Ian G. DiBernardo, Esq., Partner, Intellectual Property Practice Group of Stroock & Stroock & Lavan LLP Amy E. Wilson, Ph.D., Technical Consultant to Stroock, Registered Patent Agent.

Background

The issue of human embryonic stem cell research and its funding has been much debated over the last several years, with politi­cians, theologians, entertainers and bio-ethicists all weighing in on the matter. The excitement surrounding stem cell-based research is due to the potential of stem cells to produce life-altering therapies that have not been seen in the scientific community in recent years. Stem cell research has raised the possibility of transplanting cells into a human body that could be directed to differentiate and replace diseased or damaged cells. Speculation as to the applications of such therapies runs the gamut, from Alzheimer’s disease, to diabetes, to spinal

cord injuries. Despite the specu­lation, there is no way to predict how useful these cells will be without appropriate, thoughtful and careful research efforts.

Funding the Research

This is where things get complicated. In August, 2001, President Bush announced that federal funds would be available to support limited human embryonic stem cell research. The new policy restricts research to 64 stem cell lines that were already in existence as of the date of the announcement. As a result, public funding in this area has been limited, with the National Institutes of Health (NIH) spending only $29 mil-lion on this research in 2003.¹ In comparison, California has recently passed a $3 billion bond initiative to specifically fund human embryonic stem cell research for ten years at $300 million annually. Several other states have begun to inves­tigate the possibility of following California’s lead, but it remains to be seen how these

state initiatives, if they are fund­ed, will be structured.

The private sector is the logi­cal candidate to fill the funding gap, but the biotechnology and pharmaceutical industries will not take on a project of this magnitude without a reasonable prospect of profitability. The cornerstone to a company’s profitability in these sectors is both securing its own intellectu­al property rights, and avoiding running afoul of a competitor’s intellectual property rights, par­ticularly patents.

Intellectual Property Is sues in a Nutshell

Patents

A patent gives the owner the right to exclude others from making, using, offering for sale, selling, or importing the patent­ed invention. A patent does not confer the patent owner the right to practice the invention, only to exclude others from practicing. With regard to stem cells, patentable subject matter could include products (e.g.,

LabToWallStreet

stem cells themselves) and processes (e.g., stem cell isola­tion, culture of stem cells, genetic modification, differenti­ation, and non-embryo

processes for making stem

cells). Indeed, over 100 patents already have issued, and over 100 other published patent applications regarding stem cells are pending. The assignees con­sist mainly of universities and some biotechnology companies.

The WARF Patent Portfolio A potentially major intellectu­al property hurdle that entrants into stem cell research will needto overcome is the patent portfo­lio of the Wisconsin Alumni Research Foundation (WARF). WARF purports to own key patents covering human embry­onic stem cell innovations. When commenting on the California initiative, the Managing Director of WARF stated that any California com­pany that wants to take advantage of the funds under the state’s bond initiative, musttake a license from WARF.² The message is clear: anyone who works in the area of human embryonic stem cell research must be prepared to deal with WARF. Whether or not this is true remains to be seen, but anycompany wishing to do research in this area will have to take into account WARF’s intellectu­al property claims.

Surveying the IP Landscape Accordingly, companies evalu­ating the possibility of conducting human embryonic stem cell research should con‑

sider surveying the intellectual property landscape to determine if they have the freedom to operate. This would involve per-forming a survey of the claims of issued patents and published patent applications to determineif particular work is covered by another’s patent or application. Even a company practicing its won patents must be concerned with potentially infringing another’s patent because a patent only gives the right to exclude others from practicing the invention; a patent does not grant the owner the right to use the invention. In certain cir­cumstances, it may be advisable to obtain a legal opinion from outside counsel to protect your interests in case of future litiga­tion. Furthermore, even if a company that undertakes a sur­vey is fortunate enough not to encountered an infringement issue, it will not have wasted precious capital, as the results of the survey may help identify competitors or research areas already too crowded with partic­ipants to justify further work.

License Agreements

Overview

If it is determined that infringement issues exist and there is no clear freedom to operate, all is not lost. Patent owners may be willing to enter into a license agreement.

A license agreement is the means by which the patent owner, such as a university, grants the company, or a fund­ing entity, the ability to practice the patented technology. A license agreement can be viewed

as a waiver of a right to sue thelicensee for conduct that, absentthe license, would be actionableas an infringement. Accordingly,a patent license is a waiver by

the patent owner of its right to exclude the licensee from mak­ing, using, selling, offering for sale, or importing the claimed invention. The license agree­ment may be a stand-alone agreement or part of a more encompassing business arrange­ment such as a research collaboration agreement or a joint venture. Whether taking or granting a license, the license agreement should address cer­tain key provisions.

Exclusive vs. Non-Exclusive First, the license agreement should state whether an exclu­sive or a non-exclusive license is being granted. In an exclusive license, the licensor/patent owner grants the licensee rightsin the licensed technology to the exclusion of others (and some-times to the exclusion of the licensor’s own use). Accordingly, the licensor cannotlicense the licensed technology to any other party, and the licensor may promise not to practice the licensed technology itself. In contrast, a non-exclu­sive license conveys limited rights in the licensed technology to the licensee, for example, rights to use, but not to make or sell, a patented product.

Field of Use

Second, a “Field of Use” should be considered. The Field of Use provision enables the licensor to divide the licensing

rights pertaining to one patent or group of patents among vari­ous applications, markets, or geographical areas. For example, a license may carve out fields for various types of human stem cells, such as nerve or cardiac cells. Similarly, a license may be limited to allowing sales in the United States, but not in

Europe.

With appropriate fields of use, a licensor can maximize the return on its intellectual proper­ty by picking licenses particularly suited for exploiting each field, and a licensee can keep its costs down by only pay­ing for rights it will actually use.

When deciding on a Field of Use, a licensee should carefully consider its business model. Does the limited field appropri­ately cover the licensee’s future business goals? Is the field broad enough to prevent the develop­ment of competitive technologies? At a minimum, the licensee should consider covering the specific area of technology in which it operates, the markets in which it antici­pates doing business, and the geographical areas in which it conducts operations.

Financial and Other Terms In the context of a university or other research entity receiv­ing funding, the license shouldalso set a time frame for execu­tion of the agreement.

Frequently, the funding entity has an option to obtain a licensefor a certain period of time after disclosure of the funded tech­nology by the research entity. In any business arrangement, espe‑

cially one that turns on technol­ogy that may have a limited window of utility, the interests of both parties usually are fur­thered by establishing and enforcing deadlines and obliga­tions that are well understood by both parties.

Finally, the financial terms should be explicitly laid out in advance, including any combi­nation of upfront licensing fees, licensing maintenance fees and royalties. An upfront licensing fee typically is paid on or aboutthe date the license is effective. In contrast, any maintenance fees typically are paid annually by the licensee on the anniver­sary date of the effective date. A royalty is an on-going payment made under a license agree­ment. Rather than setting the royalty payment at a fixed dollar amount, royalty payments may be calculated as a percentage ofthe net sales, gross sales or prof-it of the patented item, a fixed dollar amount per item, or other measure.

Sometimes a license agree­ment will consist of two parties cross licensing their respective intellectual property. Sometimes a company offers such a cross license as settlement in response to a claim of infringement,. The statement that “the best defense is a good offense” often rings true. Of course, a company must actively build its intellectual property portfolio to be able to offer a compelling cross license.

Filing for Patent Protection A company developing novel technology should actively col­lect, evaluate and (selectively)

file for patent protection of its inventions. Processes for isolat­ing or culturing cells may also be actively protected as a tradesecret. Ideally, an invention dis­closure form will be part of the research culture to capture potentially valuable inventions early. Public disclosure of an invention prior to filing for a patent can preclude obtaining any patent rights, so early iden­tification of inventions is a must.

Of course, filing for patents indiscriminately, on all inven­tions and in many countries, should be avoided. Funding is scarce. The appropriate balancebetween filing and not filing canbe achieved only through evalu­ation and periodic reevaluation of business goals and technolo­gy. If created properly, a patent portfolio can tell a compelling story of innovation and can rep-resent a meaningful asset.

Conclusion

Companies deciding to enter into the potentially lucrative field of embryonic stem cell research must take into consid­eration the increasingly complex intellectual property landscape in order to protect their inter­ests. Securing intellectual property rights and addressing others’ rights is an on-going process that should begin at an early stage, when rights can belost inadvertently lost and scarce resources wasted.

1 Gulbrandsen, Carl, “Stem-Cell Patent Holder’s View of the California Challenge”, Wisconsin Technology Network, Nov. 16, 2004.

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