Evolving Patent Issues and the Trans-Pacific Partnership Agreement (TPP)

Introduction
I. Scope of Patentability
II. Evergreening Patents
III. Patent Trolls
IV. Presumption of Validity
V. Injunctions
VI. Exclusive Rights Over Test Data
VII. Patent Linkage
VIII. Delinkage/Positive Agenda
Conclusion

Introduction
The currently negotiated Trans-Pacific Partnership Agreement, a large regional trade agreement being negotiated by Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, is reportedly nearing its end stages with efforts to conclude by December. Although there are no more full rounds of negotiations, there have been numerous “intersessional” meetings of chapters with outstanding work to be done. One of the most controversial chapters has been the intellectual property chapter which is set to meet again next week in Japan, with another intersessional toward the end of November (location in November has not been set yet).

The negotiations over the IP chapter cover a range of controversial issues, both within the negotiations themselves as well as within the domestic context of the United States. For example, I recently wrote a blog on evolving copyright issues, including efforts on comprehensive copyright reform. Although the U.S. has already had comprehensive patent reform recently, through the America Invents Act, there are still discussions and bills in Congress on patent issues, as well as the numerous court cases working their way through the system. As noted in the blog regarding evolving copyright issues, those negotiating the TPP should ensure that flexibility in the agreement is preserved to accommodate and allow for such changes.

For purposes of this blog, I focus on the evolution of patent law and discussions regarding patent reform (focusing on the U.S. context) from the start of the TPP negotiations to the present and how these changes relate to the U.S. proposals for for the TPP (based on the leaked chapter from March 2011 and October 2011; as with the copyright issues, these proposals could be outdated and there may have been changes to the text or U.S. negotiating positions during this time period, but without greater transparency or a release of the text there is little else to rely on). This blog updates some portions of KEI’s August 2011 paper on Inconsistencies Between the USTR Proposal for the TPP and Current U.S. Law.

I. Scope of Patentability
According to the leaked text, the U.S. proposed very low standards of patentability that, if agreed to, would also reduce the ability of parties to exercise their TRIPS flexibility. The U.S. proposal included a requirement that parties grant patents on plants and animals as well as diagnostic, therapeutic and surgical methods. As previously noted, U.S. law allows the patenting of surgical methods, but also includes some limitations on liability for medical practitioners. In effect, this limitation means that surgical patents cannot be enforced against a surgeon who practices a patented surgical method during the course of treating his patient.

Since the leak of the U.S. proposal for the IP chapter, there have been several court cases, including before the Supreme Court of the United States, on issues related to this text. Twice in the last two years, the Supreme Court has unanimously rejected patents related to diagnostics.

In May 2012, the Supreme Court held in a 9-0 opinion in Mayo v. Prometheus Laboratories that one must do more than provide mere application of a law of nature to be eligible for patent protection and rejected the patents-at-issue. In holding that the patents-at-issue were not patentable, the Court found that more than one must do more than a mere application of a law of nature to render such a law patent eligible. It stated that a patent that describes the relation set forth in natural law does does not do enough to permit a patent. The Court noted the importance of looking at how the patents will affect future innovation and stated:

there is a danger that the grant of patents that tie up their use will inhibit future innovation premised upon them, a danger that becomes acute when a patented process amounts to no more than an instruction to ‘apply the natural law,’ or otherwise forecloses more future invention than the underlying discovery could reasonably justify.

Additionally, in rejecting the patents, the Court noted that the claims involved well-known methods in the scientific community:

To put the matter more succinctly, the claims inform a relevant audience about certain laws of nature; any additional steps consist of well-understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately. For these reasons we believe that the steps are not sufficient to transform unpatentable natural correlations into patentable applications of those regulations.

Similarly, in June 2013, in the highly-publicized case involving the BRCA1 and BRCA2 genes, the Supreme Court ruled on the issue of whether human genes were eligible for patent protection and made several key points regarding the balance between incentives for innovation but also promoting future innovation. The patents over the BRCA1 and BRCA2 genes were being used to block others from developing their own diagnostic tests for mutations on these genes.

In another unanimous opinion, the Supreme Court held that isolated DNA, as products of nature, are not patent eligible subject matter. In doing so, the Court noted the concern that allowing such patents would hinder future innovation and reaffirmed its exclusions over products of nature because:

. . . without this exception, there would be considerable danger that the grant of patents would “tie up” the use of such tools and thereby “inhibit future innovation premised upon them.” Id., at ___ (slip op., at 17). This would be at odds with the very point of patents, which exist to promote creation. Diamond v. Chakrabarty, 447 U. S. 303, 309 (1980) (Products of nature are not created, and “‘manifestations . . . of nature [are] free to all men and reserved exclusively to none’”). . . As we have recognized before, patent protection strikes a delicate balance between creating “incentives that lead to creation, invention, and discovery” and “imped[ing] the flow of information that might permit, indeed spur, invention.”.

Although these cases involved subject matter eligibility with regard to laws of nature and products of nature, it is telling that the Supreme Court unanimously rejected these patent related to diagnostics and repeatedly noted the impacts that allowing these patents would have on future innovation.

II. Evergreening Patents
The U.S. proposal would require patents on new forms, new uses and new methods for a known product even absent any enhanced efficacy of the product. This practice, known as “evergreening,” has the effect of extending monopoly protection and delaying the entry of generics into the market. These patents often reflect little to no innovation, but instead involve only minor tweaks to the existing product.

President Obama’s budget proposal for 2014 included an anti-evergreening provision with regard to biologics, stating:

The Budget also proposes to accelerate access to affordable generic biologics by modifying the length of exclusivity on brand name biologics. Beginning in 2014, this proposal should award brand biologic manufacturers seven years of exclusivity, rather than 12 years under current law, and prohibit additional periods of exclusivity for brand biologics due to minor changes in product formulations, a practice often referred to as “evergreening.” The proposal will result in $3 billion in savings over 10 years to Federal health program including Medicare and Medicaid.

Recognizing the high costs associated with the delay of entry into the market, Obama’s 2014 budget seeks to eliminate evergreening for biologics. Such an exclusion was not reflected in any leaked version of the the U.S. proposals for the TPP nor have there been any reports that the U.S. has sought to include such anti-evergreening measures in the agreement (whether for small molecules or for biologics).

III. Patent Trolls
There have been numerous bills and discussions recently regarding curbing abuses of the patent system, particularly with regard to patent assertion entities, also known as patent trolls. Patent trolls, which are entities or individuals that are not actually involved in contributions to innovation but instead acquire patent rights in order to bring suits against potential infringers, have harmed the innovation system. Representative Goodlate (R-VA) has a bill to address patent trolls and has been working on a new version of this bill. Senator Schumer (D-NY) has a version of a similar bill. Senator Cornyn (R-TX) and Representatives DeFazio (D-OR), Chaffetz (R-UT), Deutch (D-FL), Farenthold (R-TX) and Jeffries (D-NY) have introduced bills on this issue. Senator Leahy (D-VT) and Senator Lee (R-UT) are reportedly working on their own patent troll legislation.

The Obama Administration has similarly expressed concerns regarding patent trolls stating that:

In the last two years, the number of lawsuits brought by patent trolls has nearly tripled, and account for 62% of all patent lawsuits in America. All told, the victim of patent trolls paid $29 billion in 2011, a 400% increase from 2005. . .

As a result, the White House announced an intention to address these problems recognizing that

innovators continue to face challenges from Patent Assertion Entities (PAEs), companies that . . . ‘”don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

Patent trolls often rely on the prospect of high damages and injunctions. The remedies available are often out of proportion to the offense with regard to patent trolls who simply own the rights to the innovation but have not actually been a part of the innovation process itself. The provisions regarding remedies for patent infringement will therefore have at least some impact on the ability of patent trolls to continue with abusive litigation. Many of the bills that have been introduced with regard to addressing the problem of patent trolls deal with who can be sued for patent infringement and making it easier to get review of patents by USPTO.

IV. Presumption of Validity
According to the leaked text, the U.S. is pushing for a presumption of validity for all granted patents: “each Party shall provide for a rebuttable presumption that a patent is valid, and shall provide that each claim of a patent is presumed valid independently of the validity of the other claims.”

Within the United States, the presumption of validity has been at least somewhat controversial and the Supreme Court could decide to hear the WildTangent v. Ultramercial or CLS Bank v. Alice which involve this presumption. One of the questions at issue in the CLS Bank case involves whether the statutory presumption validity only apples to questions of fact and not to questions of law. Whether the presumption applies to subject matter eligibility is a controversial one and Supreme Court precedent suggests that the presumption does not apply in these inquiries.

Furthermore, data released by the USPTO regarding Mike Masnick of TechDirt notes:

That means that 78% of all patents that are granted a re-exam had serious problems with their original claims — and remember, 92% of re-exam requests are granted. All these patents were initially approved and enjoyed the presumption of validity, which would may have cost companies millions (or more). This isn’t just a failing grade. This is an epic disaster. It’s true that 67% of the re-examined patents still are allowed with “claim changes”, and only 11% are completely rejected, but those numbers are little comfort when we’re told that we need to presume all of the claims in all patents are perfectly valid.

For those patents that do not go through the re-examination process, they would be required to be presumed valid, putting a heavy burden on the defendant of a patent infringement case to prove that it is not violating the patent.

V. Injunctions
The U.S. proposal on injunctions can be interpreted in more than one way. If it is interpreted and enforced in a manner that requires injunctions in all cases and as noted in KEI’s 2011 paper, such a provision would be inconsistent with current U.S. law. In 2006, well before the TPP negotiations began, the Supreme Court of the United States unanimously held in eBay v. MercExchange that injunctions are not required in all cases and that a four-factor test is instead applied to determine the appropriate remedy in a patent infringement case.

In the wake of the 2006 case, there have been several cases involving medical technologies (among other patent cases) where courts have applied the four-factor eBay test and denied permanent injunctions. Despite the clear language and unanimity of the Supreme Court’s 2006 decision, while the district courts have been awarding damages rather than permanent injunctions, it appears that the Court of Appeals for the Federal Circuit has reversed the lower courts, at least in some instances. However, in the recent CoreValve appeal reversing the lower court’s denial of a permanent injunction, the concurring Federal Circuit opinion noted the danger in the majority opinion which seems to ignore the standard applied in eBay v. MercExchange. There, the concurring judge noted that he joined in all parts of the decision except the portion discussing standards for a permanent injunction:

Some complain of areas of patent law in which our guidance is mixed or muddled. This is not — or should not be — one of those areas after the Supreme Court’s clear pronouncement in eBay. eBay made clear that there is no general rule that a successful plaintiff is entitled to an injunction; rather, the plaintiff bears the burden of establishing the four equitable factors that weigh in its favor in order to obtain a permanent injunction. We should take care to avoid possible misinterpretation of an otherwise clear Supreme Court standard. Because the majority’s statements appear to me to deviate from the standard articulated by the Supreme Court and our court, I respectfully concur.

A petition for a writ of certiorari was filed during the Supreme Court during the court’s recess and was denied earlier this month. Regardless of the Federal Circuit’s attempt to reinstate a presumption of granting a permanent injunction, the Supreme Court’s 2006 opinion remains the law of the land.

VI. Exclusive Rights Over Test Data
In the text on pharmaceutical provisions tabled by the U.S. in September 2011, provisions that would require exclusive rights over test data (data exclusivity) were included. The leaked text revealed efforts, as part of a complicated and controversial “access window” package, to require these exclusive rights for a period of “at least” five years for a new pharmaceutical products with an additional three granted for new clinical information on an existing product.

The problem with exclusive rights over test data is that where these rights exist even when there is no patent or the patent has expired, a generic company wishing to enter the market has another barrier to overcome. Replicating the tests are time consuming and expensive. Furthermore, duplication of these tests is not only wasteful, but also unethical as noted in the World Medical Association Declaration of Helsinki – Ethical Principles for Medical Research Involving Human Subjects. Other models exist, such as those involving cost-sharing where the originator of the test data is compensated for some portion of the cost involved in creating the data by those wishing to rely on the test data. These cost-sharing models have been included in a number of free trade agreements involving European countries with regard to agricultural products and was also referenced in an annex to the EFTA-Korea FTA with respect to both agricultural products as well as pharmaceuticals.

In the United States, Senator Sanders has introduced several bills to address the ethical concerns caused by exclusive rights over test data. Most recently, in 2012, Senator Sanders reintroduced his ethical pathways bill as an amendment to another bill.

There are serious shortcomings with regard to exclusive rights over test data and consideration should be given to the delay of generics that data exclusivity causes as well as the unethical nature of requiring generic firms to repeat clinical testing when the outcome is already known.

VII. Patent Linkage
Although not directly related to the issue of linking the regulatory process to patent status, a recent Supreme Court case highlights one of the ways that the patent linkage system as enacted in the United States caused unintended consequences. Patent linkage in the United States is found in the Hatch-Waxman Act, which also provides for incentives for generic companies to challenge weak patents held by branded pharmaceutical companies by providing for a 180-day duopoly to the first successful generic filer. The system allows the branded pharmaceutical to delay the approval of the generic firm’s product for up to thirty months and to force parties to litigate the merits of the patent (compulsory litigation). Instead of fully litigating the case, however, a number of branded pharmaceutical companies provided settlement agreements to the generic challengers, essentially paying them to delay entry into the market. These payments, known as “reverse settlement agreements” or “pay-for-delay,” essentially resulted in branded pharmaceutical companies paying for generic companies not to continue on the merits of the case, perhaps because of the likelihood of generic success on the merits. In an FTC study, over 70% of all cases that reached the merits, the branded pharmaceutical company’s patent was found to be invalid and the generic company was able to proceed with its product.

Over the past several years, there have been several cases regarding the legality of pay-for-delay settlement agreements, causing a deep circuit split. The Supreme Court agreed to hear one case, FTC v. Actavis, in the 2012-2013 sitting. During oral arguments, Justice Kagan summed up the motivation behind pay-for-delay as follows:

JUSTICE KAGAN: Suppose you had a — a lawsuit and the generic sends the brand name manufacturer an e-mail and the e-mail says, we have this lawsuit, I think I have about a 50 percent chance of winning.

If I win, I take your — your monopoly profits down from 100 million to $10 million. Wouldn’t it be a good thing if you just gave me 25 million? All right? And then the brand name sends an e-mail back, says — you know, that seems like a pretty good idea, so I’ll give you 25 million.

Now, as I understand it, your argument is, I mean, that’s just fine. That’s hunky dory. [. . .] Is that fine?

Although this result could be a quirk of the U.S. Hatch-Waxman system, the prevalence of pay-for-delay in the United States illustrates the potential unintended consequences of the linkage system. As Justice Scalia noted during oral arguments, “Although this result could be a quirk of the U.S. Hatch-Waxman system, the prevalence of pay-for-delay in the United States illustrates the potential unintended consequences of the linkage system.”

The Supreme Court ruled in a 5-3 opinion that pay-for-delay settlement agreements are not immune for antitrust scrutiny. It summarized that pay-for-delay:

simply keeps prices at patentee ­set levels, potentially producing the full patent ­related $500 million monopoly return while dividing that return between the challenged patentee and the patent challenger. The patentee and the challenger gain; the consumer loses. Indeed, there are indications that patentees sometimes pay a generic challenger a sum even larger than what the generic would gain in profits if it won the paragraph IV litigation and entered the market. (emphasis added)

U.S. PIRG released a report in July 2013 highlighting the top twenty pay-for-delay drugs, though noting that the FTC has reported that as many as 142 drugs have been delayed by reverse payment agreements.

Although the Supreme Court did not rule pay-for-delay agreements to be presumptively illegal, it rejected the position of branded pharmaceutical companies that such behavior falls within the scope of the patent. The U.S. should take care in pushing its own systems of patent linkage or even requiring forms of patent linkage because of the potential unintended consequences, such as where pay-for-delay agreements arise in order to prevent generic companies from carrying forward in litigation over weak patents.

VIII. Delinkage/Positive Agenda

In May 2011, Senator Sanders (I-VT) introduced two bills to de-link the costs of research and development from the price of medicines through the use of prize funds. In May 2012, the Senate Health, Education, Labor and Pensions (HELP) Committee held a hearing on the “High Cost of High Prices for HIV/AIDS Drugs and the Prize Fund Alternative” to explore the prize fund model and concept of delinkage.

The concept of delinkage has been supported at the global level, including explicit reference in WHA Resolution 61.21, the 2008 Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property. Since then, there have been numerous efforts to push for concrete measures that address and support delinkage. A consultative expert working group (CEWG) on research and development was established, with a report released in April 2012, that noted “Delinking should be a fundamental principle underpinning open approaches to research and development and innovation.”

In May 2013 at the World Health Assembly, “Decisions PointWHA 66(12)was drafted and agreed to. The Decisions Point instructed the WHO Director-General to convene a technical consultative meeting in December 2013 (which takes place at the same time as the 9th WTO Ministerial Conference in Bali) to evaluate demonstration projects that:

1. address identified R&D gaps related to discovery, development and/or delivery, including promising product pipelines, for diseases that disproportionally affect developing countries, particularly the poor, and for which immediate action can be taken;
2. utilize collaborative approaches, including open-knowledge approaches, for R&D coordination;
3. promote the de-linkage of the cost of R&D from product price; and
4. propose and foster financing mechanisms including innovative, sustainable and pooled funding.

Even within at least one TPP negotiating party, this concept has been included in a prior FTA. In the FTA between the EU, Peru and Colombia, explicit mention of the WHA Resolution 61.21 is included at Article 197(4):

4. The Parties also recognise the importance of promoting the implementation of Resolution WHA 61.21 Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property, adopted by the World Health Assembly on 24 of May 2008.

This inclusion demonstrates that it is possible to preserve policy space for alternative models for innovation within a trade agreement. While there are many ways to incorporate positive proposals and preserve this space to explore new models for innovation, parties to the negotiation should recognize the evolving intellectual property system and the efforts being made within their own domestic situation as well as at the international level, such as at the World Health Organization.

Conclusion
Since USTR tabled its proposed text for the intellectual property chapter in February 2011, all three branches of government in the U.S. have made or considered changes to the patent and innovation system. These changes reflect the evolving nature of the intellectual property system and efforts to improve innovation and address some of the concerns that have arisen because of abuses by rightholders or merely inefficiencies of the current model. An overly-prescriptive intellectual property chapter in the TPP would hinder the ability to make some of the needed changes and it is important to ensure that enough flexibility exists in the chapter to address the concerns mentioned above, as well as those that may arise in the years to come. The evolving nature of the intellectual property system as a whole should be carefully considered in determining the appropriate balance and language for the TPP, rather than simply seeking to lock in current rules.

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Krista Cox