DRAFTING LICENSE AGREEMENTS IN VIEW OF RECENT SUPREME COURT DECISIONS

1. DRAFTING LICENSE AGREEMENTS IN VIEW OF RECENT SUPREME COURT DECISIONS Mark P. Levy October 16, 2007

2. 2 Starting Premise: Recent Supreme Court rulings potentially could weaken the negotiating position of IP Owners. It is becoming substantially more difficult to obtain and to defend improvement patents.

3. 3 Conclusions: To insure your expected return on your IP license we recommend that Patent Owners consider: (1) uncoupling royalty payment obligations from patent validity for marginally patentable inventions and (2) establishing dispute resolution procedures that forestall DJ actions (3) involving licensee in patent process.

4. 4 KSR v. Teleflex

5. 5 Result of KSR v. Teleflex The Supreme Court placed a heavy emphasis on industry knowledge and trends. As a result, many improvement inventions may be considered predictable and hence unpatentable subjects. Unfortunately, the Supreme Court has undermined the concept that �obvious to try" does not constitute obviousness. In re Deuel, 51 F.3d 1552, 1559 (CA Fed. 1995).

6. 6 KSR v. Teleflex (cont.) The combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results. If a person of ordinary skill can implement a predictable variation, � 103 likely bars its patentability. � [I]f a technique has been used to improve one [compound], and a person of ordinary skill in the art would recognize that it would improve [other compounds] in the same way using the technique is obvious unless its actual application is beyond his or her skill �

7. 7 KSR v. Teleflex (cont.) Design Incentives and Market Forces When a work is available in one field of endeavor, design incentives and other market forces can prompt variations of it, either in the same field or a different one. [A] court must ask whether the improvement is more than the predictable use of prior art elements according to their established functions.

8. 8 Prior Existence of the Problem and Its Solution [I]t often may be the case that market demand, rather than scientific literature, will drive design trends. Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may, in the case of patents combining previously known elements, deprive prior inventions of their value or utility. One of the ways in which a patent's subject matter can be proved obvious is by noting that there existed at the time of invention a known problem for which there was an obvious solution encompassed by the patent's claims.

9. 9 KSR v. Teleflex (cont.) The same constricted [TSM] analysis led the Court of Appeals to conclude, in error, that a patent claim cannot be proved obvious merely by showing that the combination of elements was "obvious to try." When there is a design need or market pressure to solve a problem and there are a finite number of identified, predictable solutions, a person of ordinary skill has good reason to pursue the known options within his or her technical grasp.

10. 10 KSR v. Teleflex (cont.) Greater Use of Summary Judgment The ultimate judgment of obviousness is a legal determination. Graham, 383 U.S., at 17, 86 S. Ct. 684, 15 L. Ed. 2d 545. Where, as here, the content of the prior art, the scope of the patent claim, and the level of ordinary skill in the art are not in material dispute, and the obviousness of the claim is apparent in light of these factors, summary judgment is appropriate. Nothing in the declarations proffered by Teleflex prevented the District Court from reaching the careful conclusions underlying its order for summary judgment in this case.

11. 11 The Crystal Ball in view of KSR More invalidity challenges based on: Predictability of results. Industry recognized design incentives or market forces for developing the product. Prior knowledge of the problem and its solution. Obvious to try � solution is one of a limited number of available approaches.

12. 12 Evidence of the coming trend Toprol XL patents struck down. Pfizer enantiomer struck down but other saved . Pfizer Norvasc � use of besylate in place of maleate salt for stability and to reduce sticking held obvious.

13. 13 How do you overcome KSR? You come into your patent attorney with a new dosage controlled release patch fast dissolve new indication gel new enantiomer nebulizer How do you justify/establish patentability unique problem -- stability or solubility unique solution � stabilizer/ sol. enhancer unexpected results unpredictable art

14. 14 �Chemical� Arts recognized as unpredictable In re Curtis, 354 F.3d 1347, 1355 (Fed. Cir. 2004). In other cases, particularly but not necessarily, chemical cases, where there is unpredictability in performance of certain species or subcombinations other than those specifically enumerated, one skilled in the art may be found not to have been placed in possession of a genus or combination claimed at a later date in the prosecution of a patent application.

15. 15 �Chemical Mfr.� Arts not always unpredictable. In re Kekhoven, 626 F.2d 846, 853 (Fed. Cir. 1980) Although the manufacture of detergents may involve chemical reactions in process steps, claim 5 involves merely the physical process of simultaneously spray-drying two known slurries, and there is no indication that a chemical reaction occurs in the spray-drying tower. Accordingly, the uncertainty and unpredictability often associated with the chemical arts is not present here.

16. 16 Showings of Unobviousness If the problem and the solution are not new, but performance is enhanced, those differences can be the basis for unobviousness. Important to establish the level of results the industry would have expected and prove that the new dosage exceeds the expected. Important to establish new reactions, interactions or drug development hurdles. May see narrower patents that are more easy to design around.

17. 17 If the invention is marginally patentable � then what? From the perspective of filing your application -- File and be prepared to advocate aggressively for protection. From the licensing perspective Decouple revenue from patent rights Engage licensee in patenting process.

18. 18 Coupling vs Decoupling Royalty and Patent Validity Patent Owner will want to decouple. Close door to validity challenge and exit without a continuing royalty obligation. However, under Lear v. Adkins, the patentee cannot leave the licensee without any incentive to challenge the patents. Licensee will want to couple. Open the door to an early royalty free exit.

19. 19 Decoupling the Royalty from validity Get upfront monies � trade the royalty for more up front money. Attribute money to development services instead of patent license. Make Milestone payments consideration/bonus for successful services. Attribute income to clinical trial work or an incentive payment as opposed to patent license. Much of the above is consistent with favorable revenue recognition principles, i.e., recognize instead of amortize the payment. Include trade dress and trademark rights.

20. 20 Hybrid Agreements Hybrid Agreement = patent and know-how license Several cases hold that royalty provisions of hybrid licenses are not enforceable if the patent is held invalid, but, the licensor should be entitled to a reduced royalty on trade secrets on an unjust enrichment theory. To avoid the need to prove the value of your trade secrets after the fact, the lawyer (but perhaps not the BD manager) would provide for a royalty reduction. Aronson v. Quick Point.

21. 21 Establish the value of your know-how Reflect the co-existence of patent and know-how rights in your royalty structure. Perhaps use heavier royalty in early years in recognition of the �head start� value of know-how Preserve the rights to know-how in treatment accorded records and the like. Possibly use DMF or NDA filings as events to compensate for know-how.

22. 22 Establishing the value of Know-How Draft tech transfer provisions such that in the event of invalidation it is clear that there is a basis for the on-going royalty obligation. Consider granting rights to improvements. Have the Licensee acknowledge the value of know-how that is transferred under the agreement in recitals and in the definition of the licensed technology.

23. 23 Get Licensee Buy In Include provisions that involve the licensee in the prosecution of the licensed patent. Creates serious credibility problems � if the licensee is involved in obtaining the patent, perhaps even to the extent of proposing arguments, it will be difficult for the licensee to turn around and challenge the validity later.

24. 24 Transfer an Interest in the Patent ? ! Some cases have held that Lear does not bar assignee estoppel on a bargain and sale theory. Sybion Transition Corp. v. Nixon Hargrave, (W. D. N.Y. 1991). Make the transfer contingent on receipt of a minimum payment that is actually made and not merely promised. Transfer of a Joint Ownership Interest could be just as effective in warding off validity challenges as a transfer of the entire interest.

25. 25 Transfer the Patent � Strings Attached Include automatic reverter: Customer breaches. Customer fails to develop diligently. Customer fails to launch by a date certain. In addition to reverter include transfer of product registrations, Customer know-how and a license under any essential Customer IP. Include a right to sue if the Customer refuses. Notice restrictions in the recordal document.

26. 26 Patents are now also more vulnerable from a procedural standpoint. Inter partes Reexamination --USPTO is trying to assist in reducing litigation costs by promoting an effective patent office forum for litigating validity challenges. KSR appears to be enhancing this trend. Medimmune � Licensee challenges to patent validity KSR ---Availability of Summary Judgment.

27. 27 Reexamination Ex Parte Reexaminations are up 30% from 392 in 2003 to 511 in 2006 to 477 as of 3Q 2007. Inter Partes Reexaminations are up 233% from 21 in 2003 to 70 in 2006.

28. 28 MedImmune v. Genentech Genentech granted MedImmune the right to make, use, and sell Licensed Products. At signing the patent had not issued. The agreement defined "Licensed Products" as a specified antibody, the manufacture, use or sale of which . . . would, if not licensed under the Agreement, infringe one or more claims of either or both of the licensed patents which have neither expired nor been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken.

29. 29 MedImmune v. Genentech After the license was executed, one of the licensed patents issued and Genentech notified MedImmune and demanded payment. The royalty obligation was defined in terms of infringement of a patent that had not been held invalid. Petitioner paid the demanded royalties under protest and with reservation of all of its rights.

30. 30 MedImmune v. Genentech The question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.� We concluded that "the requirements of [a] case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim."

31. 31 Drafting Strategies to Deter DJ Actions: Include a (prolonged) dispute resolution clause. Include a patent friendly forum selection clause. Include a binding arbitration clause. Industry arbitrators may not be as hard on industry patents. Structure the license to include substantial up front payments, thereby making it less economically desirable (bigger write off) for the licensee to attack the patent.

32. 32 Deterring DJ Actions Require the licensee to pay licensor�s attorney fees during the pendancy of the litigation. Require the licensee to pay higher royalties in the event of a challenge. Require the licensee to reimburse the licensor�s attorney fees if the licensee�s challenge is not successful.

33. 33 MedImmune v. Genentech (cont.) Expressly indicate that the royalties are not refundable, even if paid under protest. Portions of the Court�s opinion may also open the door to recovering royalties during the pendancy of a successful challenge. Require payment of the royalties until there is a final determination. This is consistent with earlier decisions holding that the licensee receives value during the pendancy of litigation until a final determination of invalidity.

34. 34 No challenge and related clauses No challenge clauses are generally considered unenforceable under Lear, Inc. v. Adkins, 395 U.S. 653 (1969). Termination in the event of a challenge clauses are generally considered enforceable. The Court in MedImmune addressed the case or controversy issue. Unlike Lear, the Court did not premise its decision on merits of challenging invalid patents. Thus, Lear and its progeny are not directly affected by this decision.

35. 35 Notice Letters Because the MedImmune case represents a lowering of the bar for establishing declaratory judgment jurisdiction, counsel will also want to be careful in drafting infringement notice letters. Notice letters must not establish a controversy of sufficient immediacy and reality to warrant DJ.

36. 36 Patent Reform Act of 2007 Would Further Weaken Patent Owner�s Position Specific limitations on when damages may be trebled for willfulness requiring a clear and convincing showing. Bifurcation of willfulness until holding that patent is valid and infringed. Inter partes re-examination proceedings with a reduction in the litigation estoppel effect to issues actually raised.

37. 37 LES Survey Says: About 52% of IP professionals say that limitations concerning damages calculations will inhibit innovation by reducing the penalties for infringement. About 8% indicated that the limitations would promote innovation by reducing the costs of potential damages. About 40% say damages calculations will fairly apportion the economic value of the patented technology. Regarding the post-grant opposition, half the survey respondents said this would hinder innovation by encouraging challenges and increasing patent-related expense. However, 41% said it would encourage innovation because it would improve the quality of patents.

38. DRAFTING LICENSE AGREEMENTS IN VIEW OF RECENT SUPREME COURT DECISIONS Mark P. Levy October 16, 2007