Print PDF

Reasonable Royalty Is Not Limited to License Fee Regularly Charged at Time of Sale

May 24, 2007

Decision icon Decision

Last Month at the Federal Circuit - June 2007

Judges: Lourie, Rader, Bryson (author)

[Appealed from: E.D. Mo., Judge Perry]

In Monsanto Co. v. McFarling, Nos. 05-1570, -1598 (Fed. Cir. May 24, 2007), the Federal Circuit held that the jury’s verdict of a reasonable royalty of $40 per bag of genetically modified seed was supported by evidence and was not grossly excessive.

The technology at issue relates to genetically modified soybean plants that contain an enzyme that confers resistance to the pesticide glyphosphate, also known as Roundup®. Farmers can apply Roundup® to crops containing the modified soybean plants to kill weeds without harming the soybean plants. Monsanto Company (“Monsanto”) protected its genetically engineered soybean seeds under two of its patents, U.S. Patent Nos. 5,633,435 (“the ’435 patent”) and 5,352,605 (“the ’605 patent”). The ’435 patent claimed a plant cell containing a DNA molecule encoding a genetically modified enzyme, and the ’605 patent claimed a plant cell containing a genetic promoter facilitating the production of the modified enzyme by a plant.

For a farmer to obtain Monsanto’s soybean seeds, he had to purchase the seeds from a dealer authorized by Monsanto and he had to sign a “Technology Agreement,” promising not to replant seeds from the first generation of soybean crops and not to sell seeds that were produced by the first generation crop to others. At the time of purchase, Monsanto collected a license fee of $6.50 per fifty-pound bag of seed and the dealer charged $19 to $22 per bag of seed.

In 1998, Homan McFarling purchased Monsanto’s soybean seeds from an authorized dealer, signed the Technology Agreement for that year, and paid the license fee. Later that year, however, McFarling saved the seeds that came from the first generation soybean crop and planted those seeds in 1999. He repeated his actions the following year, saving the seeds from the second generation crop in 1999 and planting them in 2000. He did not pay Monsanto the license fee for 1999 or 2000.

The current appeal to the Federal Circuit is the third appeal to this Court in this case. In the first appeal, the Federal Circuit affirmed the district court’s granting of a preliminary injunction to prohibit McFarling from continuing to plant genetically modified soybean seeds. In the second appeal, the Federal Circuit upheld the district court’s finding that McFarling was liable for breach of contract and upheld the district court’s rejection of various defenses raised by McFarling, but reversed the district court’s judgment, holding that the liquidated damages provision in the contract was unenforceable. Based upon this finding, the Federal Circuit remanded the case for a determination of Monsanto’s actual damages. In the third and current appeal, the Federal Circuit addressed four issues.

First, the Federal Circuit considered whether McFarling could reassert the defenses he raised in the second appeal because, on remand, Monsanto canceled the claim upon which the Court based its denial of those defenses. Specifically, in the second appeal, the Federal Circuit determined that Monsanto’s license did not impermissibly restrict the use of farmer-grown genetically modified soybean seeds. Concluding that the ’435 patent read on first and second generation seeds, the Court held that Monsanto did not misuse its patent because prohibiting the use of second-generation seeds was tantamount to prohibiting unlicensed use of the invention. Upon remand, Monsanto withdrew its claim of infringement under the ’435 patent, but maintained its claim under the ’605 patent. Because the Federal Circuit found that the logic underlying a finding of no patent misuse of the ’435 patent also applied to the ’605 patent, the Court did not reconsider its prior rejection of that defense. The Court also rejected McFarling’s argument that the Court should reconsider his prior asserted antitrust counterclaim because the Court found that McFarling’s counterclaim was merely a restatement of his defense of patent misuse.

Second, the Federal Circuit determined whether the jury’s finding that $40 per fifty-pound bag of seed was supported by the evidence. McFarling argued that he should pay no more than the $6.50 license fee per bag. The Court disagreed with McFarling and noted that if the reasonable royalty were limited to the $6.50 license fee, it would give infringers like McFarling an unfair advantage over farmers that complied with all of the provisions of the Monsanto license. In addition, Monsanto would be denied benefits from the cooperation of seed companies in promoting its seeds and regulating the distribution of its seeds.

Instead, the Federal Circuit began its analysis by first calculating the amount of money a farmer would normally pay per bag of seed by adding the license fee per bag ($6.50) and the fee per bag ($19-$22) charged by the authorized seed dealer. Just because Monsanto split these fees between itself and the dealer, the Court reasoned, did not mean that the dealer’s fee should not have been considered in the reasonable royalty calculation. The Court noted, however, that it would have been improper to hold that the reasonable royalty damages would be between $25.50 and $28.50 per bag of seed.

In addition to the license fee and dealer’s fee, the Federal Circuit also considered the benefits Monsanto enjoyed as a result of its licensing requirement that farmers not save and replant seeds. This licensing scheme reduced the risk of underreporting and harm to Monsanto’s reputation among farmers, allowed Monsanto to monitor the quality of its seeds from year to year, and provided leverage to Monsanto in negotiating with new seed companies. Though the Court did not assign a monetary value to these benefits, it nonetheless explained that they should be taken into consideration.

Additionally, the Federal Circuit also considered the benefits that McFarling gained by his practices in 1999 and 2000. Monsanto’s expert testified that the use of Monsanto’s seeds increased the crop yield on McFarling’s farm by a value of $14 to $25 per acre when compared to a crop yield for natural soybean plants. Also, Monsanto’s genetically engineered plants reduced the expense of weed control, allowing McFarling to save $17 to $36 per acre. Based on this testimony, the Federal Circuit concluded that McFarling saved between $31 and $61 per acre by improperly using next generation seeds from Monsanto’s soybean plants. Because a fifty-pound bag of seed provided enough plants for approximately one acre, the Court concluded that McFarling saved between $31 and $61 per bag of seed. Based on this additional savings alone, the Court concluded that the jury’s verdict of a $40 reasonable royalty per fifty-pound bag of seed was supported by the evidence and was not excessive.

Third, the Federal Circuit addressed McFarling’s argument that Monsanto’s expert should not have been allowed to testify as to damages because the expert was not a farmer or agronomist. According to McFarling, the expert’s testimony was no more than subjective opinion. Acknowledging that the expert was a valuation analyst, the Court held that the district court was within its discretion to allow the expert’s testimony because McFarling’s objection spoke to whether the jury should believe the expert and not whether the expert’s opinions had a reasonable basis in fact.

Fourth and finally, the Federal Circuit considered Monsanto’s request to modify the district court’s permanent injunction against McFarling. Monsanto argued that the injunction forced Monsanto to license its genetically engineered seeds to McFarling and, thus, requested that the injunction be amended to enjoin McFarling from obtaining the seeds unless Monsanto gave its “express authorization.” The Federal Circuit disagreed with Monsanto’s interpretation of the injunction and explained that the injunction meant that if Monsanto entered into a binding technology agreement with McFarling againthrough the purchase of seed from a lawful dealer, the injunction would not prohibit the licensed conduct.