Summary of a Recent
Judicial Development in
Biotechnology

Monsanto Sues Farmer for Patent
Infringement and Breach of Contract

Gaby R. Jabbour
National AgLaw Center Research Assistant

In an action brought by Monsanto Company (Monsanto) against farmers who purchased genetically modified seeds containing Monsanto's patented biotechnology alleging that the farmers reused the patented biotechnology without its authorization and replanted the seed in violation of a "Technology Agreement" signed by the farmers that required the farmers to use the seed in only one growing season, the United States District Court for the Eastern District of Missouri has ruled that Monsanto was entitled to summary judgment on its claims for patent infringement and breach of contract. Monsanto Co. v. Swann, No. 4:00-CV-1481 CEJ, 2003 WL 1487095, at *2-9 (E.D. Mo. Jan. 8, 2003).

Monsanto, plaintiff, developed genetically modified soybean and cotton plants that were resistant to glyphosate herbicides such as Roundup(r) brand herbicide. See id. at *1. Monsanto owned several utility patents pursuant to 35 U.S.C. § 101, which claimed the "glyphosate-tolerant plants, the genetically modified seeds for those plants, the specific modified genes, and the method of producing the genetically modified plants." Id. Monsanto authorized various companies to manufacture and sell seed containing its patented biotechnology. See id. It required that the companies "obtain a 'Technology Agreement' from purchasers" and "that the purchasers pay a licensing fee, or 'Technology Fee,' for each unit of patented seed purchased." Id.

On February 25, 1998, Hal Swann and Swann Farm Partnership, defendants, purchased the genetically modified seeds manufactured by Monsanto and signed a Technology Agreement (Agreement) for that year. See id. Under the Agreement, Monsanto licensed the use of the patented biotechnology contained in its seed, subject to two conditions: (1) that the purchased seed be used "for planting a commercial crop only in a single season;" and (2) that the defendants not "save any crop produced from [plaintiff's patented] seed for replanting, or supply saved seeds to anyone for replanting." Id.

In 2000, Monsanto discovered that the defendants were planting seed containing its patented biotechnology that had not been legitimately purchased pursuant to an applicable technology agreement. See id. Monsanto tested the defendants' 2000 cotton and soybean crops and discovered that the defendants' crops contained its patented biotechnology. See id. The defendants admitted that they replanted seeds generated from crops produced by Monsanto's patented seed from the 1998 growing season. See id. (citation omitted).

Monsanto brought an action against the defendants and filed a motion for summary judgment, claiming that there was "no issue of material fact as to whether [the] defendants used plaintiff's patented biotechnology without authorization or breached the 1998 Technology Agreement" and sought "summary judgment on its patent infringement claims and its breach of contract claim." Id. at *2.

The defendants argued "(1) that the 1998 Technology Agreement violates the doctrine of patent exhaustion or first sale; (2) that the right of farmers to save seeds of plants registered under the Plant Variety Protection Act (PVPA)", 7 U.S.C §§ 2321-2583, "permits defendants to save seeds subject to plaintiff's utility patents; [and] (3) that the doctrine of patent misuse precludes plaintiff from asserting its patent infringement claims . . . ." Id. The defendants also argued that there was "a material issue of fact as to whether they agreed to the terms of the 1998 Technology Agreement." Id. Because the court did not specifically address this issue, it is not discussed in this article. See id.

The court first examined Monsanto's patent infringement claim and noted that "[t]here are two steps to evaluating a patent infringement claim: (1) claim construction and (2) infringement analysis." Id. at *3 (citing Embrex v. Service Eng'g Corp., 216 F.3d 1343, 1347 (Fed. Cir. 2000)).

With respect to the claim construction step, the court first considered the scope of the allegedly infringed patent claims and found that all of Monsanto's patents "cover genes and promoter elements existing in both genetically modified seed and the plants that seeds produces." Id. The court explained that the second step, infringement analysis, "requires the Court to compare the allegedly infringed patent claims with the allegedly infringing product." Id. (citation omitted). It stated that both the soybean and the cotton samples from the defendants' crops for the year 2000, which were the infringing products, contained the chimeric gene and the enhanced promoter element covered by Monsanto's infringed patents. See id. (citation omitted).

The court noted that the defendants "admit saving and replanting seeds generated from crops produced by seed containing plaintiff's patented technology." Id. (citation omitted). Therefore, the court stated that "there is no issue as to whether defendants used biotechnology covered by the . . . [plaintiff's] patents" and that "there is no dispute that defendants' use of plaintiff's patented biotechnology was without authority." Id. The court concluded that "the use of a patented product without authority constitutes patent infringement" and that "absent an applicable defense, plaintiff is entitled to judgment as a matter of law on its patent infringement claims." Id. at *3-4 (citation omitted).

The court stated that the defendants raised "three defenses on plaintiff's infringement claims: (1) that the doctrine of patent exhaustion or first sale preclude plaintiff's patent infringement claim, (2) that the PVPA preempts plaintiff's claim for infringement of its utility patent, and (3) that plaintiff's patent misuse bars its infringement claim." Id. The court stated that the defendants' first two arguments were disposed of in Monsanto Co. v. MacFarling, 302 F.3d 1291 (Fed. Cir. 2002). See id. at *4. In McFarling, the Federal Circuit

affirmed a district court's decision to issue a preliminary injunction addressing claims functionally identical to those presented here. In so holding, the McFarling court (1) expressly rejected the applicability of the first sale or patent exhaustion defense . . . and (2) expressly rejected the possibility of PVPA preemption . . . . Accordingly, the Court finds that the Federal Circuit's decision in McFarling precludes defendants from defending against plaintiff's patent infringement claims under the PVPA or under the patent exhaustion defense.

Id. (quotations and citations omitted).

The court next considered the defendants' argument that Monsanto's patent misuse barred its infringement claim. See id. at *5. It explained that "[p]atent misuse is an equitable defense to an infringement claim, which is available against a patentee who uses its patent in violation of antitrust laws or to impermissible [sic] expand the scope of its patent rights with an anti-competitive effect." Id. (citation omitted). The defendants asserted that Monsanto had implemented a "'tying'" arrangement, which is an arrangement "in which a patentee conditions a license to use its patent on a separate purchase." Id. (citation omitted). Tying arrangements are considered to be a per se patent misuse. See id. (citation omitted). The court stated that

[a]lthough plaintiff's Technology Agreement in effect compels a grower to re-purchase seeds in the subsequent growing seasons, it does not require the purchase of plaintiff's patented seed. Without more, a prohibition on saving and replanting a certain brand of seed, does not create an obligation to purchase that same seed in subsequent growing seasons.

Id. at *5 (citing McFarling, 302 F.3d at 1291). It concluded that the "doctrine of patent misuse does not shield [the] defendants from [the] plaintiff's patent infringement claim." Id.

Next, the court considered Monsanto's breach of contract claim. See id. It noted that the 1998 technology agreement signed between the parties contained a forum selection clause that provided that all disputes arising under the technology agreement were governed by Missouri law. See id. at *6 (citations omitted).

The court explained that "[t]o recover for breach of contract under Missouri law, a plaintiff must show: (1) the existence of a binding agreement; (2) the rights of the plaintiff and obligations of the defendants under the terms of that agreement; (3) a breach by defendant; and (4) damages stemming from that breach." Id. (citing Boyer v. Sinclair & Rush, Inc., 67 S.W.3d 627, 632-33 (Mo. Ct. App. 2002)). The court considered all four components and found that "[the] plaintiff is entitled to judgment as a matter of law on its breach of contract claim." Id. at *7.

Finally, the court examined whether the liquidated damages clause contained in the Technology Fee Agreement was enforceable. See id. The court explained that "[t]he requirements for a liquidated damages provision to validly fix damages are (1) that the harm is of a kind difficult to accurately measure and (2) that the amount fixed as damages is a reasonable forecast of the harm caused by a breach." Id. (citation omitted). The liquidated damages clause provided that

[i]n the event that the Grower saves, supplies, sells or acquires seed for replant in violation of this Agreement and license restriction, in addition to other remedies available to the technology provider(s), the Grower agrees that damages will include a claim for liquidated damages, which will be based on 120 times the applicable Technology Fee.

Id. (citation omitted).

Monsanto asserted that calculating the harm caused by defendants' breach is difficult because "each misused bag of seed can produce an exponentially increasing number of illicit seed bags in subsequent seasons - in the case of soybeans, an exponential multiple of 36." Id. (citation omitted). Thus, it argued that multiplying the Technology Fee by 120 was a reasonable forecast of the harm caused by the defendants' breach. See id.

The court stated that Monsanto's justification for liquidated damages provision and its calculation of liquidated damages was based upon "incongruous conceptions of the harm caused by the defendants' breach." Id. It also stated that Monsanto "relies on the harm caused by the misuse of a legitimately purchased seed bag to demonstrate that breach damages are difficult to calculate. When actually calculating damages, however, plaintiff relies on the harm caused by the uncompensated use of its patented biotechnology." Id. at *8. It added, "[r]eliance on the unauthorized-use harm characterization, however, would render the liquidated damages provision invalid because . . . that harm is not at all difficult to calculate." Id. (citations omitted).

The court also stated that it has the obligation to construe ambiguous contractual terms against the drafter. See id. Thus, it declined to read the liquidated damages provision "to include a to-be-determined multiplier that is exclusively under [the] plaintiff's control," but rather considered "the phrase 'applicable Technology Fee' to refer to the Technology Fee paid for each unit of seed that defendants purchased in 1998 and subsequently misused." Id. (citation omitted).

The court concluded that the liquidated damages provision was enforceable but rejected Monsanto's "proffered application of that provision." Id. at *9. It added that damages

must be calculated by multiplying the Technology Fee for each misused bag- that is, each bag that supplied seeds the produce of which defendants saved for replanting- by 120. Lacking information on the applicable 1998 Technology Fee and the number of seed bags subject to defendants' breach of the 1998 Technology Agreement, the Court cannot at this point calculate the liquidated damages to which plaintiff is entitled.

Id.

In conclusion, the court granted Monsanto's motion for summary judgment with respect to its patent infringement and breach of contract claims. See id. The only remaining issues were "the issue of damages owed by defendant to plaintiff for the infringement of plaintiff's patents and the issue of damages owed by defendant to plaintiff pursuant to the 1998 Technology Agreement's liquidated damages provision as that provision is construed in this order." Id.

The case was decided on January 8, 2003; this summary was posted July, 2003