Newsletter for Leaders in the Medical Device Industry – November 2009

16 November 2009 Publication
Authors: Ronald S. Eppen Judith A. Waltz

Legal News: Medical Devices

Health Reform Bills Include Physician Payment Sunshine Provisions
By R. Michael Scarano, Jr. (mscarano@foley.com) and Judith A. Waltz (jwaltz@foley.com)

Among the myriad of proposals for health care reform are some familiar provisions that are intended to increase the transparency of relationships between device and pharmaceutical manufacturers and physicians (and some others). The two leading health care reform bills currently moving through Congress — Affordable Health Care for America Act, which passed in the House on November 7, 2009, and America’s Healthy Future Act, a Senate Finance Committee bill currently being merged with a bill put together by the Senate Committee on Health, Education, Labor & Pensions — both contain versions of the Physician Payment Sunshine Act previously introduced by Senators Chuck Grassley and Herb Kohl. Although different in a few respects, both the House and Senate versions of the sunshine provisions would require reporting of certain payments and other “transfers of value” by device and pharmaceutical manufacturers and, in the House version, distributors (Reporting Entities) to physicians and certain other recipients (Covered Recipients). The bills also require reporting of physician investment and ownership interests in manufacturers, group-purchasing organizations (GPOs), and, in the House version, distributors and certain other entities. The reports must be made to the Secretary of the United States Department of Health and Human Services (Secretary), the federal agency that, among other things, is responsible for the operation of the Medicare and Medicaid programs through its component, the Centers for Medicare and Medicaid Services (CMS).

Covered Recipients in the Senate version include only physicians, physician organizations, and teaching hospitals, as defined. The House version also includes other prescribing practitioners, pharmacies and pharmacists, health insurers, pharmacy benefit managers, patient advocacy or disease specific groups, continuing medical education sponsors, and others.

Reportable payments or other transfers of value under the bills include, but are not limited to, any compensation, gift, food, entertainment, research funding, honorarium, speaking fee, service, consulting fee, travel, stock dividends or profit distributions, stock or stock option grants, and other items of value. Both bills contain exclusions for certain items, including:

  • Small payments under a specified amount (in the House bill, $5; in the Senate bill, $10, except to the extent that the aggregate value of payments or other transfers of value exceeds $100 in any year)
  • Loans of covered devices for a period not to exceed 90 days
  • Items or services provided under a contractual warranty
  • Discounts (including rebates)
  • In-kind items used for the provision of charity care
  • Certain other items

Information to Be Reported and Timing for Reports
Both bills would require Reporting Entities to report Covered Recipients’ identifying information, the amount of each payment, a description of the form and nature of the payment, the drug, device, or biological associated with the payment (if applicable), and certain other information. Reporting would be required on an annual basis by the 90th day of each calendar year for payments or transfers of value during the preceding calendar year. However, delayed reporting would be permitted for payments made pursuant to product development agreements or clinical trials. In those situations, the House bill would permit a delay in reporting of up to two years, while the Senate bill would permit delays of up to four years. Reporting would be required sooner if the associated product had been approved by the FDA at an earlier date or, in the House version, the clinical trial had been registered on the Web site maintained by the National Institutes of Health.

Penalties for Noncompliance
Reporting Entities would be subject to a civil monetary penalty of up to $10,000 for each payment or transfer not reported, up to an annual maximum of $150,000. However, knowing violations would be punishable by fines of up to $100,000 for each such violation, up to an annual maximum of $1 million (or, in the House version, 0.1 percent of the revenues of the Reporting Entity, if greater than $1 million).

Public Availability of Information
The Secretary would be required under both bills to establish procedures to ensure the public availability of the reported information on a Web site. Covered Recipients (and, in the Senate version, Reporting Entities) would have an opportunity to submit corrections to their information before it is posted on the Web site. The Secretary also would be required to make annual reports to Congress and to the states.

Preemption
One of the most important provisions in both bills pertains to preemption of state reporting laws. Both bills would preempt any state law or regulation that requires Reporting Entities to disclose the same type of information required under the bills. However, the bills would not preempt state laws or regulations requiring the disclosure or reporting of information not required under the bills; the types of information excluded from reporting under the bills (with the exception of the $10 reporting exclusion in the Senate bill); or information required to be reported to state or local agencies for public health surveillance, investigation, or related purposes.

Ownership Interest Reports
In addition to the requirements for reporting payments or other transfers of value, the bills require manufacturers, GPOs, and, in the House version, distributors to report any ownership or investment interest (other than ownership or investment interest in publically traded securities and mutual funds) held by a physician or immediate family member. The House version further requires hospitals and other health care entities to report on the ownership shares held by physicians in the entity.

Conclusion
The physician payment sunshine provisions in the leading Senate and House health reform bills would impose significant new federal obligations on Reporting Entities. However, to the extent that overlapping state law requirements would be preempted, the legislation would provide welcome relief from the patchwork of tedious, overlapping, and sometimes conflicting reporting statutes currently cropping up in many states. Because the preemption provisions are limited, however, such relief as currently proposed would be less than complete.


A New Limitation on Patent Infringement for Activities Outside the United States
By Matthew A. Ambros (mambros@foley.com) and Robert J. Silverman (rsilverman@foley.com)

A thorny area of patent law concerns whether or not activities outside of the United States can create liability under U.S. patent law. For example, shipping parts overseas — in order to assemble a device that would infringe, if it were done in the United States — can be an act of patent infringement under U.S. law. Yet, uncertainty has long surrounded the precise application of this aspect of the patent law.

The en banc Federal Circuit recently clamped down on one such type of potential infringement in the case of Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc. (August 19, 2009). The case involved Cardiac Pacemakers, Inc.’s (Cardiac) patent for a “method” of detecting abnormal heart rhythms and correcting them by delivering electrical stimulation, using an implantable cardioverter defibrillator (ICD). Cardiac argued that St. Jude Medical infringed the patent by shipping ICDs overseas. The Federal Circuit held that shipping ICDs out of the United States did not infringe the patented method.

The key to the case was the meaning of the patent statute’s (Section 271(f)) prohibition on supplying “components” of a patented invention, from the United States, such that the combination of those components would result in infringement — if that combination took place inside the United States. The Federal Circuit determined that such components cannot be intangible, but instead need to be physical components. A “step” of a patented method, the court explained, is intangible and cannot be a component as required by statute. Therefore, as a result, the Federal Circuit held that this section of the patent statute “cannot apply to method or process patents.”

This restriction on infringement liability is part of a recent trend in limiting the extraterritorial reach of the U.S. patent law. The U.S. Supreme Court, in its 2007 Microsoft Corp. v. AT&T Corp. decision, marked a turning point on the issue. In that case, the Supreme Court held that Microsoft did not infringe a patent, through its shipment of “master” discs outside the United States, even though the master discs contained software that would be copied and installed onto computers — acts that would have made Microsoft liable for infringement, if done inside the United States. In that case, the Supreme Court did not reach the issue of whether a method or process, implemented abroad, could fall under Section 271(f).

Now the Federal Circuit, in Cardiac Pacemakers, has laid down a sweeping conclusion, barring the application of Section 271(f) to method or process patents, which will have broad consequences in the protection and enforcement of patent rights. Intellectual property owners will need to pay attention to this opinion, not just when considering how to draft claims and assert U.S. patent rights, but also when contemplating what sort of foreign patent rights are necessary to protect their business interests.


Working With Doctors to Maintain the Strength of Your Brands
By John M. Garvey, J.D. , Ph.D. (jgarvey@foley.com) and Matthew L. Fenselau, J.D., M.Phil. (mfenselau@foley.com)

For medical device companies, a comprehensive intellectual property strategy includes not only patents and trade secrets, but extensive use of trademarks and branding strategies as well. In many instances, the trademarks outlive patent protection and provide the company with ongoing market share based on historical product recognition and goodwill. Building brand recognition is difficult and happens over the long term. However, damage to brands and loss of goodwill can happen quickly; companies must remain vigilant against such degradation. Unfortunately, the source of the problem can oftentimes be persons considered to be strategic partners in the success of the products — the very same doctors that provide the health care services utilizing the company products.

A common problem with colloquial trademark usage is the misperception of consumers that trademarks are “names” of things (i.e., nouns) rather than “types” of things (i.e., adjectives). A trademark is a differentiator of a product in the stream of commerce and continual reference to a trademark as a thing can result in eventual loss of that mark as the mark becomes generic. For example, “aspirin” was originally a brand of pain-relieving tablets composed of acetylsalicylic acid; now most consumers see it as the compound itself. In addition to pharmaceuticals, various types of health care products have been trademarked. These include various surgical procedures (for example TruFuse® brand facet fusion procedures by minSURG) and many types of medical equipment (such as LadarVision® brand excimer lasers by Alcon).

For health care companies that are developing surgical devices and procedures, consumer awareness of the devices and products is directly related to doctor recommendations. Thus, the doctors provide the first orientation to the consumer; it becomes critical for the doctor to propagate information about the device/procedure in a way that enhances the brand identity and minimizes harm to the trademark. Since doctors are largely unconcerned with product marketing and would rather focus on patient care, the onus shifts to the company’s marketing personnel to make sure that the doctors are given proper information about the products and are informed about the correct use of company trademarks.

When a procedure or a device gains significant market share, other challenges arise. Doctors are naturally looking to attract patients and engage in their own types of marketing activities. Having a doctor advertising your company’s products in connection with their own services is not something to discourage. However, many laws exist that regulate such activities, and a full discussion of this issue is beyond the scope of this article. Nevertheless, in the spirit of aggressive marketing, sometime doctors acquire domain names that include the registered trademarks of a company, leaving that company with little recourse but to sue the doctor for the rights. Understandably, that is bad business for the company. To preempt this, a company may choose to aggressively purchase certain do main names to lock up property rights in what could become competing domains. Next, when presenting to doctors, company marketing personnel should provide the doctors with notice that the company is carefully protecting its trademark rights and also is providing clear written instructions on trademark usage guidelines and policy guidelines about using permutations of the trademarks in advertisements or in connection with Web sites. In the event a doctor has already appropriated similar domain names and is reluctant to address the issue with the company, stronger measures need to be employed to ensure the protection of the trademark and its associated goodwill. Most of the time, this can be accomplished through careful negotiation and by informing the doctor that it is in both parties’ interest to have a strong trademark. In rare cases, litigation might be the only way to resolve the dispute. In such event, having clear trademark-usage guidelines and a paper trail of letters and/or e-mails to the doctor advising them on trademark compliance will be necessary to a successful outcome in the litigation.

A trademark and branding strategy is not difficult to create, but it does require active monitoring of the marketplace and a proactive approach to solving issues before they become unmanageable. However, the rewards of doing so will be years of additional market share based on goodwill built up in the mark. Both the health care providers and the company gain from such a strategy.


Medical Devices: What’s Hot and What’s Not
By Ronald S. Eppen (reppen@foley.com)

Recent research regarding investments and mergers and acquisitions (M&A) trends in the medical device industry suggests five overall trends in device industry transactions: (1) overall volume of exit transactions is down significantly during the first three quarters of 2009; (2) average deal valuations during this time are down by almost half, with increasing frequency of creditor- or investor-directed “date certain M&A events” (i.e., fire sales); (3) private equity buyouts comprise a much lower percentage of activity versus prior periods; (4) strategic acquisitions, while down in overall volume, constitute a significantly larger percentage of M&A deals; and (5) the volume of venture investment deals is down less than M&A, but the average venture deal size is down approximately 40 percent from last year.

The level of venture investment in the device industry during the previous decade was atypically high, and with ongoing structural changes in the venture capital industry, the lower volume seen this year represents a return to a more rational level. Many observers believe that aggregate dollars invested in the sector are likely to remain at or near 2009 levels for the foreseeable future.

Accordingly, companies will need to operate in a much less capital-intensive manner than times past. Ability to self-fund (through family, friends, and so forth) until the point of product validation is critical. With venture capital funds much tighter and many alternative funding sources from past periods (such as direct investment by hedge funds) now effectively foreclosed, the following are areas believed to be the most promising funding sources for companies seeking “survival capital” in the current environment. One key strategy is co-development arrangements, in which customers or prospective customers help fund product development and rollout in exchange for preferred access or other favorable terms post-development. Where hospitals are customers, provision of access to facilities, personnel, and infrastructure also can lower product development costs and stretch tight capital budgets. Non-dilutive funding sources such as philanthropic organizations, NIH funding/SBIR grants, and other grant programs at the state level also are increasingly seen as important sources of scarce capital. It is important to note that philanthropic organizations have become much more rigorous in assessing potential grant recipients and that companies seeking such funding need to be prepared to make a strong, detailed demonstration of how they align with the target organization’s philanthropic mission. With increased competition for government funding at all levels, companies are well advised to obtain the appropriate professional guidance — strategic, lobbying, and the like — to maximize chances for success.

Business models involving a long product-development cycle, from inception and product validation to the market, and requiring multiple infusions of large amounts of capital are likely to continue to be out of favor for the foreseeable future. Companies that survive and attract investment are likely to be those that can conserve capital, have the ability to get products to market with a small amount of investment dollars, and have well-thought-out and proven regulatory and reimbursement strategies.

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