Federal Circuit Finds that Licensing Limitations That Prevent Patent Exhaustion For Use of Seeds Also Do Not Constitute Patent Misuse or Antitrust Violations

In Monsanto Company v. Mitchell Scruggs, 459 F.3d 1328 (Fed. Cir. 2006), Mitchell Scruggs (Scruggs) appealed the holding of the Northern District of Mississippi granting Monsanto Company (Monsanto) a permanent injunction against Mr. Scruggs and granting  Monsanto’s motions for summary judgment regarding patent validity and infringement to the United States Court of Appeals for the Federal Circuit.  Mr. Scruggs also appealed the District Court’s denial of his claims of antitrust violations, patent misuse, tortuous interference, unfair competition and invasion of property.  The Federal Circuit affirmed the District Court’s holding with respect to the motion for summary judgment of patent validity and infringement and the denial of Mr. Scruggs’ cross-claims.  The Federal Circuit further ordered the permanent injunction to be vacated and the case remanded to the District Court for reconsideration of the permanent injunction in light of the Supreme Court’s eBay Inc. v. MercExchange L.L.C. holding. 

Monsanto is the owner of U.S. Patent No. 5,352,605 (‘605).  The ‘605 patent is directed toward insertion of a synthetic gene consisting of a 35S cauliflower mosaic virus promoter amongst other advancements, to create herbicide resistance.  Using the ‘605 patent, Monsanto developed glyphosate herbicide resistant soybeans and cotton which were sold as Roundup Ready (Roundup) soybeans and cotton.  The licensing of Roundup Ready soybeans and cotton began in 1996.  Monsanto further combined the ‘605 patent with patents No. 5,164,315; 5,196,525; and, 5,322,938.  This combination was licensed in 1998 as Bollgard/Roundup Ready cotton technology.

Monsanto’s licensing agreements with seed growers allowed the seed growers to incorporate Monsanto’s biotechnology into their seeds.  The licenses also required seed companies to avoid selling seeds to growers unless the grower signed a Monsanto license and that seeds sold under the license be used to grow only a single commercial crop. 

Mr. Scruggs purchased the seeds produced under the Monsanto patents from seed companies but never signed a licensing agreement.  Further, he harvested the soybeans and cotton, retained the new generation of seeds and subsequently planted the new seeds in a later generation of crops.  Monsanto filed suit for infringement of their patents against Mr. Scruggs in 2004.

Patent Exhaustion

The District Court found the patent exhaustion defense claimed by Mr. Scruggs was inapplicable because Monsanto never made an unrestricted sale of its biotechnology.  He argued that he purchased the Monsanto seeds in an unrestricted sale.  As such, he was therefore entitled to use those seeds in an unencumbered fashion under the doctrine of patent exhaustion. 

Relying on Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 701 (Fed. Cir. 1992); and LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3f 1364, 79 USPQ2d 1443 (Fed Cir. 2006), the Federal Circuit held that the “first sale/patent exhaustion doctrine establishes that the unrestricted first sale by a patentee of his patented article exhausts his patent rights in the article.”  Based upon this standard, the Federal Circuit affirmed the District Court’s denial of the affirmative defense of patent exhaustion because patent exhaustion was inapplicable to the Mr. Scruggs’ case since there was no unrestricted first sale. 

Specifically, the Federal Circuit found there was no unrestricted sale because the use of the seeds by seed growers was conditioned on obtaining a license, and because the new seeds grown from the original batch had never been sold in a manner corresponding to an unrestricted first sale.  The Court therefore found that there can be no patent exhaustion as to a subsequent generation of seeds where there was no unrestricted first sale.  Thus, the fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology.  The Federal Circuit concluded that the application of the first sale doctrine to subsequent generations of self-replicating technology would injure the rights of the patent holder, and resultantly upheld the District Court’s holding that the patent exhaustion defense is inapplicable.

Antitrust/Misuse

Mr. Scruggs claimed Monsanto violated the Sherman Act §1 and §2 by asserting that the exclusivity provision, no replant policy, and technology fee payments required by Monsanto’s licensing agreement with seed growers are illegal anticompetitive practices.  Mr. Scruggs also argued on appeal that Monsanto was tying the purchase of seed to the purchase of Roundup through grower license agreements, grower incentive agreements and seed partner license agreements, a violation of section 1 of the Sherman Act.  Mr. Scruggs also claimed Monsanto unlawfully monopolized or attempted to monopolize a relevant market under §2 of the Sherman Act and misused its patents.    

Section 1 of theShermanAct

The Federal Circuit first analyzed Mr. Scruggs’ claim under section 1 of the Sherman Act, specifically, the claim of a tying agreement.  The Court stated that a tying arrangement is the sale or lease of one product on the condition that the buyer or lessee purchase a second product.  To prove a tying arrangement existed, he was required to show the involvement of two separate products or services; the sale of one product or service being conditioned on the purchase of another; Monsanto’s market power in the tying product; and, the amount of interstate commerce in the tied product was not insubstantial. 

In affirming the District Court’s rejection of the anticompetitive claim under section 1 of the Sherman Act, the Federal Circuit stated Monsanto had a right to exclude others from making, using or selling its patented plant technology.  Additionally, Monsanto’s “no replant policy simply prevents purchasers of the seeds from using the patented biotechnology when that biotechnology makes a copy of itself.”  The Federal Circuit further stated Monsanto’s uniform technology fee was essentially a royalty fee which was also within the scope of the patent grant.  The Court lastly stated that a no research policy is a field of use restriction and is also within the protection of the patent laws.

The Federal Circuit also found Mr. Scruggs failed to point to sufficient evidence to establish that Monsanto’s behavior constitutes illegal tying, that the grower incentive program was optional and not coerced and that Monsanto’s seed partners were not forced to buy Roundup under the seed partner agreements.  As a result, the Federal Circuit affirmed the District Court’s rejection of the claim of an antitrust violation under section 1 of the Sherman Act.

Section 2 of theShermanAct

The Federal Circuit next analyzed Mr. Scruggs’ claim under section 2 of the Sherman Act which prohibits unlawful monopolization.  The Court stated that proving a section 2 violation required that the party charged had “monopoly power in a relevant market and acquired or maintained that power by anti-competitive practices instead of by competition on the merits.”  The Court affirmed the District Court’s denial of the unlawful monopolization claim under section 2 of the Sherman Act because he failed to provide sufficient evidence proving unlawful monopolization or attempted monopolization.

Patent Misuse

The Federal Circuit also analyzed Mr. Scruggs’ claim under the patent misuse doctrine.  Although the Court stated patent misuse can be found even where there is no antitrust violation, “the policy of the patent misuse doctrine is to prevent the patentee from using the patent to obtain market benefit beyond that which inures in the statutory right.”  Further, the Federal Circuit held that patent misuse requires a party to impermissibly broaden the scope of the patent grant with anticompetitive effect.  As such, the doctrine of patent misuse does not extend to a patent owner by reason of his refusal to license or use any rights to the patent, which is within the permissible scope of the granted patent rights. 

The Federal Circuit quickly affirmed the District Court’s denial of the claim of patent misuse because patent misuse covers activities falling outside of the patent grant.  Specifically, he did not point to any activity falling outside Monsanto’s patent.  Further, under the patent misuse doctrine, Scruggs was required to show that the challenged contract had an actual adverse effect on competition, which Mr. Scruggs failed to do.  As such, the Federal Circuit found that Monsanto’s conduct did not amount to patent misuse.

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