April 4, 2011
LES Insights
Authored by Raymond M. Gabriel, D. Brian Kacedon and John C. Paul
The licensing of data relating to the genetic code of various organisms has become an increasingly important aspect of biotechnology research. Given the complexity of developing this data, it is often cost and time-prohibitive for scientists to develop this data anew when they wish to research certain organisms. In contrast, by licensing the data, researchers and scientists can save time and focus their resources on applying their discoveries.
These licenses, however, often include restrictions that are not fully appreciated by the scientists and researchers. Providers of genome sequencing data often restrict how a licensee can use the genetic data. For example, because commercial use may be more profitable than academic use, a provider may restrict a researcher to academic purposes but also charge a lower rate than it would a commercial researcher. In Integrated Genomics, Inc. v. Gerngross,1 No. 09-3718 (7th Cir. Feb. 24, 2011), the Court of Appeals for the Seventh Circuit addressed the issue of whether one such license clearly prevented commercial use. In finding that the agreement did not prevent such use, the court provided guidance for those who practice in this area.
In 2000, Tilman Gerngross, a faculty member at Dartmouth College formed a private corporation, GlycoFi, with a fellow faculty member, with the aim of genetically modifying yeast to produce human proteins. Gerngross sought to modify a particular species of yeast and approached Integrated Genomics, Inc. ("IG")―which had previously mapped the genome for that specie―to acquire a license to its data.
IG ultimately agreed to license Gerngross its data for $5,000, but Gerngross refused to sign any written agreement. During negotiations, IG conveyed to Gerngross that it was concerned about devaluing the data by making it publicly available. Gerngross agreed to restrict his publication of the data and drafted a letter to that end. The letter became the sole writing evidencing any agreement between the parties. Following these negotiations, IG sent Gerngross the data.
In December 2002, GlycoFi opened its own facility separate from Dartmouth and Gerngross loaded IG's data on GlycoFi's computers. Around the same time, IG became aware of Gerngross's affiliation with GlycoFi but did not raise its rates, which were typically lower for academic licensees than for commercial licensees. Moreover, in April or May 2003, Gerngross contacted IG to get updated data. Although IG had no files documenting the Gerngross transaction, IG supplied the data without further restrictions or compensation.
In May 2006, Merck purchased GlycoFi for $400 million. A few months later, IG demanded that Merck compensate IG, alleging that Gerngross used IG's data for commercial purposes. After Merck refused, IG filed suit against Gerngross, alleging that he fraudulently misrepresented his status and breached his written agreement not to publish the data.
At trial, the district court weighed the conflicting evidence of whether Gengross disclosed his commercial affiliation with GlycoFi, and found that he had not. One of IG's witnesses stated that IG would have charged Gerngross more if it had known of his commercial affiliation, however, IG had not inquired whether Gerngross had a commercial affiliation. The district court held that the data was not "published" within its common and ordinary meaning and that although Gerngross may have deceived IG by not clarifying his end use, IG had not convincingly shown that it would have charged a higher rate for the data. IG appealed the decision.
On appeal, the Seventh Circuit affirmed the decision of the district court. It first held that the correct meaning of the term "publication" in the agreement between Gerngross and IG was its plain and ordinary meaning, i.e., disclosure to the public. The court stated that there was no evidence or precedent to support IG's definition of "publication," which included disclosure to another individual or corporation within the context of a business or professional relationship.
The Seventh Circuit also held that IG did not provide clear and convincing evidence that Gerngross fraudulently misrepresented his academic affiliation. While the evidence showed Gerngross did not disclose his commercial use of the data, IG had not proven that it would have necessarily charged a higher fee had it known. Although some evidence showed that IG typically charged more for commercial use, other evidence supported the opposite conclusion. The appeals court would not undermine the district court's conclusion that IG had not shown it would have acted differently based on this balance of evidence.
First, the appeals court found that IG did not prohibit Gerngross from making commercial use of the data, only from publishing the data. Second, IG's interactions with Gerngross showed that it did not take care in determining if Gerngross intended commercial uses of the data. The court reasoned that if IG was concerned about commercial use it would have pursued the issue further. The court also reasoned that IG would not have turned over the updated data in 2003 because by that time it was on notice of Gerngross's commercial affiliation. Third, Gerngross was neither seeking an exclusive license or customized work by IG. These facts cut against IG's argument that it would have charged a higher price for the data. Finally, IG was in financial distress when it licensed the data to Gerngross. That evidence showed that it was more important to make a sale than to get a higher rate from Gerngross.
IG failed to be able to prove that its licensee's use of the licensed technology was limited and it was unable to obtain compensation at a higher rate for that use of the licensed technology for two reasons: First, it did not clearly limit Gerngross's use of the data in a written agreement. Second, it did not use consistent practices or properly document its standard procedures with either academic licensees or commercial licensees regarding rate differences.
To avoid the same pitfalls as IG, licensors who wish to restrict how licensees use licensed data or other information should clearly specify such terms in the license agreement, to the extent they have the bargaining power to include such terms in the agreement. Licensors should also follow consistent practices when dealing with certain categories of potential licensees, and document negotiations to preserve evidence of the parties' communications and understandings in case a dispute ever arises.
1 The Integrated Genomics decision may be found at: http://www.ca7.uscourts.gov/tmp/6E0JNT9C.pdf (link no longer active as of 5/1/2012).
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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