Imagine a situation in which your competitor can sue you, but you are barred from suing your competitor. Think that would be unfair? You're not alone.
In recent years, states have used the courts to enforce patents that their universities and research institutions own. At the same time, the states are able to avoid being sued themselves by asserting sovereign immunity under the 11th Amendment -- a rule founded on the principle that subjects can't sue their king.
So, when Biomedical Patent Management (BPMC) sued the California Department of Health Services, claiming the state was infringing its patent on a diagnostic test, the State of California claimed immunity from patent suits.
It's not hard to see why states love this rule. BPMC's patent, which claims a method for screening for a chromosomal defect, could be worth as much as $100 million during the life of the patent. Needless to say, the State of California doesn't want to pay up.
Even though the state had intervened in an earlier, related action (which was dismissed for technical reasons), the court said that didn't mean it had waived sovereign immunity under the 11th Amendment in a later case.
States may admit that this is unfair, but they claim they're just making use of the system they're entitled to -- that is, the risk-free bonus of suing without being sued. Thus, state universities and research institutions get to have their cake and eat it, too.
Many think that a state's use of the courts to sue for patent infringement means that the state has waived its immunity. Biomedical Patent Management has now filed an appeal with the U.S. Supreme Court asking the court to weigh in on these inconsistencies.
Public policy and fairness would seem to dictate that the states should not be immune from federal court suits for patent infringement, especially if they make use of that very system for their own benefit. What's not clear is whether the Constitution authorizes Congress to abrogate state immunity in patent action, since a recent case held that Congress would need to give a compelling reason why it was doing so. I expect the Supreme Court will set out guidelines delineating when states have waived their rights.
It's hard to feel sorry for California. Its University of California system is one of the largest patent holders in the U.S. and has generated about $500 million in revenue over the past five years. As a plaintiff in patent-infringement suits, the university has been quite successful.
In fiscal year 2006, the university system entered into 473 new licenses. Revenue for the program was $210 million, including $100 million in an up-front payment from Monsanto (NYSE: MON) as part of a settlement in a lawsuit. In the suit, the university system had accused Monsanto of infringing upon its patent for the recombinant DNA used to make a dairy-cow growth hormone, bovine somatotropin, which enhances milk production in dairy cows. Monsanto also agreed to pay the university system $0.15 for every dose of the hormone it sells, which could bring the university at least $5 million a year in royalties through 2023.
Previously, Genentech (NYSE: DNA) had agreed to pay $200 million to the University of California to settle its long-running patent battle over Protropin, a genetically engineered human growth hormone. At trial, a jury unanimously rejected Genentech's argument that the university's patents were invalid and came within one vote of deciding Protropin had infringed upon them. It could have been much worse for Genentech. Had a new jury decided the company was guilty of willful infringement, the university could have been awarded as much as $2.8 billion.
In another patent suit, the University of California won a $30 million settlement from Microsoft (Nasdaq: MSFT) after finding that Microsoft infringed upon a university patent for enabling Internet Explorer to use plug-ins and applets in the software.
The problem is not limited to California, however, since all state universities are able to take advantage of the same immunity. Meanwhile, the 1980 Bayh-Dole Act, which allows state universities to keep ownership of their faculty members' research, has allowed universities to become major patent players.
Every state institute will be anxiously watching how the Supreme Court moves on this issue. Investors, especially those with holdings in diagnostic and therapeutic companies, will be rooting against the states, since budget-strapped agencies will be increasingly tempted to take advantage of private patent rights.
More patented Foolishness:
