Pattent Matters: License to Grow –

Edward Hurwitz, a director at Alta Partners, knows firsthand how much time it takes to defend a biotech company’s portfolio of patents in the courtroom. As the former CFO of Affymetrix from 1997 to 2001, Hurwitz had to defend the company in numerous lawsuits involving patent infringement. He recalls that it became harder and harder to balance his day-to-day CFO duties and deal with the expensive and distracting litigation cases. It was like having at least two full-time jobs. How bad was it? At one point, Hurwitz says the Santa Clara-based biotech company was fending off four different patent litigation suits at once.

“You’re playing with fire if you don’t have quality patents,” says Hurwitz. “I’ve seen plenty of situations where the quality of the patents can make or break a case.”

The litigation that Hurwitz dealt with wasn’t anything out of the ordinary. That was true during his time at Affymetrix. And it remains true today, as he invests in life science companies for Alta.

More than 2,500 patent lawsuits were filed nationwide in 2002, compared to just about 1,000 annually in the early 1980s, and the number of patent suits continues to grow, according to a study by the Seattle law firm Perkins Coie. Similarly, Steven Bauer, a partner with the Boston law firm Proskauer Rose, estimates that about 10 new patent infringement cases are filed each day.

“As a result, it is more important now than ever before that VCs perform more due diligence to confirm the quality of the patents in a company’s portfolio before investing in the company,” says JiNan Glasgow, founder and CEO of SPORE, Inc., a Raleigh, N.C.-based company that offers proprietary patent mapping tools for analyzing patents.

Patented Growth

It wasn’t long ago that major corporations ignored their portfolio of patents. Enforcing patent rights on cash-strapped startups was viewed as a distasteful option. Many simply didn’t want to pursue such cases of patent infringement against a smaller company for fear of appearing as a bully, says Phillip Philbin, an intellectual property specialist and a partner in the Dallas office of Haynes and Boone.

But over the years, companies such as IBM have ramped up efforts to translate their intellectual property into bottom line cash and have begun enforcing their patents and seeking license revenue. Of course, patent protection is not helped by the backlog in patent filings.

Glasgow, a former patent examiner with the United States Patent & Trademark Office, says that the number of patents is growing due to the rapid growth in so many nascent technology fields, such as nanotechnology and biotech. The Patent Office is anticipating about 500,000 new patient applications this year and is on a hiring spree to keep up with the flood of filings. However, the current backlog means that in most cases, patents take more than two years before they are approved. In some case, the delay may be more than three years.

These longer approval times threaten to make some patents obsolete even before they are issued, critics complain. The delay also dampens interest from the venture industry, which typically wants the assurance of patented technologies before they invest. The situation is particularly tough on independent inventors and small companies who need those patents to secure funding.

Because patents are among a biotech company’s most valuable assets, the stakes in a life sciences patent litigation suit are generally high. Losing a case could wreck havoc on startups or even lead to its demise.

Dan Coughlin, an attorney with Mintz Levin in New York, says that patent protection is critical, because it can establish a product’s monopoly in the marketplace-or lack of patent protection can wipe out a company’s potential profit by the billions of dollars. What’s more, patent litigation suits can run up in the millions of dollars to defend and take years of court proceedings to resolve.

Coughlin, who specializes in intellectual property, points to Amgen’s high profile case with Transkaryotic Therapies Inc. While the U.S. District Court in Massachusetts favored Amgen, the legal system in the United Kingdom sided with Transkaryotic, costing drug-maker Amgen billions of dollars. (See story, this page).

Reform Push Underway

Companies spend roughly between $15,000 and $25,000 for every patent they file for approval; startups, constrained by cash flow, will typically file three to five patents a year, says Sheila Mikhail, a partner with Life Sciences Law in Durham, N.C. Thus, A startup looking to file four patents in one year, can see the costs grow quickly, and this is before any patent litigation, which can costs millions of dollars. Genentech lost a patent case in 1999 that cost the South San Francisco biotech company $200 million (See story, opposite page).

“You can’t go into a patent lawsuit with your riffle half-loaded,” Hurwitz says. “When you fight a patent suit, the experience drains your energy, resources and cash.”

Thus, it’s not surprising that there’s a push to bring changes to the system. Microsoft, which is among the largest targets of patent lawsuits, last month unleashed its sharpest criticism to date, saying the system needs reform. Though the reform ideas are far from new, Microsoft says that, among other things, the patent system needs a special court that would consolidate and hear all infringement cases at the federal district level to improve consistency and predictability of patent litigation.

“It is too easy for a litigant to manipulate the U.S. system and look to a patent lawsuit as the ultimate lottery ticket, hoping to confuse jurors with technical jargon that will yield the payment of a lifetime,” said Brad Smith, Microsoft’s senior VP and general counsel, in a prepared statement. t