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Restrictions on Making, Using, or Selling a Second-Generation Plant Product Does Not Constitute Patent Misuse

April 09, 2004

Decision icon Decision

Last Month at the Federal Circuit - May 2004

Judges: Clevenger (author), Lourie, and Plager

In Monsanto Co. v. McFarling, No. 03-1177 (Fed. Cir. Apr. 9, 2004), the Federal Circuit affirmed a district court’s findings that Homan McFarling had breached a technology agreement he had signed with Monsanto Company (“Monsanto”) when he replanted some soybeans he had purchased pursuant to the agreement, and that McFarling had failed to demonstrate a genuine issue of material fact on his counterclaims or defenses to Monsanto’s breach of contract claims. However, the Court vacated and remanded the district court’s judgment relating to damages.

The two patents-in-suit relate to geneticmodification technology in the field of soybean seeds. Monsanto manufactures ROUNDUP® herbicide, which contains glyphosate, a chemical that kills vegetation by inhibiting a particular enzyme: 5- enolpyruvyl-shikimate-3-phosphate synthase (“EPSPS”). Monsanto also markets ROUNDUP READY®, which operates by inserting the gene sequence for a variant of EPSPS that is not affected by the presence of glyphosate but still performs its enzymatic function. Therefore, ROUNDUP® can be sprayed on a field where ROUNDUP READY® soybeans have been planted, killing weeds but leaving the soybeans intact. Monsanto’s U.S. Patent No. 5,633,435 (“the ’435 patent”) and Patent No. 5,325,605 (“the ’605 patent”) relate, respectively, to the gene encoding the modified EPSPS enzyme and to the use of a particular promoter in genetically modified plant cells.

Monsanto licenses its ROUNDUP READY® technology through two interrelated licensing schemes. First, it licenses the patented gene to seed companies that manufacture the glyphosate-tolerant seeds that are sold to farmers. Second, Monsanto requires that seed companies execute licenses, rather than conduct unconditional sales, with their farmer customers.

The 1998 version of the Monsanto Technology Agreement (the “Technology Agreement”) between Monsanto and the farmers using ROUNDUP READY® soybeans places several conditions on the farmers’ use of the licensed soybeans. For example, the farmers are only allowed to use the seed containing the Monsanto gene technologies in a single season, and they cannot save any crop produced from this seed for replanting. The Technology Agreement also contains a liquidated-damages clause. In the event of a breach, the damages will include a claim for liquidated damages based on 120 times the applicable technology fee.

McFarling, a farmer in Mississippi, executed the Technology Agreement and licensed 1000 bags of ROUNDUP READY® soybeans. He concedes that he saved 1500 bushels of seed from his 1998 crop and then replanted them in 1999.

As a result, Monsanto filed suit against McFarling, alleging, among other things, infringement of the ’435 and ’605 patents and breach of the Technology Agreement. McFarling’s affirmative defenses included patent misuse, antitrust, and the Plant Variety Protection Act (“PVPA”). The district court granted SJ in favor of Monsanto on all of McFarling’s affirmative defenses, as well as on liability with respect to the ’605 patent-infringement claim and the breach of contract claim. As to the damages claim, the district court entered final judgment on Monsanto’s breach of contract claim in a specified amount only after McFarling had stipulated that he purchased 1000 bags of Monsanto’s soybean seeds. The district court fashioned its own formula to use the multiplier in the liquidated-damages clause.

The Federal Circuit affirmed the district court’s grant of SJ against McFarling’s patent-misuse affirmative defense. McFarling argued that Monsanto had committed patent misuse because it had impermissibly tied an unpatented product to a patented product. Specifically, by prohibiting farmers from saving seeds, McFarling argued that Monsanto had extended its patent on gene technology to include an unpatented product—the germplasm, or “God-made” soybean seed. The Federal Circuit held that this was not a tying arrangement. The Technology Agreement did not impose a restriction on the use of the product purchased under the license, but instead imposed a restriction on the use of the goods made by the licensed product. However, in this case, the licensed and patented product (the first-generation seeds) and the goods made by the licensed product (the second-generation seeds) are nearly identical copies. Since Monsanto’s ’435 patent reads on the first-generation seeds, it would also read on the secondgeneration seeds; therefore, the restrictions in the Technology Agreement prohibiting the replanting of the second-generation ROUNDUP READY® soybeans do not impermissibly broaden Monsanto’s rights under the patent statute. The Federal Circuit also rejected McFarling’s antitrust counterclaim for the same reasons.

Additionally, the Court refused to reconsider its previous ruling that the PVPA does not preempt and invalidate all prohibitions on seed saving contained in utility-patent licenses. The Federal Circuit maintained that the right to save seeds of plants registered under the PVPA does not impart the right to save seeds of plants patented under the Patent Act. The two statutes can mutually coexist and Congress did not intend for exemptions to exist for saving seeds under a utility patent or prohibit owners of utility patents from enforcing seed-saving prohibitions in their licenses.

However, the Federal Circuit did vacate the district court’s damages award. The Court held that under Missouri law, the provision in the Technology Agreement applying a 120 multiplier to the technology fee is an unenforceable and invalid penalty clause. Accordingly, the Court remanded the judgment of damages to the district court for determination of actual damages.