval. Merck did not object to the jury instruction. The jury found patent infringement and rejected Merck's argument that it had an exemption under 271(e)(1). The District Court denied Merck's post-trial motion to overturn the jury's determination that the FDA exemption did not apply. Merck appealed to the Federal Circuit arguing that the experiments were exempt from infringement by the FDA exemption as a matter of law.

The Federal Circuit affirmed. The majority opinion, written by Judge Rader, held that the pre-clinical trial experiments conducted by Scripps for Merck were not exempt under the FDA exemption because these experiments were not done solely to supply information to the FDA - and therefore, not "solely for uses reasonably related" to clinical tests for the FDA. Judge Newman dissented, opining that the basic research conducted by Scripps is exempt under the common law experimental use exemption and that anything beyond basic research is exempt under the FDA exemption. According to Judge Newman, a gap between common law experimental use exemption and the FDA exemption would be illogical.

IV. The Supreme Court Should Affirm The Federal Circuit's Decision

How should the Supreme Court construe the FDA exemption?

At the outset, the Supreme Court should not be persuaded by the equities argued by Merck and its amici. They painted a melodramatic picture of patients dying of diseases which could have been prevented if the drug companies could develop their products without having to wait for the expiration of patents which cover its research activities. Merck argued that by not permitting drug companies to conduct research without worrying about existing patents, the Federal Circuit has transformed the United States into "hostile territory for drug innovation." Merck's argument overlooks the fact that Integra offered to license its patents to Merck and that most, if not all, "tool patents" are available for licensing. The conjecture that a company may not license its tool patents and therefore thwart progress of research is not credible. As pointed out by briefs favoring Integra's position, biotech companies and universities which develop tools for drug research generally can only derive revenues by licensing its tool patents. Moreover, in most cases several tools are available for doing research and the competition among tool patent holders assures that the licensing terms are reasonable. Thus, the equities favor Integra's position since maintaining enforceability of tool patents promotes the development of tool inventions, which in turn, facilitates discoveries of new drugs.

This is a statutory construction case. The outcome hinges on the meaning of "solely for uses reasonably related." As pointed out by several amici, it is fundamental that in construing a statute, all words must be given effect if at all possible. The word "solely" means only for purposes reasonably related to meeting the federal law requirements. This is the meaning ascribed to "solely" by Judge Schwarzer in the Scripps case:

The statute's meaning is clear: The use of a patented invention is protected so long as that use is solely for purposes reasonably related to meeting the reporting requirements of federal drug laws.

Scripps Clinic & Research Foundation v. Genentech, Inc., 666 F.Supp. 1379, 1396 (N.D. Cal. 1987).

This construction is also consistent with the overall scheme of the statute and gives the best effect to the overall intent. Eli Lilly, 496 U.S. at 665-69. Congress permitted use of a patented invention to allow a competitor to get the necessary federal approval of the competitor's product so that the competitor could start marketing the product immediately upon expiration of the patent. The legislative history confirms that Congress intended that the exemption have de minimus effect on existing patent rights. H.R. REP. NO. 98-857, pt. 2, at 8, 30 (1984) reprinted in 1984 U.S.C.C.A.N. 2692, 2714. Allowing research for drug candidates, which has the additional purpose of identifying and testing drug candidates for potential clinical trials, would not be consistent with the language of the statute.

Merck's argument is that the exemption immunizes its activities even prior to the identification of the product for which approval was eventually sought. The problem with Merck's argument is that this construction of the statute would allow drug companies to use "tool patents" without paying for their use. There are tens of thousands of "tool patents" which are directed to expediting or facilitating drug research. Since the only value of "tool patents" is to facilitate drug research, the construction proposed by Merck would render them useless. Thus, the Merck construction is contrary to the overall intent of the statute in that such construction would have a devastating effect on the value of thousands of patents, rather than the de minimus effect contemplated by Congress.

The arguments by Merck and amici supporting its position that in construing the statute the effect of the statute on tool patents should be ignored because tool patents are not involved is not convincing. Once the statute is construed, it will affect tool patents whether or not tool patents are involved in this case.

An extension of the FDA exemption to all drug research would have a disastrous long-term effect on drug research activities. If biotech and other companies which are in business to develop tools for identifying drug candidates are not able to enforce patents for their "tool" inventions, they are less likely to attract investment and develop tools that are critical to drug research. To the extent that funding is obtained, the research on "tool" inventions is likely to be shrouded in secrecy and made available to drug companies only under secrecy agreements. Therefore, the construction of the statute advocated by Merck and the amici would be contrary to Congressional intent in that it would turn issued "tool patents" into "useless things" while Congress intended that FDA exemption to have a de minimus effect on patent rights. In short, both the equities and the law favor the construction of the FDA exemption argued by Integra and adopted by the Federal Circuit.

The Supreme Court's decision is expected before the end of June.

Steve Szczepanski is a Partner of Kelley Drye & Warren LLP. This article is an edited version of the article originally published in the March 28, 2005 issue of the New Jersey Law Journal and is reprinted here with permission. (c)2005 ALM Properties, Inc. all rights reserved.

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