Junk DNA or junk debate?

by Jeff Bergmann


One of the hottest topics at AusBiotech 2003 was Genetic Technologies Limited (GTG), a small Melbourne company with rights to patents relating to the use of the non-coding regions of DNA, or so-called "junk'" DNA. The Australian and New Zealand biotech community has been abuzz since the ABC Catalyst program featured the inventor Dr Malcolm Simons in July 2003 and, more recently, an ABC Four Corners report inspired by the debate at the World Genetics Congress in Melbourne in July.

Four Corners revealed that GTG has been approaching companies, health service providers and universities seeking licence fees for continued use of techniques that it claimed fell within the scope of GTG's patents.

The licence fees are significant, with the latest request being NZ$10 million up front and NZ$2 million per annum to enable the Auckland Hospital Board to continue to perform genetic diagnostic testing (GTG have subsequently claimed to have offered to 'plough back' 50% of any upfront fee to support research institutes in New Zealand). A further development noted was GTG's offer of nominal (US$1000) licences to research entities - entities which have generally not been considered as engaged in commercial research, and therefore not requiring patent licences to engage in research.

Not surprisingly, a major concern of many of the people interviewed by Four Corners was that GTG claimed to have patent insurance, allegedly protecting GTG against costs associated with taking patent infringement action. The implication was that it may be more commercially palatable to accept a licence on the terms offered by GTG than to risk defending an infringement suit and/or challenging the validity of any of the patents.

This controversial commercialisation strategy is undoubtedly working with GTG signing up a new licensee, Quest, only recently and then completing a successful $10 million bookbuild fundraising a few days later.

GTG's approach has split the biotech and scientific community. On one side are those who support GTG's strategy and see it as a perfectly legitimate commercial strategy which may put Melbourne on the world map as leader in biotech commercialisation. On the other side are those who feel that GTG is engaging in heavy-handed tactics and may jeopardise the standard or cost of medical care presently available.

What to make of the matter?

No-one can deny GTG its option to exercise the rights granted by its patents. Similarly, no-one can deny GTG the right to insure itself against costs associated with defending its major asset. In fact, GTG's shareholders no doubt feel that the officers of the company are doing a tremendous job of looking after their interests. The difficulty comes in measuring the legitimate extent of those rights.

First comes assessment of the validity of the patents and the scope of the claims. Only then can a potential licensee determine whether its conduct requires a licence. It is beyond the scope of this article to assess the validity of the GTG patents, and much of what has been said recently in the press about alleged obviousness and lack of novelty may have been made with the considerable benefit of hindsight. However, it is a well established principle that an inventor at the forefront of his or her field may be entitled to patent claims beyond the literal advance demonstrated in the patent specification - Olin Corporation v Super Cartridge Co Pty Ltd And Another (1977) 14 ALR 149. Further, patent examiners are by necessity unfamiliar with a new field of technology and often have difficultly appreciating the actual scope of the claims under consideration. The result is that broad claims are often granted very early in pioneering fields, irrespective of the technology.

A further problem in these situations is that there is often limited prior art available to assess pioneering inventions and granted patents. As the art or technology advances over time, the claims of subsequent patents are usually much narrower and more focussed on the actual invention disclosed. Advancement in the art, however, does not necessarily assist in challenging patents directed to pioneering inventions. Recent experience with business methods patents of the early 1990s shows how the broader pioneering patents have proved difficult to challenge, but, as further prior art is introduced, a shakeout eventually occurs in the field, and later patent applications struggle to demonstrate novelty and inventive step to the requisite standard.

It is also important to note that patents have a limited life and the GTG patents (and its commercial leverage in this area) will expire, at least in Australia, in approximately 7 years (although at least one US patent continues until 2014).

Second, even assuming that the GTG patents are valid, one may assess the extent of GTG's rights to exercise those patents. Contrary to common belief, there is no doctrine that allows unfettered exercise of an IP right without regard to anti-trust laws. An unfortunate corollary of a pioneering invention is that the discovery may generate a market in its own right and may vest substantial power in that market in the hands of the patentee. Limits are imposed on the exercise of such power, especially in relation to conduct towards competitors or new entrants in that market. It will be interesting to see how GTG deals with potential licensees who may compete with GTG's recently stated mission 'to establish a world-class, independent genetic testing laboratory'.

Third, in a similar vein, a patentee's ability to make representations about the scope of its claims, assert the need for a licence, and make representations about the existence of any insurance cover, are regulated. It is for the potential licensee to assess the strength of GTG's statements of this nature and determine the merits of the respective negotiating positions. The law prohibits statements from companies that are false, misleading or deceptive, or likely to mislead or deceive.

Fourth, an untested issue is the extent to which a patentee is required to bring its patents to the attention of the market without undue delay. Applications for these patents were first filed in the late 1980s, and only now, some 13 years later, are they being enforced. Ordinarily, a delay issue does not arise because the patents are exercised against the patentee's competitors and the patentee usually draws the existence of its patents to the attention of its competitors as soon as possible. However, in a situation where a global licensing strategy is suddenly and aggressively implemented some 13 years after the priority date and many years after grant, it may be arguable that this delay has prejudiced the ability of a defendant to an infringement action to obtain evidence to challenge the validity of the patents. It is also worth noting that the Australian Patents Act 1990 requires an infringement suit to be brought within six years of an infringing act.

Fifth, by GTG's own admission, patent insurance is very expensive. It is also likely to have limits - it may, for example, exclude speculative claims. The exact scope of the cover is difficult to determine, and again it is for the potential licensee to assess the merits of any patent insurance. Interestingly, it would appear that the existence of such insurance remains a significant element in GTG's successful licensing strategy.

Sixth, the question of research use of a patented invention remains unresolved. The previous issue of Biotech News discussed a recent US case, Madey v Duke, which assessed whether research conducted within a research environment amounted to infringing commercial use. This is likely to be assessed on a case-by-case basis and each institution approached for a licence will need to form its own views on whether a licence is required. However, it may take a principled stand to reject a nominal US$1000 licence fee and mount a challenge on the necessity for such a licence.

For investors, it may be difficult to question the GTG strategy which has to date proved extraordinarily effective. But how long before a potential licensee calls GTG's bluff and refuses to sign up?


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