By Adam Jones

In a case that will dramatically impact both the pharmaceutical and biotech industries, the U.S. Supreme Court recently expanded the ability of researchers to experiment with patented drugs without being held liable for patent infringement.#160 In a unanimous ruling, the Court held that the use of patented compounds in preclinical studies is protected under the current “safe harbor” law allowing experimental use of patented compounds, as long as there is a reasonable basis for believing that the experiments will produce information relevant to filing for FDA approval.#160 The case, Merck KGaA v. Integra LifeSciences, was a clear victory for pharmaceutical researchers and may have the effect of speeding the development and delivery to the market of new and generic drugs, however, some biotech companies worry that the case could put them out of business.

The dispute in the case began over Integra’s ownership of patents related to short amino acid sequences, called RGD peptides, which play an important role in many biological functions.#160 Merck had been funding anti-cancer research looking for drug candidates that would inhibit angiogenesis, the process by which new blood vessels sprout from existing blood vessels.#160 Angiogenesis plays a critical role in the development and nourishment of tumors.#160 When Merck proceeded to make use of Integra’s patented RGD peptides in its drug research without obtaining a license from Integra, Integra sued for infringement.#160

It is usually an act of patent infringement to make, use, offer to sell, or sell any patented invention, including pharmaceutical drugs and compounds.#160 However, in 1984 Congress created a “safe harbor” from patent infringement for certain activities related to drug research.#160 The purpose of this safe harbor, found in the Hatch Waxman Act of 1984, was to encourage the speedy delivery to market of generic drugs by allowing researchers to use whatever tools were available to them, without fear of liability for patent infringement.#160 Before enactment of the safe harbor, pharmaceutical companies owning a patent on a compound or drug could bar competitors from using the patented compound or drug for any purpose, including research, thus effectively stalling the development of potentially useful drugs by competitors until the term of the patent expired.

Merck claimed that its angiogenesis research was protected under the safe harbor.#160 Integra argued that the safe harbor did not apply to Merck because not all of Merck’s experiments using the patented compounds resulted in submission to the FDA of a product for regulatory approval.#160 The lower courts agreed with Integra, adopting a narrow view of the safe harbor protection, and essentially limiting the use of patented compounds to clinical trials, the final stages of drug research, rather than early-stage experiments that could determine which of several compounds would make a good drug candidate.#160 This interpretation of the safe harbor clause severely limited the research abilities of pharmaceutical companies.#160 Integra was awarded $15 million in damages based on patent infringement in a jury trial in the U.S. District Court in San Diego.#160 The Federal Circuit Court upheld Merck’s liability for patent infringement, and the Merck appealed to the Supreme Court.

After reviewing the case, the Supreme Court took a broad view of the safe harbor clause, finding that Congress intended to “leave adequate space for experimentation and failure on the road to regulatory approval.”#160 The Court interpreted the safe harbor to exempt from infringement “all uses of patented compounds ‘reasonably related’ to the process of developing for submission under any federal law regulating the manufacture, use, or distribution of drugs.”#160 The decision makes clear that the safe harbor for using patented compounds applies to a wide variety of medical and pharmaceutical research, not solely to research that will yield an FDA-approved drug.#160 Researchers must only have a reasonable basis for believing that a patented compound may be useful in creating a new drug for submission to the FDA for approval.#160

The decision allows researchers much greater freedom to experiment with patented compounds in an effort to create new and useful drugs.#160 One of the major benefits to patients that may come of the Court’s ruling, though, may be in the increased availability of generic drugs.#160 The expanded scope of the safe harbor clause, will now allow pharmaceutical companies to more quickly obtain FDA approval for generic counterparts to brand-name drugs, and introduce the generic drugs to the market as soon as possible after expiration of the brand-name drug’s patent.#160 Without a broad interpretation of the safe harbor clause, pharmaceutical companies would have to wait to perform research on patented drugs until the 20-year patent term had expired.#160 It typically takes many years to perform the experiments required to obtain FDA approval, and now pharmaceutical companies can begin the process of developing generic and competing drugs before the patents of the original drugs have expired.#160 The result is that companies are able to bring generic and competing drugs to market as soon as possible after the expiration of the relevant patents, rather than being delayed for up to a decade while maneuvering through the experimentation and FDA approval stages.

Not everyone is happy with the Supreme Court’s recent decision, though.#160 Many biotech companies produce patented compounds and products used in drug research.#160 The broad interpretation of the safe harbor clause could deprive them of valuable licensing revenue, and effectively put them out of business.#160 Also, universities that rely on licensing money from patents they hold for research techniques could be adversely affected.#160 The owners of existing drug patents that will now be freely available for use in research by their competitors argue that they spent substantial time and money to develop and market the patented drugs, and now their competitors will have an unfair head start in bringing competing drugs to market.#160

Patent law was established to provide a reward for innovation by granting its owner a limited monopoly on the patented invention, and some feel as though the expanded view of the safe harbor clause undercuts the reward function of patented drugs, and may in fact reduce the incentive to create new drugs based on compounds other than those already patented.#160 We continue to struggle to find a balance between rewarding innovation and making products freely available to the public.#160 Nowhere is this balance more difficult to achieve than in the pharmaceutical industry, where humanitarian concerns play an important role, and innovation is key to survival.

By Julie Garcia

Determining the choice of entity for a high technology company can be a daunting task. In general, careful consideration should be given to the choice of entity when forming any type of company; however, high technology companies have additional issues that may alter the decision regarding the choice of entity. Generally, raising capital to fund the research, development and manufacturing of the company’s products may determine the type of entity best suited to the needs of the new company. Typically, the type of entity will be either a corporation or a limited liability company. If a corporation is chosen, the decision as to whether the corporation will be a Subchapter S Corporation will also need to be made. Partnerships and sole proprietorships are not commonly chosen as the type of entity for high technology companies primarily due to liability concerns. Corporations and limited liability companies each have pros and cons that must be carefully considered for each situation when determining the type of entity.

Corporations have been in existence for a long time and generally have a well established base of both statutory and case law guidance. Although each jurisdiction may have different rules, regulations and cases that govern corporations and some jurisdictions may be more favorable to corporations than other jurisdictions, general corporate principles exist that can be examined when determining the type of entity to use for a new venture. If a corporation is chosen, the jurisdiction for formation should be carefully analyzed to determine the most advantageous jurisdiction. Many businesses prefer corporations because of the long standing history and general feeling of comfort regarding issues that are important to the founders of a business, such as liability protection and corporate governance. Financing a corporation is a path that has been well trodden and individual strategy based on the company’s circumstances and business plan becomes the focus of financial planning. If a high technology company plans on funding its operations through venture capital, formation of a corporation is generally preferable to other types of entities due to general familiarity with the corporate structure and a long history of investments into corporations by venture capitalists, angel investors and institutional investors.

A Subchapter S Corporation, generally referred to as an S Corporation, is a variation on the corporate entity. An S Corporation provides the same general protections as a corporation and is subject to the same corporate governance rules and regulations as a corporation; however, S Corporations generally provide a tax benefit to the company. An S Corporation is subject to limitations on the number and type of eligible shareholders. An S Corporation is limited to 75 shareholders (subject to specified counting considerations, for example, husband and wife) and, in general, only individuals and not entities are allowed to be shareholders of an S corporation. In addition, shareholders cannot be nonresident aliens. There are a few exceptions to the rule denying entities as shareholders, however, the exceptions generally relate to trusts formed for estate planning purposes controlled by a shareholder. Another corporation is generally not allowed to be a shareholder of an S Corporation which may create an issue if the funding of the company depends on institutional investors or venture capitalists. Most high technology companies obtain financing from venture capital funds, institutional investors or angel investors which are generally formed as entities that are not allowed to be shareholders of an S Corporation. Although an S Corporation is generally favored by high technology companies that will be funded by the founders, a high technology company that plans on obtaining significant funding from external sources will generally not be eligible to become an S Corporation.

A limited liability company is a newer type of entity, as compared to corporations, that has gained wide acceptance and is the preferred choice of entity in certain industries and/or transactions. A limited liability company provides a lot of the same general protections as a corporation, and although an analogy can generally be made to the rules, regulations and case law governing corporations, significant areas of limited liability company rules and regulations have not yet been tested in the courts. Although capital can be raised for a limited liability company, the general structure of a limited liability company may impose an administrative burden if a significant number of investors are projected. Although a limited liability company operating agreement may allow for different classes of membership interests and ultimately may allow for more creativity in structuring the investment transaction, the lack of court and statutory guidance on a number of issues deter many smaller high technology companies from choosing the limited liability company structure.

High technology companies face a number of issues that a traditional company may not face due to concerns with its intellectual property protection and concerns relating to financing of the company. The traditional model for a high technology company seeking funding from venture capitalists or institutional investors is generally to form as a corporation and sell stock to raise capital. Although corporations may have different classes of stock and become complicated, the general nature of corporate governance may be more structured than a limited liability company and provide a better framework to handle a large number of investors. Although an S Corporation may be preferable, particularly from a tax perspective, it may not be a viable option if the company intends to seek investments from venture capitalists or institutional investors formed as entities to fund its research, development and product launch. A limited liability company, although preferable in a number of industries, may impose limitations on a high technology company that become burdensome and outweigh the tax advantages as the choice of entity. Careful consideration to the business plan, future financing needs and general operating structure of a new business venture should be made prior to the formation of a high technology company.

By Audrey Millemann

#160 #160#160 #160#160 #160#160 #160The “peanut butter and jelly sandwich patent” has been a hot topic lately, from television news broadcasters to intellectual property commentators.#160 The triggering event was a Wall Street Journal article on April 5, 2005 concerning a hearing to be held that day by the Federal Circuit Court of Appeals.#160 The case was an appeal by the J. M. Smucker Company of an earlier decision by the Board of Patent Appeals and Interferences.#160 The Board had upheld the Patent and Trademark Office examiner’s rejection on obviousness grounds of two patent applications filed by Smucker’s for its crustless peanut butter and jelly sandwich (sold as the “Uncrustable”), a product that apparently generated $27.5 million in sales in 2004.

#160 #160#160 #160#160 #160#160 #160One of the claims at issue in these applications states:

#160 #160#160 #160#160 #160#160 #160″A method of creating a hermetically sealed crustless sandwich, said method comprising:

#160 #160#160 #160#160 #160#160 #160(a)#160 #160#160 #160#160 providing a first slices of bread with an edge crust;

#160 #160#160 #160#160 #160#160 #160(b)#160 #160#160 #160#160 applying a layer of peanut butter onto said first slice in an area inside said crust and defining a substance free outer periphery of said first slice;

#160 #160#160 #160#160 #160#160 #160(c)#160 #160#160 #160#160 applying a layer of fruit spread over said peanut butter layer leaving a perimeter of uncovered peanut butter;

#160 #160#160 #160#160 #160#160 #160(d)#160 #160#160 #160#160 covering said layer of fruit spread by a second layer of peanut butter contacting said first layer of peanut butter to encapsulate said fruit spread;

#160 #160#160 #160#160 #160#160 #160(e)#160 #160#160 #160#160 applying a second slice of bread over said first slice of bread with an edge crust matching said the edge crust of said first slice;

#160 #160#160 #160#160 #160#160 #160(f)#160 #160#160 #160#160 #160providing a cutter with a continuous cutting edge having a desired cut shape larger than said periphery;

#160 #160#160 #160#160 #160#160 #160(g)#160 #160#160 #160#160 positively forcing said cutting edge through said slices in unison with said cut shape outside said area to cut two matching cut portions of bread with an outer periphery outside side area and a contour matching said cut shape and surrounding said area;

#160 #160#160 #160#160 #160#160 #160(h)#160 #160#160 #160#160 compressing said bread completely around said outer periphery to seal said bread around said contour with said peanut butter and encapsulated first spread captured between said bread portions, wherein said compressing operation also crimps said substance free periphery at spaced pressure points to give space locations of greater sealing force at said outer periphery of said bread portions; and,

#160 #160#160 #160#160 #160#160 #160(i)#160 #160#160 #160#160 #160placing said crustless sandwich into an airtight package for long term storage.”

#160 #160#160 #160#160 #160#160 #160The key issue before the Board was whether Smucker’s method of crimping the edge of the Uncrustable sandwich was unique.#160 The Board had adopted the examiner’s reasoning, finding that Smucker’s claims were obvious based on existing methods used to make ravioli and pie crust.#160 The Board cited prior art including an international tart cookbook and related device and a newspaper article telling parents how to make peanut butter and jelly sandwiches that didn’t get soggy in school children’s lunch boxes.#160 The Board was not persuaded by the commercial success of the Uncrustable product, stating that there was no “nexus between the claimed invention and the evidence of commercial success.”#160 The Board affirmed the examiner’s rejection.#160 2003 WL 23507730 (Dec. 10, 2003).

#160 #160#160 #160#160 #160#160 #160On appeal to the Federal Circuit, Smucker’s argued that the prior art disclosed a “smashed edge,” not a “surface-to-surface-seal” as was used in Smucker’s method.#160 According to Smucker’s, the prior art was “the antithesis” of Smucker’s method; Smucker’s method preserved the integrity of the two separate slices of bread at the edge while the prior art method crushed the edge into one mass.#160

#160 #160#160 #160#160 #160#160 #160Things did not go well for Smucker’s at the Court of Appeals hearing.#160 One judge stated that he and his wife had used a crimping method when making peanut butter and jelly sandwiches for their child (presumably many years before Smucker’s patent application was filed).#160 Two days later, on April 8, 2005, the Court of Appeals affirmed the Board’s decision without an opinion.#160 In re Kretchman, Case No. 04-144849 (Fed. Cir. April 8, 2005).#160

#160 #160#160 #160#160 #160#160 #160This is not the first venture of Smucker’s into the world of patenting peanut butter and jelly sandwiches.#160 The original Uncrustable product was developed in 1995 by two dads in the Midwest who filed a patent application in 1997 and were selling the sandwiches to schools.#160 Smucker’s bought the dads’ business, and on December 21, 1999, the patent issued as United States patent no. 6,004,596.#160 The two patent applications before the Federal Circuit were continuations of continuations of the ‘596 patent.

#160 #160#160 #160#160 #160#160 #160Smucker’s takes the peanut butter and jelly sandwich business very seriously.#160 In 2001, it filed a patent infringement suit against a Michigan grocery/catering business, Albie’s Foods, alleging that Albie’s crustless peanut butter and jelly sandwiches infringed the ‘596 patent.#160 That case was eventually dismissed, but the ‘596 patent is now under reexamination.#160

#160 #160#160 #160#160 #160#160 #160As happened a few years back with Amazon.com’s “one-click” business#160 method patent, Smucker’s peanut butter and jelly sandwich patent has caused a flurry of criticism of the United States patent system and (yet another) demand for patent reform.#160 These critics argue that the patent system must be broken because it resulted in the ‘596 patent being allowed.#160 They believe that it is too easy to get a patent allowed and too difficult to invalidate a patent, all of which stifles competition.#160 They also feel that the costs of obtaining a patent and enforcing it in litigation (or defending against a bogus patent infringement claim) are too high.#160

#160 #160#160 #160#160 #160#160 #160All of this is well and good, but, at least at this time, with respect to Smucker’s two pending applications, the patent system appears to be working.#160 When the decision in the reexamination is made, we will know for sure.

By Scott Hervey

Podcasting is a way of publishing sound files to the Internet, and delivering the files to users who subscribe to a feed.#160 Podcasting uses a distinct content delivery protocal that has enabled many producers to create self-published “radio shows” that users can subscribe to and have delivered directly to their computer via one of a number of content aggregators.#160

Podcasts are technologically unlike webcasting or streaming. Webcasting is an Internet stream of a live broadcast, or an online simulcast of a broadcast signal.#160 Streaming is a technological means for accessing a stream of electronic information at the same time it is delivered to a user’s computer.#160 Neither webcasting nor streaming result in the creation of an audio file on the Internet user’s computer.#160 Podcasting however, involves the downloading of a single complete audio file to a user’s computer to be listened to at a later time.

Like blogs, podcasting has been adopted both by amatures who want to host their own “radio show” and by professionals who see podcasting as an inexpensive way to distribute content.#160 Podcasting is not the realm of techno geeks or Internet extremists.#160 Mainstream broadcasting and media companies have realized the benefit of podcasting.#160 National Public Radio offers podcasts of most of its shows, and Infinity broadcasting network announced plans to launch a pure podcast radio station.#160 ABC is even offering podcasts of Nightline and Good Morning America.#160 Despite Corporate America quickly embracing this new technology, the majority of podcasts being offered today are from individuals and small businesses.

One of the quickest ways for a podcaster to get into hot water is to infringe a third party’s copyright.#160 #160A number of music podcasts are produced by DJ’s or independent record labels that use their podcast programs as a means of promoting other artists.#160 Most of these podcasts have a “mixed tape” quality to them, especially in the dance, hip-hop and rap genres.#160 Other podcasts are produced by music fans who may be interested in a certain style or type of music.#160 For example, one more popular podcast, Coverville, focuses entirely on covers songs.#160 If a podcast includes music and the podcaster has not obtained all the necessary rights, copyright infringement will result.#160 The real problem is for podcasters who want to stay out of the RIAA’s crosshairs, determining exactly what type of license to get can be challenging.

Copyright law implications in music can become very confusing, very quickly.#160 Copyright law provides the copyright owner with the following rights:#160 the right to control the public performance of its copyrighted work; the right to control the production and distribution of a sound recording embodying a copyrighted work; and the right to create a copy of a sound recording.#160 Each of these rights may be implicated in podcasting.#160

Performance right organizations (PRO), such as BMI, ASCAP and SESAC license the public performance of copyrighted work.#160 Usually a license from all three is recommended because each organization represents different publishers of musical works.#160 #160Performance rights organizations have staked a claim to the right to license music for podcasting.#160 On its website, BMI claims that it has “been licensing podcasters for nearly a year covering the public performance rights to the BMI repertoire” and lists Coverville as one of its licensees.

The right to produce and distribute a sound recording which embodies a copyrighted composition is controlled by music publishers, who have abdicated the responsibility to the Harry Fox Agency.#160 HFA collects mechanical license fees (a mechanical license covers the right to reproduce and distribute copyrighted musical compositions [i.e. songs], including uses on CDs, records, tapes, and certain digital configurations) on behalf of publishers.#160 This includes full permanent downloads, whether or not charged for.#160 Since podcasting technology results in the creation of a single digital audio file to a user’s computer, HFA could rightfully claim that it is the proper agency to control licensing for podcasts.#160 While HFA has yet to make this claim, given what occurred when PROs and HFA were trying to determine who controlled the right to issue licenses for webcasting and streaming, it is only a matter of time.

It is important to note that HFA licenses cover the right to make and distribute recordings of musical compositions, and not the use of existing sound recordings.#160 In order to clear those rights, a podcaster would have to obtain permission from the owners of each sound recording, which in most cases are record labels.#160

In 1995 and again in 1999, the Copyright Act was amended to create a statutory license mechanism for the digital transmission of sound recordings and musical works.#160 The 1995 legislation covered uses like the commercial sale of MP3s, while the 1999 amendment covered webcasting and streaming.#160 The 1999 amendments allowed webcasters the right to webcast or stream copyrighted music, and required them to pay certain pre-set royalties to SoundExchange, a performance rights organization that was designated by the U.S. Copyright Office to collect and distribute statutory royalties.#160

The 1999 amendments to the Copyright Act do not provide coverage for podcasting because the statutory license only covers the transmission of a sound recording, not the distribution of a copy of it.#160 Podcasting involves the reproduction of a sound recording and results in the creation of an audio file on a user’s computer.#160 As stated above, clearing the right to create a reproduction of a sound recording, not just the musical composition, necessitates approval from the record label that owns the sound recording.#160

Although BMI and ASCAP are offering performance licenses, podcasters who want to remain on the right side of the law may also need to clear rights from other parties.#160 Because there is no industry wide standard and no central clearance mechanism like SoundExchange, clearing rights to the sound recording can be rather expensive and time consuming.#160 The music industry and our lawmakers need to devise a mechanism that allows podcasters to easily comply with the law and a licensing scheme that is not financially daunting.#160 Most non-corporate podcasters, such as Coverville, fund their operation entirely out of their own pocket, or by donations from listeners.#160 There is a desire for this type of alternative music programming; a desire that is not being fulfilled by commercial radio.#160 It would be shame if red tape and licensing costs silenced these unique and interesting programs emanating from the left of the radio dial.

By Scott Hervey

Wired reports that the French judiciary has been issuing lenient sentences and penalties to individuals involved in criminal proceedings involving illegal file trading.#160 The president of the French magistrate union, Judge Dominique Barella, has openly taken the position that the harsh criminal penalties imposed under French copyright law are inappropriate under the circumstances.#160 Wired reports#160 the Barella has insisted that a more appropriate policy needs to be adopted in France and in Europe that protects what he says are mostly young people of the MP3 generation who are weak targets against the machinations of the entertainment industry’s legal agenda.

The French entertainment industry is not taking Barella’s position lightly.#160 In a letter to the French Minister of Justice, representatives of France’s entertainment, film, music associations stated “[w]e are surprised and shocked that the president of the magistrates union, given the level of influence he has on his colleagues, can publish in the press a call to not criminally sanction criminal acts, which contradicts the intentions of government bodies.”

Barella defends his position, stating that the government’s resources would be better spent focusing on large scale, international counterfeiting rings instead of targeting young Parisians who just want fill their ipod.