Recent Supreme Court decisions in patent law: What pharmaceutical companies need to know

Venue shopping

Patent holders looked for those US District Courts that seemed to have the most favorable jury decisions and damage awards against infringers. For example, of the 5819 new patent cases filed in 2015, 2540 cases were filed in the Eastern District of Texas based in Marshall, Texas, of which 1686 were presided over by Judge Rodney Gilstrap. ⁶ As an example of the influence of the cottage industry, Samsung sponsored an outdoor ice rink and over $50,000 in college scholarships to local high school students in Marshall, Texas, population around 24,000. ⁷

In T.C. Heartland, L.L.C. v. Kraft Foods Group Brands, L.L.C., the Supreme Court effectively put an end to this cottage industry by eliminating patent suits under the personal jurisdiction standard and limiting the meaning of the word “resides” to where the company is incorporated. The discrepancy between the prior holding of the lower court, the Federal Circuit, and the Supreme Court arises from changes to the venue statutes enacted by Congress and how the statutory changes would overturn prior Supreme Court precedent.

Legal history of patent case venue

In 1988, Congress amended the general venue statute that applies “[f]or the purposes of venue under this chapter”. ⁸ Since the statute governing patent infringement venue ⁹ was within the same chapter of the US statutory code as the general venue statute, the Federal Circuit held in 1990 that the general venue statute “clearly applies” to patent cases. The patent venue statute and general venue statute also used similar terms for determining where a suit may take place. The former used “resides,” ¹⁰ and the latter featured “residence.” ¹¹ Since “residence” in the general venue statute meant any place where a defendant had personal jurisdiction, the Federal Circuit held that patent infringement suits could be brought not only in the place of incorporation but also in any jurisdiction in which there was personal jurisdiction, including where an infringing product was effectively marketed or sold. ¹²

The Supreme Court’s decision

After almost 20 years venue shopping, the Supreme Court unanimously ¹³ reversed the Federal Circuit’s decision by criticizing the premise that the general venue statute—and the terms therein—can also apply to the patent venue statutes. As in 1956, when the court held that the patent venue statute at 28 U.S.C. §1400(b) “is the sole and exclusive provision controlling in patent infringement actions, and… is not to be supplemented by §1391(c) [the general venue statute],” ¹⁴ the Supreme Court now holds that “reside[nce] in §1400(b) refers only to the State of incorporation.” ¹⁵ In short, patent infringement suits, unlike for example product liability for negligence torts, no longer can be brought to venues in which the alleged infringing product was sold or marketed.

Consequences

As a general practice, however, suits may not be merely limited to where the defendant resides. The patent venue statute also establishes venue where the defendant has committed acts of infringement and has a regular and established place of business. ¹⁶ For example, the location of factory producing an infringing product could be used to establish venue in that US District Court. Moreover, for a non-US company, venue is proper in any US District Court. ¹⁷

Certainly, there are states and geographic regions with a disproportionate number of companies incorporated in them, such as Delaware and Northern California. Additionally, for pharmaceutical companies, New Jersey is also prominent, with New York, Pennsylvania, West Virginia, and Illinois also having significant generic presence. The US District Courts of these areas will likely observe the greatest spike in the number of patent infringement suits. The District of Delaware has already requested and been assigned Visiting Judges from the Eastern District of Pennsylvania. ¹⁸ The Eastern District of Texas will most likely see a drop in the filing of patent infringement cases from its peak of 40% of the national total.

As noted above, the same general venue statute states that a foreign defendant can be sued in any US District Court, so long as he or she is not a natural person lawfully admitted and residing in the US. ¹⁹ Since the scope of the general venue statute does not extend to the patent venue statute, the court in T.C. Heartland may have opened up a substantial question of law regarding where foreign defendants should be sued. However, the Supreme Court addressed this previously and held that foreign defendants “may be sued in any district” as set forth in 28 U.S.C. §1391, the general venue statute. ²⁰ An argument might be made that under T.C. Heartland, foreign corporations cannot be sued in any US District Court. ²¹ However, lower courts would have to grant T.C. Heartland greater weight than the Supreme Court’s prior precedent that is immediately on point. Alternatively, Congress may be forced to amend the patent venue statute to clean up any loose ends.

Multidistrict litigation (MDL) is a type of litigation involving one or more common questions of facts pending in different US District Courts. MDL allows for the transfer to any one of the districts involved in the original litigation for coordinated discovery and pretrial proceedings in order to increase judicial efficiency and avoid inconsistent decisions. There might be a question of whether MDL litigation can still apply to patent infringement cases because it is codified in the general venue statute. ²² Congress identified patent cases as appropriate for MDL proceedings when it enacted the MDL statute. ²³ The Supreme Court also used Congressional intent in T.C. Heartland as a particularly important criterion for whether the general venue statute applies to the patent venue statute. ²⁴ So, grounds also remain for arguing MDL should continue to be used in patent litigation.

In summary, the holding of T.C. Heartland should end venue shopping in patent cases. Foreign corporations, multiple defendants, and those subjected to MDL will likely also utilize new arguments to challenge venue in a patent infringement suit. The Supreme Court might have to further clarify which sections of the general venue statutes apply to patent infringement cases. Congress might also intervene to copy those statutory provisions in the general venue statute that are viewed positively, like joinder of out-of-state defendants, foreign defendants, and MDL, and paste them into the patent venue statute.

Background

Lexmark developed a complex scheme to try to prevent remanufacturers from refilling Lexmark toner cartridges. The original purchasers of the cartridges could either buy them at full price, unrestricted, or sign a contract with Lexmark, agreeing to return the cartridges to Lexmark in exchange for a 20% discount. As an added protection, Lexmark also installed an anti-tamper microchip on only those cartridges sold under the discount program.

Some of the anti-tamper cartridges were sold instead to remanufacturers, such as Impression Products, Inc. The remanufacturers developed ways to bypass the anti-tamper microchips, refill the cartridges, and resell them.

Lexmark sued alleging that they still had patent rights in the original cartridges sold under contract because Lexmark only licensed the cartridges to the end user, and because Lexmark did not authorize the purchaser to resell the cartridges. Because both the end user and the remanufacturer knew that these products could only be returned to Lexmark, they were therefore operating outside the scope of the patentee’s authorization and were infringing the patent. The presence of the microchip, for example, was evidence that the patent rights were not yet exhausted. Likewise, Lexmark also separately alleged that those cartridges initially sold abroad could not have their patent rights exhausted because the US patent rights only attached to those products upon importation of the remanufactured cartridges into the US Lexmark never gave anyone the authority to import them. ²⁵

The holding

The Supreme Court held otherwise. The Court resolved itself on a long history of cases that held when a patentee sells an item under an express, and otherwise lawful restriction, the patentee does not retain patent rights in that product. ²⁶ A patentee could sue for a breach of contract related to the express agreement, but that is a suit based on contract law. ²⁷ Its rights to enjoin, control, and extract royalties under its patent rights were exhausted. It also held that the doctrine of patent exhaustion is not presumptive. Courts cannot presume that the patentee exhausted all patent rights absent some contract showing otherwise. ²⁸

Just as patent exhaustion is not presumptive, it is also not qualified by international borders. Lexmark argued that the Patent Act excludes others from making, selling, using, or importing its products, but only so long as those occurred within the US. Because those exclusionary powers do not apply abroad, the patentee might not be able to sell its products for the same price overseas. Without this reward, there is no exhaustion. Without noting that Lexmark probably already had patent protection overseas in the same cartridges, the Supreme Court wrote that the presence of a reward cannot determine whether the patent is exhausted. Rather, patent exhaustion depended on whether the patentee authorized or decided to make the sale abroad. If so, its patent rights were exhausted. The Supreme Court noted that a generic smart phone could have components in it that are in total covered by upward of 250,000 patents. ²⁹ Without the doctrine of patent exhaustion, the phone could be encumbered by a particularly long and complex web of patent rights and depend upon which components were sold abroad.

Distinctions

Of note, the court also contrasted these exhaustive sales from the types of license agreements involved in the supply chain. ³⁰ A licensee in the supply chain can knowingly make sales outside of the scope of its license. These are cases of legitimate infringement because the court treated sales outside the scope like sales that occurred without a license. ³¹ The patentee could sue both the licensee and the purchaser, who knew about the breach. Likewise, if the patentee had nothing to do with the initial overseas sale, then patent rights in the particular product were not exhausted. ³² Thus, so long as the patentee decided to make the sale, its rights in the patent were exhausted. If the patentee did not authorize the sale or if the sale was outside the scope of the authority granted to the licensees in the supply chain, then patentees could sue for patent infringement.

Consequences

In the pharmaceutical industry, the effects of Impression Products, Inc. will be felt immediately, especially in the area of drug/device combination products. The Supreme Court overturned a Federal Circuit decision, Mallinckrodt, Inc. v. Medipart, Inc., involving compound products used for delivery of medicines.

In Mallinckrodt, the patentee manufactured nebulizers and, like Lexmark, attempted to impose a single-use restriction on the nebulizer by placing a notice on each product and package insert that the product could be used only once. The Federal Circuit decided that “[if] the sale of the [patented device] was validly conditioned under the applicable law such as the law governing sales and licenses, and if the restriction on reuse was within the scope of the patent grant or otherwise justified, then violation of the restriction may be remedied by action for patent infringement.” ³³

In light of Impression Products, Inc., a court could well no longer find that the restriction on reuse is within the scope of the patent grant. As is, manufacturers would have to enforce single-use provisions under contract law. In the absence of an express contract, the manufacturer would have to prove that the person violating the sales contract knew of the restriction on single use before he agreed to purchase the product. ³⁴ A product insert or patient guide discovered after the fact will likely not suffice. ³⁵ To adapt, manufacturers will likely have to take tighter control of their supply chains and draft contracts with each hospital before selling the products so they can enforce those contracts. Enforcing the contract against subsequent purchasers will be even more difficult third parties do not have privity of contract. Existing contracts between patentees and foreign distributors will likely need to also be renegotiated, because they were predicated on patentees having some right upon importation. Manufacturers hoping to prevent reuse of its products will likely have lobby FDA for new administrative rules, arguing on public policy grounds that reuse is unsafe. But it is not clear whether FDA would be receptive to such arguments in the absence of proof of lack of safety.

Summary

In summary, Impression Products represents a ground shift, likely requiring renegotiation of supply chain agreements and making it harder for patentees to enforce restraints on their products once sold under their authority.

The statutory framework for the patent dance

Congress created a structure for attempting to efficiently resolve FDA licensing and potential patent infringement actions for applications for follow-on biologics. The first manufacturer to produce the biologic (the sponsor) may obtain a license from FDA if it can demonstrate that the biologic is “safe, pure, and potent” ³⁹ as defined by the Biologics Price Competition and Innovation Act of 2009 (BPCIA). ⁴⁰ Subsequent manufacturers may piggyback on the first license, via an abbreviated showing that the biosimilar (the subsequent biologic) is “highly similar” to the previously licensed product (reference product) and that there are no “clinically meaningful differences” in terms of “safety, purity, and potency.” ⁴¹ Applicants for biosimilars cannot submit an application until four years after the reference product is first licensed, and the FDA may not license the biosimilar until 12 years after the reference product was first licensed. ⁴²

The BPCIA facilitates resolution of patent disputes during the FDA approval process by defining the submission of a biosimilar application as being an act of patent infringement. Hence, the Supreme Court labeled this as “artificial infringement.”

The BPCIA creates a tightly regulated scheme involving two separate phases of litigation in order to resolve the patent disputes. The first phase consists of immediate litigation of at least some of the patents at issue, which should be concurrent with FDA’s approval process. The applicant must notify the sponsor within 20 days of submitting the application to FDA in order to trigger this early immediate litigation phase. During this phase, the biosimilar applicant must give the sponsor a copy of the application and its manufacturing information, and the two parties must exchange lists of patents they believe should be litigated immediately. The second phase involves litigation of any remaining patent disputes. To initiate the second phase of litigation, the applicant is required to notify the sponsor at least 180 days prior commercialization of the biosimilar.

The regulatory scheme also provides the biosimilar applicant with certain advantages if it cooperates with the process, and disadvantages if it does not. For example, the first phase provides an opportunity for a collaborative effort to identify as many patents as possible for early resolution. If the parties do not agree on which of the sponsor’s patents are at issue or even the number of patents in dispute, the applicant has an advantage, as it initially sets the number of patents to be identified for this phase of litigation, a number which the sponsor cannot exceed when it is required to submit a list of patents for litigation. ⁴³ At most, the initial phase of litigation can only involve twice the number of patents initially identified by the applicant, assuming there is no overlap between those identified by the sponsor and those identified by the biosimilar applicant. ⁴⁴ The sponsor “shall bring an action” in court within 30 days of the date the parties simultaneously exchange the final list of patents, in the event they fail to agree on the patents at issue. Or, if the parties agree on the patents at issue, the sponsor shall sue within 30 days of the date of that agreement. ⁴⁵

The second phase also provides the biosimilar applicant with certain advantages, assuming the applicant elects to enter into the terms of the patent dance. In the second phase, the parties litigate any patents identified in the first phase but that were not fully litigated, and any patents that the sponsor later acquired. Because the applicant chooses when to begin commercial marketing, it has substantial control over the timing of the second phase. One of the questions the Supreme Court decided asked whether the notice is effective if the applicant provides the notice to the sponsor before FDA decides to license the biosimilar.

The parties might not decide to comply with the patent dance steps outlined above. But they will face various consequences for failing to do so. If the applicant fails to provide the sponsor with its application and manufacturing information and thus prevents the two-phase approach, then only the sponsor may seek a “declaration of infringement, validity, or enforceability of any patent that claims the biological product or a use of the biological product.” If the biosimilar applicant fails to perform a subsequent step, like identify potential patents for litigation, only the sponsor may bring a declaratory judgment action for any patent the sponsor initially identifies in its list of patents exchanged, and additionally, any patents it acquires after the initial listing.

The dispute

Sandoz sought approval to market a filgrastim biosimilar under the brand name Zarxio from FDA under the abbreviated application process by relying upon Amgen’s approved figrastim called Neupogen. One day after FDA accepted the application for review, Sandoz notified Amgen that it had submitted an application. At that time, Sandoz also notified Amgen that it would begin commercializing Zarxio immediately upon receiving FDA approval. When it came time for Sandoz to disclose to Amgen additional information required for the first phase of litigation, such as a copy of the FDA application and the manufacturing information for making the biosimilar, ⁴⁶ Sandoz said it would not do so. Sandoz instead stated its position that Amgen could sue for infringement immediately. ⁴⁷

Amgen therefore sued Sandoz in October 2014 and included two claims under California’s unfair competition law, which prohibits “any unlawful… business act or practice,” including unlawful acts in violation of a rule contained in some other state or federal statute. ⁴⁸ According to Amgen, Sandoz engaged in “unlawful” conduct when it failed to provide its application and manufacturing information. Additionally, Sandoz engaged in “unlawful” conduct when it provided notice of commercial marketing before, rather than after, FDA licensed the biosimilar. Amgen asked the court for a preliminary injection to compel Sandoz to provide Amgen with the FDA application, the manufacturing information, and to force Sandoz to provide notice to Amgen of commercialization only after FDA licensed the biosimilar. In response, Sandoz asked for declaratory judgments that asserted the patent was invalid and not infringed, and with regard to the California “unfair competition law, that it had not “unlawfully” violated the BPCIA. While the case was pending in District Court, FDA licensed Zarxio and Sandoz provided Amgen with a second notice of commercialization.

Once the case arrived at the Supreme Court, three legal issues remained: (1) whether courts could issue an injunction to force the parties to exchange information as part of the patent dance; (2) whether notice of commercialization could only be provided after FDA licensed the biosimilar; and (3) whether the claim under California’s unfair competition law should remain.

Holding 1: Courts cannot issue preliminary injunctions under the BPCIA for failing to engage in the patent dance

The Supreme Court held that courts could not issue injunctions to force the biosimilar applicant to engage in the patent dance. Rather, the only remedies available to courts were the declaratory judgments and declarations of infringement, validity, and enforceability mentioned in the statute. In its decision, the Supreme Court also held that the submission of a biosimilar application to FDA was the triggering act of artificial infringement, and that failure to disclose the application and manufacturing information to Amgen was not the triggering act of infringement. ⁴⁹

Holding 2: Biosimilar applicants can notify sponsors of commercialization before receiving a license

The Court also addressed whether notice of commercial marketing is effective if it is prior to FDA’s decision to license the biosimilar, holding that it is. Biosimilar applicants have the opportunity to force litigation of the two phases of the patent dance, compressing them into one. It also need not wait 12 years after the reference product was first licensed. This too might have the effect of reducing the number of patents litigated in the first phase, as there is less of an incentive for the biosimilar applicant to try to invalidate as many patents as possible. The Supreme Court’s holding prevents the 12-year administrative period from buttressing patent rights because biosimilar applicants need not wait until this period expires before forcing litigation of all the patents the sponsor could bring. Combined, the holdings also prevent courts for issuing preliminary injunctions under the BPCIA requiring the biosimilar applicant to only notify the sponsor of commercialization after licensure. ⁵⁰

Holding 3: Claims under California’s unfair competition law will need to be resolved by lower courts

Amgen alleged that Sandoz engaged in “unlawful” conduct when: (1) it failed to provide its application and manufacturing information and (2) provided notice of commercial marketing before, rather than after, FDA licensed the biosimilar. Because the Supreme Court held that notice could be provided before, the latter claim under California’s Unfair Competition Act should be dismissed by lower courts. ⁵¹ Regarding the first claim, the Supreme Court remanded the case for further proceedings. US District Courts and the Federal Circuit will thus have to evaluate whether failing to perform steps in the patent dance constitute unlawful conduct under California’s Unfair Competition Act. Even if they are, the lower courts will have to also ask whether the BPCIA pre-empts state law, meaning whether the BPCIA prevents state laws from applying to acts carried out under its procedures and process. Lower courts will have to determine whether Sandoz also forfeited this pre-emption defense at trial. ⁵²