The U.S. Supreme Court agreed to consider how patent rules apply to self-replicating technologies, accepting an appeal from a farmer seeking to circumvent Monsanto Co. (MON:US)’s planting restrictions on its genetically modified seeds.
The justices today said they will review a federal appeals court decision that Vernon Hugh Bowman infringed Monsanto’s patents when he planted soybeans he had bought from a grain elevator. Those beans were the product of seeds covered by Monsanto’s patents, and the St. Louis-based company says its rights extend to the second-generation beans.
The case centers on a technology that has helped make Monsanto the world’s largest seed company, with $13.5 billion in annual revenue, while provoking fights with opponents of genetically modified food and some farmers. Monsanto’s Roundup Ready seeds are engineered to be tolerant of herbicides. Farmers have embraced the technology because it lets them kill weeds while leaving crops unscathed.
Last year, 94 percent of U.S. soybeans were engineered to tolerate herbicides such as Roundup.
The case may affect patents on other cutting-edge technologies, including man-made cell lines, DNA molecules, nanotechnologies and organic computers, according to a court filing by the Obama administration.
Risk to Business
The case represents a risk to Monsanto’s soybean business if the court re-examines whether companies can prohibit seed saving, Chris Shaw, a New York-based analyst at Monness Crespi Hardt & Co. who rates the company’s shares neutral, said today by telephone. A ruling against Monsanto may ultimately have little financial impact if growers continue buying fresh seed to benefit from the newest varieties, he said.
“It could definitely scare people,” Shaw said. “Let’s see how the Supreme Court addresses it.”
Monsanto sold $1.77 billion of soybeans and genetic licenses during the fiscal year ended Sept. 30, about 13 percent of the company’s total. Gross profit in the soybean unit was $1.16 billion, more than 16 percent of Monsanto’s total.
The legal issues stem from Monsanto’s efforts to ensure that farmers have to buy the genetically modified seeds every year, rather than planting part of the harvest from the previous season. Farmers who buy seeds from an authorized dealer must agree that they won’t use any harvested seeds for planting.
Bowman sought to get around that requirement from 1999 to 2007 by buying less expensive soybeans from a grain elevator. Because the elevator accepted harvests from farmers using Monsanto seeds, the second-generation beans proved to be herbicide-resistant. When Monsanto found out about the practice, the company sued Bowman.
The U.S. Court of Appeals for the Federal Circuit, which handles patent cases, sided with Monsanto. The panel rejected Bowman’s contention that Monsanto had “exhausted” its patent rights by the time he bought the seed. The appeals court said Bowman “created a newly infringing article” by growing a new generation of soybeans with the seed.
Monsanto said in a statement that the Federal Circuit decision “reaffirmed important intellectual property rights of significance to the entire agricultural biotechnology industry.”
Bowman’s lawyers said in the appeal that the issue “affects every farmer in the country and the method of planting that farmers such as Mr. Bowman have used for generations.”
They argued that the lower court ruling “serves to completely eliminate exhaustion as a viable defense to patent infringement claims” involving self-replicating technologies, including genetically modified seeds.
The Supreme Court took up the case against the advice of the Obama administration, which said the Federal Circuit reached the right conclusion in the case.
The case may undermine a legal doctrine the Federal Circuit has adopted to extend the rights of patent holders. Under the so-called conditional sale exemption, patent holders can enforce their rights even after making a sale of the covered product. The doctrine has given patent holders the power to enforce restrictions against downstream purchasers.
The Supreme Court called that doctrine into question in a 2008 ruling. The justices unanimously said LG Electronics Inc. (066570) couldn’t enforce its memory-technology patents against both Intel Corp. and the computer makers that install Intel’s chips in their machines.
The Obama administration’s top Supreme Court lawyer, Solicitor General Donald Verrilli, told the justices that the conditional sale doctrine is inconsistent with the 2008 ruling. Even so, Verrilli said the court should reject the appeal because the Federal Circuit didn’t focus on the conditional sale issue in the Monsanto case.
Chuck Benbrook, a research professor at Washington State University’s Center for Sustaining Agriculture and Natural Resources in Enterprise, Oregon, said he would be surprised if the Supreme Court overturned the prohibition on seed saving.
“If it’s overturned, it will have cataclysmic repercussions for the business model in the seed biotech industry,” Benbrook said by telephone. “It would basically end the agricultural biotech industry as we know it, certainly for soybeans.”
The court will hear arguments and rule by June. The case is Bowman v. Monsanto, 11-796.
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