Critical condition: why patents matter more than ever for medical devices

In a sector dogged by uncertainty over subject-matter eligibility and where technological convergence could reshape the competitive landscape, patent strategy has become even more crucial for medical device companies

Medical device company Masimo is a classic US success story. It was founded in 1989 by Joe Kiani, a 24-year-old electronics engineer not long out of university, who had moved to the United States from Iran with his family when he was nine. He used a $40,000 loan secured on his condominium to get the business off the ground and then a handful of patent applications to help secure venture capital investment.

His plan was to develop a new kind of pulse oximeter, a sensor technology used to measure oxygen saturation in a patient’s blood, which would outperform the existing devices. The plan worked – today Masimo is a company with revenues approaching $1 billion, a workforce of nearly 5,000 and a track record of leveraging its intellectual property to fiercely protect its technology and challenge market incumbents.

“Without a strong patent system I wouldn’t have been able to raise the money to start Masimo,” Kiani told an elite gathering of the US IP community on a crisp Washington DC evening in mid-December. “I wouldn’t have been able to protect the intellectual property from the company that had 80% to 90% market share of the older technology, which had made an imitation of our product – it wasn’t as good as our product but it was clouding the market – and we wouldn’t have been able to continue innovating.”

Kiani was in DC to pick up the Intellectual Property Owners Association’s Education Foundation’s inaugural IP Champion award, a distinction that reflects not only his advocacy for the importance of a strong patent system but also the key role that IP rights have played in his company’s success.

In defending its intellectual property against larger players such as Tyco and Philips, Masimo has racked up hundreds of millions of dollars in court awards from patent infringement litigation over the last 20 years and muscled its way into the medical device market thanks to its innovation in pulse oximetry and other products.

But as he picked up his award Kiani had some words of warning for the audience, which included USPTO Director Andrei Iancu and Court of Appeals for the Federal Circuit (CAFC) Chief Judge Sharon Prost. “While the IP laws here are still better than any other country, they’re not as good as they used to be,” he cautioned. “I hope to see them once again favour the innovator.”

A familiar tale

Kiani’s concern has become a familiar one for many patent owners in the United States in the last 10-plus years due to several factors:

  • The ability to get an injunction after a finding of infringement has been curtailed thanks to the Supreme Court’s 2006 decision in eBay v MercExchange.
  • Certainty over what is eligible for patent protection has been winnowed away by a series of decisions from America’s highest court on Section 101 of the patent statute.
  • The creation of the PTAB and introduction of inter partes reviews have given defendants and others a cheaper and quicker way of challenging a patent’s validity.

These are not gripes raised solely by medical device businesses but also by their peers in the pharmaceutical industry. This situation is particularly challenging because of the value that many companies in the sector derive from their IP rights and the lengthy regulatory process that they must go through before a product can hit the market.

Not all parts of the sector are affected by the uncertainty around Section 101. However, when it comes to medical diagnostics, along with areas where medical devices are becoming increasingly digital and where new ways are being devised to collect, process and interpret data, companies and their advisers point to genuine concerns about the state of the law. “It used to be that you’d file a patent application and you’d almost never receive a 101 rejection from the Patent Office,” reveals Paul Coletti, associate patent counsel at Johnson & Johnson.

That the most controversial part of US patent law can no longer be dismissed is largely thanks to a series of decisions from the US Supreme Court, such as Mayo Collaborative Services v Prometheus Laboratories Inc in 2012 and Alice v CLS Bank in 2014, which have undermined the ability of some companies to secure patent protection for their inventions. Mayo, which concerned a patent focused on administering a drug to a patient, has had a particularly severe impact on medical diagnostics.

Research by Colleen Chien and Jiun Ying Wu of Santa Clara University Law School – published recently in the Patently-O Law Journal – shows that the rejection rate for medical diagnostic patent applications at the USPTO jumped from 7% to 32% in the month after Mayo was handed down. The rate then climbed in the years following the case to a high of 64% and to 78% among final office actions just prior to abandonment.

“Medical device companies encounter problems in the area of diagnostic devices because so much of what they do relies upon the detection of conditions that some characterise as merely reflecting the laws of nature or natural phenomena,” explains former Johnson & Johnson IP policy and strategy head Phil Johnson. As any budding patent lawyer will tell you, laws of nature or natural phenomena are not patentable under Section 101 and as Chien’s research has shown, the impact of the Mayo ruling has been dramatic.

To add to the pain, the subsequent decision in Alice – which raised questions over the patentability of some business method and software patents – has come at a time when software-implemented inventions are becoming a crucial part of a growing number of medical device technologies. According to Chien’s research the impact of Alice has been even more severe than Mayo, with the rejection rate for some business method and software applications jumping from 25% to 81% in the month after it was handed down.

Figure 1. Share of office actions including a 101 subject matter rejection

Source: Colleen Chien and Jiun Ying Wu, Patently-O Patent Law Journal

Running into problems

As Eb Bright of medical device incubator Exploramed explains: “Some of the key features in the next generation of devices are in software or firmware and not knowing what’s going to survive [a validity challenge] is a major hindrance.” That, he adds, can affect a start-up medical device company’s ability to attract investment – particularly in its early stages. “I work with venture capitalists on investments and there are times they look at devices and say ‘that’s a great improvement but you’re not going to be able to protect it’ so they take a pass.”

To illustrate where medical device companies are running into particular problems around subject-matter eligibility, Michelle Holoubek, a partner at Sterne Kessler Goldstein & Fox, points to a blood pressure monitor. The hardware around this may not encounter any Section 101 problems but as the technology becomes more sophisticated and data is processed in different ways to pinpoint other health outcomes, a filer may struggle to secure IP protection. “If you have a different way of processing data, for example by using artificial intelligence, then that’s where you can really struggle with 101,” Holoubek highlights. “I work a lot in bioinformatics and we have examiners saying, ‘all you’re doing is improving accuracy with math’.”

The position around patent eligibility is further complicated for those looking to file in other jurisdictions, as there is a clear divide between what can be protected in the United States and Europe, in particular. That is because when it comes to matters of public policy, Europe is far stricter around what can be patented in terms of surgical, therapeutic and diagnostic methods, lest a patient be denied access to a particular treatment because of IP rights.

So a company might file a series of patent applications on a new product in the United States or for new applications of an old device but in Europe they might still reach an impasse. “In theory you can still get protection for some of these uses in Europe but the problem is if there’s a single step in the claims of your method of having a therapeutic effect then your method is unpatentable,” admits Denise Lane, IP director of Boston Scientific’s endoscopy and urology division.

As a result, Lane reveals, companies are forced to live with lesser protections in Europe. If the EPO does issue something, she is far more concerned about how those grants will fare if they end up being asserted and are ultimately challenged in an opposition proceeding. “Then you’re going to have someone arguing that the patent was ineligible from the start,” she sighs.

Figure 2. Median damages award: top 10 industries: 1998-2017

Source: PwC 2018 patent litigation study

A source of optimism

If there is one bright spot that people in the medical device community point to, it is the current USPTO Director Andrei Iancu. “Iancu gets it,” enthuses Coletti.

Since he was appointed in early 2018, Iancu has been focused on restoring greater certainty to the US patent system. At the start of this year the USPTO issued new proposed guidance for the agency’s examiners and filers over what constitutes an ‘abstract idea’, the concept that has been at the heart of much of the uncertainty around Section 101.

The revised guidance explains that some abstract ideas – including mathematical concepts, certain methods of organising human activity and mental processes – can be patent eligible if they are part of a practical application of those ideas. “Instead of focusing on trying to figure out what an abstract idea is, Iancu has said ‘let’s focus on what it is not’,” Holoubek comments.

The USPTO’s proposals are still subject to final revision following a consultation period, so are still some way off from becoming reality and may not ultimately be tested for several years when they are subject to review in a case at the CAFC or even the Supreme Court. But the move is still welcomed. “I applaud the attempt to put some rational decision making behind these patent rejections rather than approaching them in what can appear to be an ad hoc fashion,” Holoubek points out.

“I think the guidelines are great,” echoes Lane. She highlights that companies can cite the guidelines to USPTO examiners rather than referencing the latest decision from the Federal Circuit. “That is better than citing case law because most examiners aren’t attorneys.”

The concern for medical device companies and other patent owners is whether ultimately patents issued under the new guidance will stand up in court. The USPTO may determine that something should be patentable but whether a court does is another matter entirely. According to Lane that largely comes with the territory. “This will always be an evolving area partly because the technology is always changing and the aim of trying to exclude patents that are based on an abstract idea is really difficult,” she shrugs. “In another five years we’ll probably have an entirely new set of guidelines to account for the law evolving.”

Figure 3. Patent holder success rates: top 10 industries: 1998–2017

Source: PwC 2018 patent litigation study

See you in court

While many in the sector fret over what might actually prove to be patentable at the USPTO or in court, the litigation landscape has been relatively kind to patent owners. That is not to say that high-profile, high-value disputes do not flare up.

Through the 1990s and 2000s, before the smartphone wars propelled patents into the headlines, it was the stent wars that kept intellectual property in the press as major players in the sector battled over the latest technology designed to re-open blocked arteries. That series of disputes ultimately produced some of the biggest court awards in patent cases of the last 20 years, including $595 million for Cordis in its spat with Medtronic Vascular (the pair would later agree a settlement) and $482 million for the surgeon Bruce N Saffran against Johnson & Johnson (although that decision was then reversed by the Federal Circuit), according to PwC’s 2018 patent litigation study.

As PwC’s data shows, medical device companies have generally seen some of the highest median damages awards (only biotech/pharma is higher) and a relatively high success rate of 40% for patent owners in court (again, bettered only by biotech/pharma).

According to Unified Patents the volume of new health-tech infringement lawsuits dropped throughout 2018 to reach a low in the fourth quarter. That reflects what some practitioners claim they are seeing in the market. “Medical device companies are being much more thoughtful about which cases they bring to court,” says Greenberg Traurig partner David Dykeman. He attributes this to the impact of inter partes reviews but adds that while fewer cases are being filed, those that do reach court are typically of a higher value.

Unified’s data also suggests that while litigation filed by NPEs has been a significant driver of new cases, the volume of suits dropped in 2018 and, in general, medical device companies do not face the same sort of threat from NPEs as businesses in other sectors such as consumer electronics.

Which is not to say that NPEs have not targeted the sector. Over the last decade some of the most experienced players (eg, Acacia Research, the former IPNav and WiLAN) have acquired and attempted to monetise portfolios in the sector, attracted by the allure of big-ticket damages awards from infringement litigation. There may be fewer medical device companies than, say, companies manufacturing smartphones, but one bulge-bracket win in court means that an NPE can more than recoup its investment in one case.

Figure 4. Health-tech litigation: NPEs versus operating companies 2012-2018

Source: Unified Patents

But there are enough additional differences with consumer electronics, where IP monetisers have notched up extremely healthy returns, to make medical devices a tough sector for NPEs to generate a return from. For one thing, the sense that some machines were starting to look more and more like consumer electronics was overplayed, admits Matthew Vella, the former CEO of Acacia and now a partner at Prince Lobel Tye.

“At Acacia we really thought that there would be more convergence between medical devices and other industries that have a lot of patent density,” Vella comments. Large numbers of patents in a relatively narrow field of technology often present NPEs with attractive monetisation opportunities, in part because the concentration of grants makes it hard for a manufacturer to design around various IP rights and make a product that is not infringing.

Plus, according to Vella, low density means that medical device companies are “more aware of what their competitors are doing and so are much better at not infringing”.

The situation is also not helped by the negative connotations associated with NPEs, meaning that juries in an infringement trial may take a more favourable view of the medical professional or company that originally obtained the patent than a business such as Acacia, which bought it some years later. With the growth in litigation funding, patent owners that might have struggled to fund their cases before and therefore turned to an NPE for help, may now be able to bring the case themselves.

“The patents are often better left in the hands of the surgeon or doctor who invented them; an NPE doesn’t cut as sympathetic a figure with juries,” Vella claims.

Opportunity or challenge?

Perhaps the greatest challenge for companies in the sector lies not in the courtroom but in the convergence of technologies – which is still expected to gather pace as new players from the tech sector (eg, Google’s parent company Alphabet) enter the market. There is also the growth in popularity of wearable devices (eg, health and fitness trackers), which currently are not particularly complex but which may represent more of a challenge to medical device companies as they become so.

Many in the medical device community insist that the entrance of new players represents more of an opportunity than a challenge, leading to collaboration between some of the largest players and the denizens of Silicon Valley. In 2015, for instance, Johnson & Johnson and Google announced that they were partnering to work on surgical robotics through a new entity called Verb Surgical, with the aim of introducing a better, cheaper robot to be used in surgery by 2020. The initiative is one of several that Google has launched in healthcare, underlining the degree to which it is actively working in the sector.

A culture of collaboration comes easily to many medical device players, which often use their patent portfolios to help strengthen their hand. “You need to protect your innovation but you can also use your intellectual property to help form partnerships; it can be a currency for cooperation,” insists Maaike van Velzen, head of IP portfolio management at Philips.

As many in the sector eye a rapidly changing patent landscape, they are hoping that they can bank on that currency continuing to give them a competitive edge.

Action plan

Medical device companies derive huge value from their patent portfolios but changes in the legal environment have created significant challenges for leading players.

  • Uncertainty over what is eligible for patent protection in the United States means that companies need to think carefully about their portfolio development.
  • New Section 101 guidelines from the USPTO have been welcomed by many but the real test for them will come in court.
  • Litigation volumes have been dropping, fuelled by a decline in lawsuits from NPEs.
  • Convergence is bringing a host of new players into the sector but medical device businesses have an opportunity to use their intellectual property to their advantage.

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