When a Patent License Fails: Looking At and Beyond the Patent Issues

Author:Mr Mitchell Stockwell
Profession:Kilpatrick Stockton LLP

US companies, government agencies, nonprofits, and universities are spending billions of dollars every year on research and development. Those efforts have fostered an enormous growth in intellectual property rights. Patent filings have increased, and the associated know-how for implementing new advances has leapt forward, but not every inventor has the wherewithal or interest to bring new technologies to market. Many universities, nonprofit organizations engaged in pure research, and companies that own rights to non-core technologies prefer to partner with other entities that will be responsible for developing and actually commercializing the technology.

The increase in research and corresponding patent activity means that there has been a similar increase in licensing arrangements. Passage of the Bayh-Dole Act by Congress in 1980 started research universities in the business of patenting and licensing their basic research.1 The latest reports indicate that they are having incredible success in those endeavors.2 Likewise, for many years, the intellectual property community has encouraged its business clients to commercialize and capitalize on technology assets, either by implementing the technology, licensing non-core developments, or pouring intellectual property assets into startup entities commissioned to develop the technology. These efforts have resulted in many agreements, ventures, collaborations, partnerships, and spin-offs. Not all of these ventures will succeed. Even optimists expect some to fail. Anyone familiar with the differing personalities and interests involved in researching versus commercializing will readily understand that failures may be the norm, not the exception. Under these circumstances, it is important to understand the ingredients of the failed technology collaboration and, more importantly, the possible consequences of a failed license arrangement.

A Failed Collaboration Case Study

The Federal Circuit recently addressed the fallout from a failed collaboration involving a series of patent licenses and technology transfer agreements. In Rhone-Poulenc Agro, S.A. v. DeKalb Genetics Corporation,3 the court considered claims by RhonePoulenc Agro (RPA) that DeKalb Genetics Corporation (DeKalb) (1) had fraudulently induced RPA to enter into a 1994 exclusive licensing agreement, (2) had misappropriated RPA's trade secrets, and (3) had infringed on RPAs patents. The underlying transaction involved a lengthy collaboration between RPA and DeKalb, which focused on developing "Roundup Ready" corn that could survive doses of "Roundup" strong enough to kill surrounding weeds. The collaboration was key to bringing the ultimate product to market in 1998 because "[n]either company appeared to have the technical expertise to perform each other's work."4

The relationship started to go downhill in 1994 when DeKalb received the results of successful field experiments with the Roundup Ready corn but did not share those results with RPA. Meanwhile, following successful patent litigation against a third party, DeKalb and RPA renegotiated their licensing arrangement, and DeKalb ended up as the exclusive licensee. Soon after DeKalb introduced the corn to market in 1998, RPA realized that DeKalb must have known of the technology's imminent success. RPA sued, alleging fraud, trade secret misappropriation, and patent infringement, and it sought rescission of the license agreement. The Federal Circuit affirmed a jury verdict awarding RPA $15 million for DeKalb's unjust enrichment, $1 nominal damages, and $50 million in punitive damages, as well as findings of patent validity and infringement.

The key to the fraud claim and, in some respects, the entire case, was DeKalb's failure to share with RPA test results showing successful field trials of Roundup Ready corn. DeKalb had received those results just months before renegotiating the license to obtain exclusive rights. DeKalb's failure to disclose occurred despite many other contacts and collaborations between the parties' scientific personnel. For instance, right after DeKalb's researcher, Dr. Flick, received the test results, he wrote RPA a brief letter asking for permission to use the gene involved in soybeans. When queried as to why he did not tell anyone at RPA about the successful field tests, Flick "responded that it would have required him to write a longer letter."5 The Federal Circuit did not find this testimony impressive, wryly observing that "Dr. Flick was evidently not a compelling witness for DeKalb."6 In rather stark contrast, the jury heard testimony from RPA personnel that the success of the field trials was not only unknown but also unexpected, which explained why RPA was willing to grant DeKalb exclusive rights during a negotiation that occurred only months after the concealed field trials. Moreover, one of RPAs employees, Dr. DeRose, had a close and friendly relationship with the scientists at DeKalb, who had always previously forwarded relevant information to DeRose without RPAs having to ask.7 On the basis of these facts, the jury found fraud, breach of contract, and unjust enrichment and awarded $65 million on those claims.

Differing Expectations of the Parties

RPA's case against DeKalb is not the only recent case in which the Federal Circuit has addressed failed relationships surrounding patented technology. Dr. Tronzo's suit against Biomet, Inc., for patent infringement, breach of confidential relationship, fraud, and unjust enrichment was heard on appeal a second time in 2001.8 Ultimately, Biomet's waiver of the right to appeal an earlier punitive damages award based on state law claims resulted in Tronzo's receiving a $20 million punitive damages award.

It is not surprising that cases involving failed collaborations are about more than just patent claims. Licensing and technology transactions frequently occur within a web of complex relationships between the parties. In the university context, the inventors' research may have been sponsored in whole or part by the licensee, which may have given grant money, equipment, or just technical support during the development of the technology. The inventor often has worked with the licensee before and after a patent is filed or know-how is developed and transferred. Many times, it is these relationships and the inventor's industry contacts that lead to a licensing deal.9 Even outside the university context, it is rare for a company to license the work of an individual inventor. More frequently, companies will license technology to or from a commercial partner, perhaps a supplier or customer...

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