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Limitations on Patent Rights: the Exhaustion Doctrine

Under 35 U.S.C. § 154 and § 271, a patent holder is granted a limited monopoly to exclude others from making, using, or selling his patented item. The counter-balance to the monopoly is the patent exhaustion doctrine, which limits the patent holder’s ability to control a patented item after an unrestricted authorized sale. The idea behind the doctrine is that the money from the sale of the patented article is the inventor’s reward for procuring a patent. Thus, when a person buys the latest smartphone, the patent holder cannot prevent the buyer from using the phone as he sees fit or from reselling the phone.

The patent exhaustion doctrine does not, however, allow a buyer to make duplicates of the patented article. In most cases, making duplicates of patented articles would be financially more expensive than purchasing additional articles. For example, an engineer could take apart a smartphone, buy duplicate parts and reassemble the parts to then have two phones. More than likely, the individual parts would cost significantly more than buying a second phone. In the biotech world, the opposite is true. In biology, many organisms, e.g. bacteria, have the ability to self- replicate. Scientist can take advantage of this ability by inserting foreign genetic material into bacteria, which gets passed onto to future generations as the bacteria replicate. The foreign genetic material causes the bacteria to produce proteins that the bacteria would normally not produce. A classic example of this technique is using bacteria to produce insulin for diabetics. Because many of the patented items in the biotech industry are capable of self- replication, making duplicates is very inexpensive. Such was the case in Bowman vs. Monsanto Co., a U.S. Supreme Court opinion that issued on May 13, 2013.

Mr. Bowman Had a Farm, E-I-E-I-O

In Bowman vs. Monsanto, Monsanto invented and patented a weed killer resistant soybean seed by inserting a glyphosate resistance gene into the plant’s genome. Plants with this gene could survive exposure to glyphosate, which is a broad-spectrum herbicide used to kill weeds and grasses known to compete with commercial crops. Glyphosate is available as the commercial product RoundUp^®. Farmers who purchased the modified soybeans, referred to as Roundup Ready^® soybeans, could spray their fields with RoundUp to kill unwanted plants thus improving their crop yield.

Monsanto sells the Roundup Ready soybean seeds with a specific licensing agreement that restricts the seed usage. Under the agreement, farmers are allowed to use the seeds for one season and any resulting crop must be consumed or sold as a commodity. The agreement specifically prevents the farmer from retaining any seeds for replanting or providing seeds to others for replanting. The reason for the restrictions is because the seeds are genetically modified and any progeny, i.e., new beans, would have the same resistance to RoundUp.

Requiring the farmers to purchase new seeds each year allows Monsanto to competitively price the Roundup Ready seeds.

Vernon Bowman is a farmer who purchased Roundup Ready soybeans from Monsanto under the license agreement. He sold his entire crop from the Roundup Ready seeds to a grain elevator, as most farmers do. Bowman wanted to plant a second crop after harvesting the first crop. However, since the crop was being planted late in the season, he did not want to pay the premium price charged by Monsanto for its Roundup Ready seeds. Instead, Bowman purchased commodity soy beans from the grain elevator, knowing that most farmers used Roundup Ready seeds, and planted those instead. He treated the second planting with RoundUp and low and behold, most of the soybean plants survived. When Bowman harvested the second crop, he saved a portion of the seed for replanting a second crop the next season. Bowman continued this practice for eight seasons.

Monsanto discovered Bowman’s practice and brought suit for patent infringement. Bowman raised a patent exhaustion defense claiming that Monsanto could not control the use of the soybeans purchased from the grain elevator because they were subject to an authorized sale that did not include Monsanto’s specific license agreement. The District Court found in favor of Monsanto and awarded $84,456 in damages. Bowman appealed to the Federal Circuit, which affirmed the District Court decision, further noting that patent exhaustion did not extend to making new copies of the patented articles. Bowman appealed to the Supreme Court, which unanimously affirmed the Federal Circuit.

The Supreme Court emphasized that the patent exhaustion doctrine only applies to the particular patented item sold. It does not apply to the patentee’s ability to prevent a buyer from making new copies of the patented item. Bowman argued that he did not make new copies of the soybeans but rather the soybeans themselves made the copies because soybeans replicate naturally on their own. Justice Elena Kagan shot down Bowman’s “blame the bean” defense creating a catchphrase that is likely to become as infamous as Johnnie Cochran’s “if it doesn’t fit, you must acquit.”

To License or Not to License, That Is the Question

The Supreme Court did not specifically address how Monsanto’s sales license agreement factored into the equation -- for example, if Monsanto or an affiliate had sold the seeds to the farmer without the special license agreement. Two footnotes in the opinion indicate that the nature of the farming industry is such that a farmer would reasonably believe that any sale of seeds for planting would come with an implied license to plant and harvest one crop. Furthermore, Bowman’s purchasing seed to plant from a grain elevator was admittedly unusual, especially since most grain elevators are restricted under federal and state law from packaging or marketing the products for use as agricultural seed. Whether you need to sell patented products with a restrictive license agreement may depend on the customs in the industry.

In the biotech and pharmaceutical industries, restrictive sales license agreements often accompany the sale of patented items. This is partially to protect the seller from unlawful use of the materials. For example, the Food and Drug Administration regulates the sale of drugs for