Newsletter for Leaders in the Medical Device Industry – June 2009

30 June 2009 Publication
Authors: Andrew E. Rawlins

Legal News: Medical Devices

Patent Portfolio Management in a Down Economy — A Guide to Efficiency
By Andrew E. Rawlins (arawlins@foley.com) and Sheena Conners (sconners@foley.com)

In difficult financial times, IP presents a special challenge. The need to decrease IP expenses tugs at one shirtsleeve of corporate counsel, who expect a 4.3 percent cut in IP budgets in 2009. (BTI Consulting Group’s Mid-Year Legal Spending Update and Outlook for 2009, survey of 1,200 corporate counsel). Tugging at the other shirtsleeve, a large majority of companies (79 percent) believe that IP has heightened value in an economic downturn. (November 2008 Price Waterhouse study of companies in the United Kingdom, Germany, and France). Faced with this tension, we all must seek increased efficiency and cost-effectiveness while remaining mindful of the high perceived value of IP rights in these difficult times.

The following procedures and practices can help your company manage its patent portfolio in a more efficient and cost-effective manner during the economic downturn and beyond:

Travel the Patent Prosecution Highway (PPH)
Patent rights may be secured more quickly and more cost efficiently by traveling the PPH. Typically, patent applications for a single invention are prosecuted separately and in parallel in each country, with the large costs and prolonged pendency expected of such separate, parallel proceedings. The PPH is a cooperative program providing an opt-in procedural alternative to standard patent application examination procedures. By requesting to travel the PPH, an applicant who has had a claim allowed in a patent application in one PPH-participating country can speed up the examination of corresponding applications in other PPH-participating countries. For example, an applicant may file a Canadian patent application and a corresponding U.S. patent application. If one or more claims are allowed in the Canadian application, the applicant can request to participate in the PPH to have the corresponding claims in the U.S. case be examined more quickly. These corresponding claims are more likely to be allowed, and the corresponding patent application typically issues more quickly than those applications examined under standard examination procedures. Further, the expense of prolonged pendency of corresponding applications can be avoided. Countries participating in the PPH cooperative program include Australia, Canada, Denmark, the European Patent Office, Germany, Japan, Korea, Singapore, the United Kingdom, and the United States.

Insist on Complete Invention Disclosures
Incomplete invention disclosures increase internal and external costs for a company. For example, an incomplete invention disclosure may make it more difficult for a company to determine upfront if an invention is properly aligned with its business objectives. As a consequence, the company may make significant monetary commitments to acquiring IP assets that turn out to have little commercial value for the company. The incomplete invention disclosure also may fail to provide outside counsel with sufficient information to efficiently draft an application covering the disclosed invention. The efforts of outside counsel to acquire more information about the invention and/or to write an application based on insufficient information will cost the company time and money.

Instituting procedures utilized before and after an invention disclosure is drafted can help minimize these costs. At the front end, a company is more likely to receive complete invention disclosures from personnel who fully understand the make-up of a complete invention disclosure. Providing formal training to personnel (e.g., from a patent attorney) is one way to help get personnel, business, and counsel on the same page. The training should include an explanation of the information that a patent attorney needs in each section of the invention disclosure form and may include a review of an actual patent to provide personnel with a clear idea of the depth and scope of information that is required to prepare a patent application.

At the back end, it is important to promptly follow-up with an inventor who has submitted an invention disclosure. This provides those on the business side the ability to ensure receipt of sufficient information in the invention disclosure while the idea is still fresh in the inventor’s mind. This further provides the opportunity to evaluate the patentability of the invention and its commercial prospects. For example, an inventor may be asked to explain why this invention will meet the United States standard for patentability. In addition, the inventor can engage in a dialogue with those on the business side about design around options and the company’s business objectives, helping to ensure that the invention is not so narrow that it has little commercial value. In this way, filing decisions can be based on optimal data and unnecessary costs can be avoided as some inventions that may have otherwise been filed are weeded out.

Use a Patent Cooperation Treaty (PCT) Application for a Cheap Search
An agreement amongst various nations, the PCT provides recognized benefits when filing a patent application. For example, by filing just one PCT application, the applicant will receive a patent office’s assessment of the pertinent prior art before the applicant has to decide upon the countries in which it will it pay the price to pursue patent protection. Cost savings can be achieved by an applicant’s careful selection of the patent office that will conduct the initial assessment of the prior art in the PCT application. For example, the cost of a search by the Korean Intellectual Property Office ($609) is far less than that of other competent patent offices such as the United States Patent and Trademark Office (USPTO) ($2080) and the European Patent Office ($2164). Use of the PCT also delays the deadline for deciding upon countries to be pursued, which gives the applicant more time to evaluate the potential markets for commercial embodiments of the invention while still preserving the option for extensive worldwide filing. In this way, a company can avoid irrational exuberance over an invention and avoid investments that may not provide the initially anticipated return.

Strategically Allocate Your IP Budget
Strategic, upfront allocation of an IP budget can help a company acquire high-value IP and avoid encountering difficult budgetary trade-offs. All too often, allocation of an IP budget is dictated by timing — for example — what IP comes through the pipeline earlier in the fiscal year. As a result, one problem companies commonly encounter is having insufficient funds in the IP budget to pursue potentially key IP assets that are developed later in the fiscal year. Recognizing that the best IP investments are typically those that are strongly aligned with a company’s business objectives, specific allocations of the IP budget can improve the likelihood that a company will realize a return on its IP investments in both the short- and long-term. One way to do this is to segment the IP budget, allocating portions by product or technology area based on importance. For example, a company may have three product lines: A (flagship product), B (solid performer), and C (reached obsolescence). The company may allocate its IP budget in accordance with the importance of the product lines, with most allocated to product A, some to product B, and a minimal amount to product C. In this way, the company can focus resources on the higher-return investments and avoid overspending on non-core technologies.

Eliminate Procedural Inefficiency
Paying attention to procedure can help keep costs down. First, use standing instructions that require certain actions, prohibit certain actions, or decide various matters in advance. Standing instructions can relate to, for example, countries in which patent protection will not be pursued, designation of an annuity payment service, and decisions on whether to pursue certain examination options (e.g., Chapter I or Chapter II in the PCT). Standing instructions can decrease the back and forth between a company and outside counsel, thereby reducing costs and saving time. Using standing instructions encourages companies to think ahead and decide various matters in advance, avoiding the costs of last-minute, poorly thought-out decisions.

Second, bundle. Prohibit activities that increase your costs without providing any value. Each exchange between a company and its counsel comes at the expense of time and money. Take time up front to determine which exchanges can be combined. For example, law firms often generate correspondence to a client every time they receive a document from a patent office, even if that document requires no action by the client. Prohibit your law firm from sending such correspondence, and instruct it to hold non-critical documents and report them all at one time and only when action is actually needed. Similarly, each exchange between counsel and a patent office comes at the expense of time and money. Prohibit counsel from filing patent applications with missing parts. Insist that the declaration and formal drawings are always filed with the application. Also, when your counsel is filing foreign applications, require them to provide all necessary documents to foreign counsel in an initial document package, instead of engaging in an expensive course of correspondence exchange with foreign law firms.


Significant New Changes for Determining Patent Infringement for Biomedical Products: The Devil Is in the Details
By George C. Best (gbest@foley.com) and Photon Rao (prao@foley.com)

In the age of multifunctional products exemplified by “hand-held devices,” many modern products are complex devices capable of doing many different things. A recent Federal Circuit decision increases the importance of the understanding and analyzing the functions of each part of these devices. Because the Federal Circuit is the highest patent court below the US Supreme Court, its opinions are very important. In this recent decision, Ricoh Co. v. Quanta Computer Inc., 550 F.3d 1325 (Fed. Cir. 2008), the Federal Circuit decided that if even a small part of the device is adapted solely to perform a patented process, the seller may be liable for contributory infringement.

Under U.S. law, a party who sells or offers to sell an apparatus for use in practicing a patented process may be liable for contributory infringement if it knows that the apparatus is especially made or adapted for use in an infringement and not a staple article of commerce suitable for substantial non-infringing use. Although this particular case involves computer hardware, the decision has broad applicability to other fields, including software, medical, and other mechanical devices.

Background
Ricoh appealed to the Federal Circuit claiming that the defendant, Quanta Storage, Inc. (Quanta), had contributed to and induced infringement of U.S. Patents Nos. 5,063,552 and 6,661,755. These patents claim methods for writing information to recordable optical discs in computer disc drives. Quanta sells optical disc drives to NU Technologies which, in turn, sells the drives to consumers. When consumers use the drives to save information, the hardware and embedded software operate in a manner that allegedly infringes the ’552 and ’755 patents.

Contributory Infringement
The District Court dismissed Ricoh’s claims for contributory infringement of the ’552 and ’755 patents because the disc drives were capable of a substantial non-infringing use — reading information already recorded on a disc that was placed in the drive. Because the ’552 and ’755 patents only claim processes involved in writing information to the discs, the District Court held that sale of the accused drives was not contributory infringement.

On appeal, The Federal Circuit held that the District Court erred by analyzing the functions and uses of the entire device actually sold by Quanta. Ricoh had argued to the lower court that portions of the disc drives were distinct and separate components that were used only to perform the allegedly infringing methods. The Federal Circuit concluded that the contributory infringement analysis should have focused on the individual components of the disc drive. Ricoh, 550 F.3d at 1337.

On remand the District Court is to determine whether the accused products contain any “hardware or software components that have no substantial non-infringing use other than to practice Ricoh’s claimed methods.” Id. at 1340. In the event that no substantial non-infringing use is found, then a finding of contributory infringement seems likely.

An Important Holding
Although this particular case involves computer hardware, the decision has broad applicability to other fields, including software, medical, and other mechanical devices. Because non-infringing uses based solely on additional features included in a multifunctional device do not defeat liability for contributory infringement, the function of each component of the device must be understood and analyzed. Freedom-to-operate analyses, therefore, are likely to be more detailed and time consuming.

What should companies do? A company’s agreements with downstream companies, who package together the components, should be carefully reviewed to be certain they are structured to provide appropriate indemnifications and warranties for this type of special liability. Under Ricoh, method patents for a company will be a useful tool in discouraging competitors from intruding on that company’s proprietary technology, especially in circumstances where the device patent has expired or is of uncertain validity.


Vermont Passes Strict Gift Ban and Disclosure Laws: Medical Device Companies Beware
By R. Michael Scarano, Jr. (mscarano@foley.com)

A new law signed by Vermont Governor Jim Douglas on June 8, 2009, S. 48, establishes what many are calling the strictest gift ban and payment disclosure law in the country. The new provision becomes effective July 1, 2009, the same day as Massachusetts’ new gift ban and disclosure law. Like the Massachusetts law, the Vermont law applies to medical device as well as pharmaceutical companies. The Vermont law expands on an existing Vermont law that already requires reporting of certain marketing expenditures by pharmaceutical companies in that state, but does not apply to device companies.

The Vermont law bans anything of value given to a “health care provider” for free, including any payment, food, entertainment and travel, or other items of value, unless the item is specifically identified in an exception to the ban, or the health care provider reimburses the cost at fair market value. A “health care provider” under the bill is defined as including health care professionals (i.e., practitioners licensed to prescribe), hospitals, nursing homes, pharmacists, health benefit plan administrators, or other persons authorized to dispense or purchase for distribution prescribed products in Vermont.

The bill exempts certain gifts from the ban, including free samples; rebates and discounts provided in the normal course of business; short-term loans of medical devices; medical device demonstration or evaluation units; and scholarships that support medical students, residents, or fellows to attend scientific or educational programs. In addition, the law treats certain payments as “allowable expenditures,” rather than gifts, and therefore also permits them. Allowable expenditures include: royalties and licensing fees; certain conference sponsorships; honoraria and payment of expenses of health care professionals participating in bona fide educational, medical, scientific, or policy-making conferences; technical training on medical devices; bona fide clinical trial expenses; certain research project expenses; and other reasonable fees, payments, and subsidies provided by a manufacturer of prescribed products at fair market value.

In addition to the ban on gifts, the Vermont law requires reporting of exempted gifts and allowable expenditures, with certain exceptions. Items excluded from the disclosure requirement include free samples; rebates and discounts provided in the normal course of business; and certain royalty and licensing fees.

The first report for medical device companies is due October 1, 2010, for the period ending June 30, 2010. The report must include the “value, nature and purpose, and recipient information” of permitted gifts and allowable expenditures covered by the reporting requirement. This information must be reported to the Vermont Office of the Attorney General (Attorney General), along with the prescribed product being marketed, if any, and certain information about the recipient.

Special reporting rules permitting deferred disclosure apply to “bona fide clinical trials,” as defined by the law. Expenditures for such clinical trials must be disclosed after the earlier of the date of the approval by the FDA, or two calendar years after the date the payment was made. The manufacturer must, nevertheless, provide certain minimum information to the Attorney General during the clinical trial, including the name of the trial, the start date, and the Web link to the clinical trial registration on the national clinical trials registry. This information must be provided at the close of the fiscal year in which the trial began.

The information disclosed to the Attorney General will be used to prepare an annual report to the Vermont Legislature. After the report is issued, the Attorney General will make all disclosed data available to the public and searchable on an Internet Web site. Penalties for failure to disclose include civil penalties of not more than $10,000 per violation.

Meanwhile, as the debate over health care reform heats up in Washington, at least one of the congressional legislative proposals currently being circulated includes a Physician Payments Sunshine Provision (Sunshine Provision), based on the Physician Payments Sunshine Act previously introduced by Senator Chuck Grassley and several co-sponsors, including Senator Ted Kennedy. The Sunshine Provision would require comprehensive reporting of gifts and other transfers of value provided by drug device, biological, and medical supply manufacturers and distributors. It is included in the Discussion Draft of the Health Reform Bill released by the House Democrats on June 19, 2009.

With the government’s continued focus on their interactions with physicians, device manufacturers and distributors must regularly review their procedures for tracking and justifying any expenditures that might be viewed as implicating their relationships with physicians. Several states now have provisions that affirmatively require such efforts, even if their provisions are not as far-reaching as those just enacted by Vermont. Compliance plans and procedures also should be reviewed to confirm that such expenditures are justified and approved in advance. Recent enforcement actions against device manufacturers have been premised on claims submitted to federal health care programs were deemed improper because they were tainted by improper physician relationships. A failure to comply with state law requirements designed to address these physician relationships might well be alleged in future cases as evidence of reckless disregard for the impact such relationships (if found to be improper) might have on claims for reimbursement.


Reexamination as a Strategy for Dealing With Bad Patents
By Matthew A. Smith (msmith@foley.com)

It has happened to the vast majority of successful companies: A random letter from someone you have never heard of arrives, claiming that one of your products infringes a U.S. patent. An engineer then reviews the patent, and tells you that it is merely a predictable combination of well-known techniques. In short, the patent is likely invalid, because it is obvious. Can you use this to help you ward off royalty payments to the patent owner?

If the patent owner sues for patent infringement, a defense of obviousness can be raised. However, this defense requires you to convince a lay jury that a highly technical concept is “obvious.” In such cases, reexamination by the USPTO (not the court) may be a useful option to pursue.

Reexamination is the USPTO’s way to correct mistakes it made in the original patenting process. It is a process that runs separate from, and even parallel to, litigation in court. Any person can file a request for reexamination. The request must demonstrate that the validity of the patent is questionable. The request also must show that the same “question of validity” was not previously decided by the USPTO. If these two hurdles are overcome, the USPTO will take a second look at whether the patent should have issued in the first place. In fact, the USPTO grants about 90 percent of all requests for reexamination.

There are notable advantages to requesting reexamination early. If the patent owner later sues, a court can, but does not have to, stay the lawsuit. This means that the USPTO would decide on the validity of the patent before the court takes any action. If the patent is invalid, your company is off the hook. Even if a court does not stay the lawsuit, there is a chance that a final decision from the USPTO will precede a final decision from the court. Furthermore, the owner of the patent may be forced to significantly change the scope of his rights. This can have the effect of substantially lowering any damages award that might otherwise occur.

The risks involved in reexamination need to be considered as well. A patent owner may be able to change claims in a way that are advantageous to his infringement case. While a patent owner’s rights cannot increase in scope, it is at least theoretically possible to tailor those rights more specifically to an accused product. Furthermore, if the USPTO does not reject the claims in reexamination, a defense of invalidity before a court may become weaker, and may even be precluded. The process may, however, be advantageous when compared to the presentation of an invalidity defense in court.

As with any strategy, a careful evaluation of the relative risks and the strength of the invalidity case should precede any decision to request reexamination. Receiving notice of a bad patent is unfortunately unpredictable; however, knowing all of your options in advance for dealing with such patents will help you ward off unwanted royalty payments.

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