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Jessica Chesher

Managing Editor

Innovation eReview
Technology Law Digest
by Eugene R. Quinn, Jr., Associate Director, NYS Science & Technology Law Center

Patent Shell Game

Unlike the other cases summarized in this section, this case is not worthy of discussion because it unveils new legal rules, nor because it embodies an excellent summary of hard to explain theories, nor because it announces a final decision in a widely followed litigation.  This case deserves our attention because of the relationship between the parties.  This case study demonstrates what can occur without proper forethought and legal counseling.  The lesson to learn here is that if you do not have an agreement in writing you do not have an agreement at all.  The subtext to this plot shows how one can be taken to the cleaners and not recognize it is happening until it is too late to do anything about it.

The pivotal moment in this patent licensing dispute between Massachusetts Eye and Ear Infirmary (MEEI) and QLT Phototherapeutics, Inc. was the filing of a continuation-in-part application, which added Dr. Julia Levy of QLT and Drs. Schmidt-Erforth and Hasan of Massachusetts General Hospital as inventors on the patent.

A continuation-in-part is similar to any other patent application save two things. First, a continuation-in-part is a second-generation application that claims priority from an earlier application.  This does not necessarily mean that the continuation-in-part supersedes the previous application, it means only that the applications are related by some common thread.  Second, unlike a generic continuing application, a continuation-in-part (CIP) is filed when the earlier application (to which this CIP is related) supports some, but not all, of the claims being submitted within the CIP.  Therefore, a CIP can get around the prohibition that no new matter can be added within any application.  Because the CIP is a new application itself, new material can be added to it.  The catch is that the earlier priority date is available only with respect to what was previously disclosed.  A new, later priority date is given to the additional material added in the CIP.  This is important because the priority date is for all intents and purposes the date of invention.  Having an earlier priority date is important because in the United States, for better or worse, we have a first to invent system, which means that the patent will go to the person with the best priority date.

The seeds for the dispute were planted in March 1994, when MEEI approached QLT about pursuing a patent application for the treatment in question. QLT agreed that the treatment was worthy of patent protection and suggested that Kate Murashige, its long-standing patent attorney, prepare the application.  Even though QLT was not claiming co-inventorship of the '473 application at that time, QLT confirmed that it would pay for the preparation of the application.  Murashige told MEEI that “QLT does not see itself as a participant in the invention other than as a supplier of the material,” and “the assignment would be entirely to MEEI.”  Nevertheless, at this point a small red flag likely should have been raised by MEEI staffers.

Within months of the '473 filing, however, QLT changed its approach to the patent strategy.  Additions were made to the invention, necessitating the addition of Levy, Schmidt-Erforth and Hasan to the application.  In the course of this switch in patent strategy, QLT made numerous assurances to MEEI that it would license MEEI's patent rights on reasonable terms. At this point, another, larger red flag should have been raised.  Promises to enter into a license are worthless, and one must seriously question the motives or parties that refuse to enter into a written agreement or contract.  If promises are to be believed why then not sign an agreement that clearly spells out the terms of the promise?

This case arose not because QLT continued to offer nothing but promises but because of what can only be characterized as a bait-and-switch patent strategy that left QLT in the driver’s seat and MEEI out in the cold, despite the fact that MEEI invented the foundation of the patent in question.  Because no licensing agreement was ever reached, and because among the assignees of the resulting patent in question, U.S. Patent 5,798,349, QLT is distinguished by its ownership of the patents on the benzoporphin derivatives, which are integral to the treatment claimed in the ‘349 patent. Thus, ownership of the benzoporphin derivatives means that QLT alone can independently exploit the rights of the ‘349 patent.

MEEI claimed that it was injured by the aforementioned actions, and further harmed by QLT's unlawful disclosure of MEEI's trade secrets.  The United States Federal District Court for the District of Massachusetts rendered summary judgment disposing of all of MEEI’s claims.  On appeal, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the decision of the district court.  The First Circuit found there was no contract and, therefore, no breach of contract.  The First Circuit also determined that there was no conversion, a claim similar to theft, because MEEI agreed to add the new inventors.  Similarly, MEEI’s misrepresentation claim was determined to be unsubstantiated.   The First Circuit did, however, find there to be sufficient evidence to move forward on the claim of unjust enrichment, which is essentially a fairness-based claim applicable in the absence of a contract.  Additionally, some, but not all of the trade secret claims were time barred by the statute of limitation.  Finally, the First Circuit explained that after a trial it might be possible for MEEI to demonstrate the applicability of its unfair business practices claim.

As a result of the ruling of the First Circuit, the case will continue and MEEI will have an opportunity to demonstrate that they were legally wronged and are entitled to compensation.  Nevertheless, the First Circuit ruling makes clear that there was no contract, which means that MEEI must rely on indirect claims to receive redress for this patent “trickeration” scheme.

The moral of the story is that to be certain, things must be in writing.  The take-away lesson for small businesses and high-tech start-ups is that caution when doing deals is not a luxury, it is a mandate.  Tread lightly, do not rush in and make sure that you are not blinded by hearing what you want to be told.

To access the full text of this decision see Mass. Eye & Ear Infirmary v. QLT Phototherapeutics, Inc. (1st Cir., February 18, 2005).

FTC Reversed on Pharmaceutical Antitrust Case

Pharmaceutical companies Schering-Plough Corp. and Upsher-Smith Laboratories, Inc. petitioned for review of an order of the Federal Trade Commission that they cease and desist from being parties to any agreement settling a patent infringement lawsuit, in which a generic manufacturer either (1) receives anything of value; and (2) agrees to suspend research, development, manufacture, marketing, or sales of its product for any period of time. The issue presented is whether substantial evidence supports the conclusion that the Schering-Plough settlements unreasonably restrain trade in violation of Section 1 of the Sherman Antitrust Act and Section 5 of the Federal Trade Commission Act ("FTC Act”).  The United States Court of Appeals for the Eleventh Circuit ruled that a brand-name pharmaceutical company holding a patent cannot be found liable for a violation of antitrust law solely based upon the payment of money to a generic competitor.  Essentially, the Eleventh Circuit rejected a bright line rule of law that would automatically invalidate any agreement where a patent holding pharmaceutical manufacturer settles an infringement case by negotiating the generic's entry date, and, in an ancillary transaction, pays for other products licensed by the generic.  To access the full text of this decision see Schering-Plough Corp. v. FTC (11th Cir., March 8, 2005). 

Reversal of $520 million Patent Infringement Judgment

The issues in this appeal related to whether the Viola Web browser, invented by Pei-Yuan Wei, constituted prior art for U.S. Patent No. 5,838,906 (the ‘906 patent).  The specific issues were essentially whether: (1) Viola version DX34 was abandoned, suppressed or concealed DX34 within the meaning of section 102(g), and therefore not capable of being prior art; (2) in the event DX34 was abandoned, suppressed or concealed, could any non-confidential demonstration of DX34 be considered a public use; and (3) whether Eolas Technologies owed a duty to the Patent Office to disclose the existence of DX34.  The United States Court of Appeals for the Federal Circuit ruled that the district court's prior art rulings were legally erroneous, specifically holding that the district court erred: (1) in finding as a matter of law that DX34 was abandoned, suppressed or concealed within the meaning of section 102(g);  and (2) finding that Wei's May 7, 1993 demonstration to two Sun Microsystems employees without confidentiality agreements was not a public use under section 102(b).  Furthermore, the Federal Circuit ruled that because Viola is prior art, the district court must reconsider whether Eolas owed a duty to disclose to the Patent Office.  As a result, the Federal Circuit remanded for additional proceedings on these issues.  This ruling is significant because the allegedly infringing product was Microsoft’s Internet Explorer web browsing program, and because this decision reverses a final judgment entered against Microsfot in the amount of $ 520,562,280.  To access the full text of this decision see Eolas Technologies, Inc. v. Microsoft Corporation (Fed. Cir., March 2, 2005).

No On-sale Bar

The issue in this appeal was whether the commercial sale of a sonobuoy could trigger an on-sale bar when a patent for a second generation version of said sonobuoy was filed more than 12 months after the first offer for sale of the originally developed sonobuoy.  The United States Court of Appeals for the Federal Circuit ruled that there was no on-sale bar because the patent filed did not cover the product sold, which is of course a requirement to have an on-sale bar.  The Federal Circuit specifically concluded that the Court of Federal Claims erroneously determined that the on-sale bar would apply because the second generation version of the sonobuoy would be considered conforming goods under the contract.  This ruling is important because it demonstrates the necessity of identity between what is sold and what is claimed in order for an on-sale bar to be triggered.  To access the full text of this decision see Sparton Corporation v. United States (Fed. Cir., February 28, 2005). 

Patent Owner Sufficiently Present to Proceed with Litigation

Evident Corporation and Peroxydent Group appeal from the decision of the United States District Court for the District of New Jersey.  The issue on appeal was whether Evident, as the licensee, had standing to sue for patent infringement.  The United States Court of Appeals for the Federal Circuit explained that a patentee should, as a general rule, be joined, either voluntarily or involuntarily, in any infringement suit brought by an exclusive licensee.  The Federal Circuit went on to hold that because Peroxydent, the patent owner, had been brought into the lawsuit as a third-party defendant the general requirement that the patent owner must be present was satisfied.  To access the full text of this decision see Evident Corp. v. Church & Dwight Co., (Fed. Cir., February 22, 2005).

Lexmark Did Not Violate
Kentucky Trade Secret Act

The issue presented in this appeal was whether there had been a misappropriation of trade secreted technology where BDT Products allegedly invented and perfected the technology which Lexmark used as part of the paper handling system of its Optra S printer, and where Lexmark used that technology without making payment to BDT Products.  The United States Court of Appeals for the Sixth Circuit explained that in order to prevail on a trade secret misappropriation claim the plaintiff must demonstrate both that the technology in question was actually a trade secret, and that there was unauthorized use.  The Sixth Circuit ruled that because BDT Products had disclosed all of the alleged trade secrets to other companies without the protection of a two-way confidentiality agreement the technology in question was not maintained as a trade secret.  Furthermore, the Sixth Circuit held that, even assuming the information was a trade secret, the existence of multiple confidentiality agreements between BDT and Lexmark permitting unrestricted use of information BDT imparted to Lexmark negated any alleged misappropriation.  To access the full text of this decision see BDT Prods. v. Lexmark Int'l, Inc., 2005 U.S. App. LEXIS 2602 (6th Cir., February 11, 2005).  NOTE: This opinion is not available online because the Sixth Circuit did not recommend it for publication. 

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