(ROG HERNANDEZ - Staff illustration)
'THANKS for the license, we have ourselves a deal."

"And oh, one more thing — we'll see you in court."

Ridiculous? Maybe. Far from reality? Maybe not. Because of a recent ruling by the U.S. Supreme Court, the situation may not be so far fetched for those in the biotechnology industry.

A January Supreme Court ruling in the case MedImmune Inc. vs. Genentech Inc. now allows a company to retain the protection of a license agreement while simultaneously pursuing a lawsuit to declare the agreement invalid.

"This decision allows companies that have taken out licenses to challenge the validity of a patent while also enjoying the benefits of that very same patent," said Charles Barquist, a partner with the firm Morrison & Foerster's Los Angeles office. "(MedImmune vs. Genentech) turns all fundamental assumptions about the stability and finality of a patent license completely on their head."

Life sciences companies are trying to figure out what the ruling will mean for them. One of the panel discussions during an April 26 conference in San Francisco hosted by life sciences advocacy group BayBio will address the case directly.

The panel is called "Will your licenses ever be the same?"

"We are getting calls all the time now from biotech companies wanting to know how it impacts them," said Eric Reifschneider, an intellectual property attorney at Cooley Godward Kronish in Palo Alto. "This definitely will have an impact on the entire industry."

In the past, when two parties signed a license agreement, it was with a simple understanding: One side, the licensor, would allow the other to use its innovation, and in exchange the licensee would pay royalties from profits on products that resulted from any patents.

Companies seek patents to protect innovation and temporarily give themselves market exclusivity.

Without the legal protection a patent provides, a biotech company could spend years devising a technique to manufacture a drug, only to see another company with more money swoop in and turn the technique into a lucrative venture.

However, as the industry matures, many of these innovations are needed by other companies to help to develop their own innovations.

"The biotech industry is unique because there are so many cutting-edge technologies out there that generate good fundamental patents that other companies want," said Henry Heines, partner of law firm Townsend and Townsend and Crew in San Francisco.

With the high number of patent applications filed every year, thin federal resources and a lack of intensive review, experts say some patents are issued that should be found invalid.

But the pressure for companies to churn out products and generate revenue is so great, many have been more concerned about having access to the patent than whether it is valid or not. Now they focus on both issues.

"Suddenly, the balance of power has changed to the licensees, because some of the bogus patents now have a chance to be challenged and shot down," Reifschneider said.

Such was the case with MedImmune vs. Genentech.

In 2001, South San Francisco-based Genentech was issued a patent, called Cabilly II, to make antibody molecules with another company, Celltech. But Maryland-based MedImmune, which also used the patent to make its own product, Synagis, cried foul. MedImmune felt the patent was invalid, saying Genentech had received an unfair extension from a previous Cabilly license. The extension required MedImmune to pay royalties for an additional 12 years, which company officials said was unfair.

The Supreme Court ultimately sided with MedImmune, which allowed the company to challenge the patent even though it was paying royalties on it.

And MedImmune's initial hunch proved correct. In February, the U.S. Patent and Trademark Office revoked the Cabilly II patent. The patent office ruling is expected to be appealed in a process that could take several years, but the message that MedImmune sent by dropping the hammer on Genentech's patent has sent a ripple effect throughout the life sciences industry.

Bill Young, chief executive of South San Francisco-based Monogram Biosciences Inc., admits he doesn't completely understand what it all means, but said he will pay closer attention to contracts — which now can be signed first, then followed later with a lawsuit. 

"I hadn't really been giving it that much thought, but it sounds like we will probably now have to look at the contracts a little more closely," Young said.

Young, who was Genentech's chief operating officer when Genentech secured the rights to Cabilly, said patents are a critical part of a biotech companies' success, because they allow the businesses that invented the technology to get an edge over the competition. However, eventually the patented technologies need to be made available to all companies.

"Patents aren't intended to last forever," he said.

Yali Friedman, author of "Building Biotechnology," said a company's financial success often hinges on how long it can hold and control its patent.

"When a patent expires, the ability to practice the invention is no longer controlled by the inventor," he wrote. "In the case of drugs, pioneers can lose a majority of market share overnight with the introduction of generic versions. Every day that competition can be delayed may be worth millions of dollars in revenues."

For example, one of pharmaceutical giant Eli Lilly & Co.'s most successful products is Prozac, used to treat depression. In 2000, revenues from Prozac topped $2.2 billion. But the year after Eli Lilly's patent expired in 2001 and generic versions of the drug were released, revenues from Prozac dropped to $200 million.

"This case certainly will put the onus on innovators to be more lenient on how they enforce their patents," Friedman said in a phone interview. "This puts more strength on the licensee side and might keep licensors from being overly aggressive in issuing their patents."

Universities and research institutions that distribute license agreements to companies based on research might be the most vulnerable to lawsuits because the educational entities don't always have the same resources as a multibillion dollar company to double-check their patents, Friedman said.

"Typically, universities are less savvy in developing and negotiating patents, so they could be more vulnerable," he said.

Even though licensors may have been dealt a blow, expect them to find ways to tweak the wording in contracts to their advantage, lawyers say.

For example, knowing a licensor might challenge a patent after signing a deal, the company might try to add clauses to its contract that would increase the royalty payments if the licensor sues and fails.

The question, however, is whether any such stipulations would hold up in court.

"Right now, you can bet companies are taking a closer look at some of the patents and license agreements they have currently signed," Reifschneider said.

Contact David Morrill at (925) 416-4805 or dmorrill@angnewspapers.com.