OK to Use 'Research Tool' Patents Offshore?

When a research method is used in a foreign country, the “product” of that research method often takes the form of information about the identity of a new chemical entity or biological product or about the properties of such a product. The ultimate commercial product, however, has no relationship to the research method. If a chemical structure identified overseas by a screening assay research-tool method is later approved as a drug in the U.S., the drug would be produced by manufacturing, not by the screening method.

Housey deals with the importation of products based upon the offshore use of a research method patented in the United States. A “substance” (as used in the claim), per se, is the product that will be commercialized. The patented research method determines only whether a particular “substance” does or does not measure up to certain parameters. In other words, it is a method of identifying substances having certain properties.

Two different patent infringement allegations were raised against Bayer by Housey Pharmaceuticals, as stated in the trial court opinion. Housey alleged infringement under 35 U.S.C. 271(g) when Bayer either sells a drug in the United States that was identified as pharmaceutically active by use of Housey's patented method or domestically uses “knowledge and information” about the drug's properties gained from use of the patented information.

The trial court summarily dismissed Housey's claim: “Upon a plain reading of the statute, the court finds that Section 271(g) addresses only products derived from patented manufacturing processes, ie, methods of actually making or creating a product as opposed to methods of gathering information about, or identifying, a substance worthy of further development.” Thus, Housey's method claims are to “processes for recognizing substances with the potential for development into pharmaceuticals.” Such methods to determine the pharmaceutical properties of drugs through production of data “are not steps in the manufacture of final drug products.” Bayer A.G. v. Housey Pharm. Inc., 169 F. Supp 2d. 328, 330, 331 (D. Del. 2001).

In Bayer v. Housey, the Federal Circuit “conclude[d] that infringement under 35 U.S.C. ' 271(g) is limited to physical goods that were manufactured and does not include information generated by a patented process, and because the physical goods here [drug products] were not 'manufactured' by a process claimed in the asserted patents, we affirm the dismissal of Housey's infringement claims.” Bayer v. Housey, 340 F.3d at 1368. The opinion of the trial court was left standing.

The court emphasized that it is the product of a manufacturing process — and not intangible information — that is protected under 35 U.S.C. 271(g). In this regard, the court may be offering a clue as to whether the export of a “component” to be combined offshore into a patented combination “product” constitutes an infringement under the parallel statutory provision of 35 U.S.C. 271(f)(2) (“Whoever … supplies … from the United States any component of a patented invention … knowing … that such component will be combined outside of the United States … shall be liable as an infringer.”).

In the recent $521 million infringement damages award case against Microsoft for, among other things, shipping a “golden master” – ie, an original software disk handed in for duplication — offshore to computer manufacturers to create a patented combination for computers to be sold abroad, the trial court held that export of the golden master is an infringing export of a “component” under 35 U.S.C. 271(f)(2) — even though it is more the information on the golden master that is exported (with the golden master being used as a “mold” to recreate and install the software on the computers). Eolas Technologies Inc. v. Microsoft Corp.

The extent to which export of a golden master represents the export of information may affect this ruling, particularly if higher courts adopt the Bayer court's viewpoint on ' 271(g) (for process patents) and apply the same logic to ' 271(f) (for product patents), the provision at issue in the Eolas case.

The legislative histories of 35 U.S.C. 271(f)(2) and 35 U.S.C. 271(g) are closely intertwined. As the court stated in Bayer v. Housey, 340 F.3d at 1374 (discussing a prior bill in the 98th Congress): “Two new acts of infringement were to be created by the proposed legislation: 1) infringement by importation, sale, or use 'of a product made in another country by a process patented in the United States' (the precursor to section 271(g)); and 2) infringement by supplying 'the material components of a patented invention … intending that such components will be combined outside the United States' (the provision that became section 271(f])(2)).”

The legislative history shows that the two reforms — the process patent infringement implicated in Bayer v. Housey and the exportation of a component along the lines of the Eolas case — were intimately intertwined to protect manufacturing, not the transmittal of information.

Eolas and future cases will no doubt test the limits of the Bayer case, in particular the question of whether similar logic dictates that ' 271(f) should not extend to block exportation of “information” derived from a patented product. A ruling that the exportation of information does not implicate ' 271(f) would create yet another loophole to infringement of U.S. patents. Such developments, in turn, might even spur Congress to consider modernizing U.S. patent laws to deal more directly with the import and export of information covered by U.S. patents.

The Aftermath

In the fallout from the $521 million verdict, Microsoft has announced detailed plans to change its Internet browser, which would have a domino-like effect by altering the interoperability standards, causing various Web page providers to change their pages, and suppliers who provide plug-ins to rewrite their programs. Some of these entities have been spurred to join Microsoft in its fight against Eolas, and they are now combing the prior art, looking for old references that would help invalidate the Eolas patent. They have lodged a request with the U.S. Patent and Trademark Office to re-examine the Eolas patent and find it invalid over previous developments.

FTC Weighs In with Proposed Patent Reforms

The debate over whether to overhaul our patent laws picked up momentum with the recent release of the Federal Trade Commission's white paper on patents and competition, which deals with a variety of troubles within the patent system that were highlighted earlier in the year through extensive hearings of the FTC together with the Department of Justice. Although none of these proposed recommendations deals directly with ' 271(g) or ' 271(f), they all are made in the spirit of trying to curb perceived patent abuses and circumscribing the rights of patentees.

Perhaps one of the most important recommendations in this paper is a proposal to create a system for post-grant challenge of patents within the Patent Office, offering a level playing field to allow parties to test patent validity without being forced to resort to costly litigation. Another important proposal in the paper is to lower the standard for proving patent invalidity in litigation from “clear and convincing” to a mere “preponderance of the evidence.” Yet another proposal deals with limiting the damages for patent infringement, although the Federal Circuit has just agreed to hold an en banc review of this subject in Knorr-Bremse Systeme fur Nutzfahrzeuge v. Dana, nos. 01-1357, 01-1356, 02-1221, 02-1256 (Fed. Cir. 9/26/03).

In a possible sign that the Patent Office intends to stand behind the FTC recommendations and demonstrate their feasibility, the Patent Office just announced that it will be publishing a comprehensive set of rules in the next few weeks relating to “contested cases” in anticipation that legislation will pass Congress that would set up the post-grant opposition system recommended in the FTC's white paper. The Patent Office did the same thing in anticipation of the General Agreement on Tariffs and Trade legislation, proposing rules relating to 18-month publication of patent applications before the laws had even been passed by Congress.

Conclusion

The FTC white paper does not consider the problems raised by recent cases such as Bayer v. Housey that highlight statutory loopholes for avoiding infringement of U.S. patents. If any of the FTC proposals are taken up in Congress, careful consideration should be given to striking the proper balance between competition and innovation, taking into account the potential weakening of patent rights brought about by the Bayer case. If patent rights are weakened too much, then investors may not have adequate incentive to invest in risky technologies, such as biotechnology and nanotechnology — areas that have the potential to create new high-tech jobs and spur economic development.

The U.S. Court of Appeals for the Federal Circuit has confirmed that there is no patent infringement liability under 35 U.S.C. 271(g)(1) for the offshore use of a “research tool” patent when only the information gained from such offshore use is introduced into the United States. Bayer A.G. v. Housey Pharm. Inc., 340 F.3d 1367 (Fed. Cir. 2003), aff'g, 169 F. Supp. 2d. 328, 329 (D. Del. 2001).

Dicta in the Bayer case also suggest that the exportation of intangible information on a computer disk may not be a “component” of an offshore assembly of a patented combination — an issue of interest in the $521 million damages award in Eolas Technologies Inc. v. Microsoft Corp., No. 99 C626, 2003 WL 21781893 (N.D. Ill. 8/11/03).

The Offshore Research Tool of 'Bayer v. Housey'

When a research method is used in a foreign country, the “product” of that research method often takes the form of information about the identity of a new chemical entity or biological product or about the properties of such a product. The ultimate commercial product, however, has no relationship to the research method. If a chemical structure identified overseas by a screening assay research-tool method is later approved as a drug in the U.S., the drug would be produced by manufacturing, not by the screening method.

Housey deals with the importation of products based upon the offshore use of a research method patented in the United States. A “substance” (as used in the claim), per se, is the product that will be commercialized. The patented research method determines only whether a particular “substance” does or does not measure up to certain parameters. In other words, it is a method of identifying substances having certain properties.

Two different patent infringement allegations were raised against Bayer by Housey Pharmaceuticals, as stated in the trial court opinion. Housey alleged infringement under 35 U.S.C. 271(g) when Bayer either sells a drug in the United States that was identified as pharmaceutically active by use of Housey's patented method or domestically uses “knowledge and information” about the drug's properties gained from use of the patented information.

The trial court summarily dismissed Housey's claim: “Upon a plain reading of the statute, the court finds that Section 271(g) addresses only products derived from patented manufacturing processes, ie , methods of actually making or creating a product as opposed to methods of gathering information about, or identifying, a substance worthy of further development.” Thus, Housey's method claims are to “processes for recognizing substances with the potential for development into pharmaceuticals.” Such methods to determine the pharmaceutical properties of drugs through production of data “are not steps in the manufacture of final drug products.” Bayer A.G. v. Housey Pharm. Inc. , 169 F. Supp 2d. 328, 330, 331 (D. Del. 2001).

In Bayer v. Housey , the Federal Circuit “conclude[d] that infringement under 35 U.S.C. ' 271(g) is limited to physical goods that were manufactured and does not include information generated by a patented process, and because the physical goods here [drug products] were not 'manufactured' by a process claimed in the asserted patents, we affirm the dismissal of Housey's infringement claims.” Bayer v. Housey , 340 F.3d at 1368. The opinion of the trial court was left standing.

The court emphasized that it is the product of a manufacturing process — and not intangible information — that is protected under 35 U.S.C. 271(g). In this regard, the court may be offering a clue as to whether the export of a “component” to be combined offshore into a patented combination “product” constitutes an infringement under the parallel statutory provision of 35 U.S.C. 271(f)(2) (“Whoever … supplies … from the United States any component of a patented invention … knowing … that such component will be combined outside of the United States … shall be liable as an infringer.”).

In the recent $521 million infringement damages award case against Microsoft for, among other things, shipping a “golden master” – ie, an original software disk handed in for duplication — offshore to computer manufacturers to create a patented combination for computers to be sold abroad, the trial court held that export of the golden master is an infringing export of a “component” under 35 U.S.C. 271(f)(2) — even though it is more the information on the golden master that is exported (with the golden master being used as a “mold” to recreate and install the software on the computers). Eolas Technologies Inc. v. Microsoft Corp .

The extent to which export of a golden master represents the export of information may affect this ruling, particularly if higher courts adopt the Bayer court's viewpoint on ' 271(g) (for process patents) and apply the same logic to ' 271(f) (for product patents), the provision at issue in the Eolas case.

The legislative histories of 35 U.S.C. 271(f)(2) and 35 U.S.C. 271(g) are closely intertwined. As the court stated in Bayer v. Housey , 340 F.3d at 1374 (discussing a prior bill in the 98th Congress): “Two new acts of infringement were to be created by the proposed legislation: 1) infringement by importation, sale, or use 'of a product made in another country by a process patented in the United States' (the precursor to section 271(g)); and 2) infringement by supplying 'the material components of a patented invention … intending that such components will be combined outside the United States' (the provision that became section 271(f])(2)).”

The legislative history shows that the two reforms — the process patent infringement implicated in Bayer v. Housey and the exportation of a component along the lines of the Eolas case — were intimately intertwined to protect manufacturing, not the transmittal of information.

Eolas and future cases will no doubt test the limits of the Bayer case, in particular the question of whether similar logic dictates that ' 271(f) should not extend to block exportation of “information” derived from a patented product. A ruling that the exportation of information does not implicate ' 271(f) would create yet another loophole to infringement of U.S. patents. Such developments, in turn, might even spur Congress to consider modernizing U.S. patent laws to deal more directly with the import and export of information covered by U.S. patents.

The Aftermath

In the fallout from the $521 million verdict, Microsoft has announced detailed plans to change its Internet browser, which would have a domino-like effect by altering the interoperability standards, causing various Web page providers to change their pages, and suppliers who provide plug-ins to rewrite their programs. Some of these entities have been spurred to join Microsoft in its fight against Eolas, and they are now combing the prior art, looking for old references that would help invalidate the Eolas patent. They have lodged a request with the U.S. Patent and Trademark Office to re-examine the Eolas patent and find it invalid over previous developments.

FTC Weighs In with Proposed Patent Reforms

The debate over whether to overhaul our patent laws picked up momentum with the recent release of the Federal Trade Commission's white paper on patents and competition, which deals with a variety of troubles within the patent system that were highlighted earlier in the year through extensive hearings of the FTC together with the Department of Justice. Although none of these proposed recommendations deals directly with ' 271(g) or ' 271(f), they all are made in the spirit of trying to curb perceived patent abuses and circumscribing the rights of patentees.

Perhaps one of the most important recommendations in this paper is a proposal to create a system for post-grant challenge of patents within the Patent Office, offering a level playing field to allow parties to test patent validity without being forced to resort to costly litigation. Another important proposal in the paper is to lower the standard for proving patent invalidity in litigation from “clear and convincing” to a mere “preponderance of the evidence.” Yet another proposal deals with limiting the damages for patent infringement, although the Federal Circuit has just agreed to hold an en banc review of this subject in Knorr-Bremse Systeme fur Nutzfahrzeuge v. Dana, nos. 01-1357, 01-1356, 02-1221, 02-1256 (Fed. Cir. 9/26/03).

In a possible sign that the Patent Office intends to stand behind the FTC recommendations and demonstrate their feasibility, the Patent Office just announced that it will be publishing a comprehensive set of rules in the next few weeks relating to “contested cases” in anticipation that legislation will pass Congress that would set up the post-grant opposition system recommended in the FTC's white paper. The Patent Office did the same thing in anticipation of the General Agreement on Tariffs and Trade legislation, proposing rules relating to 18-month publication of patent applications before the laws had even been passed by Congress.

Conclusion

The FTC white paper does not consider the problems raised by recent cases such as Bayer v. Housey that highlight statutory loopholes for avoiding infringement of U.S. patents. If any of the FTC proposals are taken up in Congress, careful consideration should be given to striking the proper balance between competition and innovation, taking into account the potential weakening of patent rights brought about by the Bayer case. If patent rights are weakened too much, then investors may not have adequate incentive to invest in risky technologies, such as biotechnology and nanotechnology — areas that have the potential to create new high-tech jobs and spur economic development.