Gerard von Hoffman, Knobbe Martens

Protecting IP Should Remain a Critical Part of Medtech Business Strategy

By Maria Fontanazza
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Gerard von Hoffman, Knobbe Martens

A look at IP litigation in 2019 and the year ahead, and some advice on how medical device companies can safeguard their intellectual property.

In a recent Q&A with MedTech Intelligence, Gerard von Hoffmann, partner at Knobbe Martens, provides an update on the IP litigation landscape in the medical device industry.

MedTech Intelligence: What lessons have medical device companies learned about protecting their IP? What challenges have they experienced in this area?

Gerard von Hoffmann: Medical device companies continue to value patents as the strongest form of intellectual property for their mechanical devices, such as catheters, heart valves, spinal implants, neurovascular coils and many others. The portion of the total market that involves electronically enabled medical devices continues to expand. More and more involve collecting data that is processed via algorithms “in the cloud”. These latter technologies often rely more heavily on trade secret protection, due to recent evolution in the law that reduces the availability of patent protection for algorithm-based innovations (considered further below). While branding may also be important, especially with larger, established companies, trademark protection is generally less critical because it may protect the name, but does not prevent competitors from copying the function or form of a medical device.

Medical device companies just [recently] won a significant lobbying battle by convincing the Congress to definitively repeal the medical device tax that had been weighing down this sector. The 2.3% tax was significant because it applied to gross sales revenue, not profit, thus pushing profitability potentially significantly off into the future. The repeal bill currently awaits signature by President Trump.

Gerard von Hoffman, Knobbe Martens
Gerard von Hoffmann, partner at Knobbe Martens

Recently, smaller medtech companies may be investing even more resources into patent landscape searches and analyses to identify potential infringement risk issues in earlier stages of their growth. This includes efforts to design around competitors and proactive exploration of licensing opportunities (payments to patent holders). It can also involve preemptive early attacks on competitors’ patents through clearing-the-path Inter Partes Reviews (IPR’s). This early IP diligence responds in part to higher expectations from acquiring companies and venture capital firms that this diligence has been done prior to investment or acquisition. If it has not, investing or acquiring firms often require measures to mitigate litigation risk, which may include larger amounts of escrowed funds or other types of insurance backing up representations and warranties.

In addition, acquisition remains a more likely exit than a public offering for early-stage medical device companies. The strategics (buyers) are continuing to seek later stage transactions, to enable the startup to further de-risk the deal (by achieving higher maturity on matters like market adoption, reimbursement, IP risk and portfolio development). This means startups are more likely to stay independent through early commercialization, converting the risk of patent infringement from theoretical to real. That challenges management to develop an appropriate balance in the budget against all of the other spending categories, to optimize their IP position and confidence.

One challenge is occurring at the U.S. Patent and Trademark Office, which has recently found more patent applications “ineligible,” merely because they include software elements. This is at a time when newer products are more and more often incorporating smart (often software-based) technology. However, the current Director of the Office favors streamlining the patent process and is working to impose regulations making it easier to get patents on these technologies. The Federal courts recently strengthened his hand, ruling in the Arthrex case that administrative patent judges (who some had referred to as patent death squads) could be fired by the director without cause. This changed a provision of the America Invents Act, and the decision is currently being reviewed by the full Court of Appeals for the Federal Circuit. In the interim, companies need to evaluate to what extent they should put resources at risk filing patent applications which may or may not have future value depending upon how this issue is finally resolved.

MTI: What impact has IP litigation in 2019 had on the medtech industry?

von Hoffmann: [December 2019], the Federal Circuit affirmed a $70M patent infringement verdict against Hospira in the Amgen v. Hospira case. Hospira had argued that it made the accused products to assist with the FDA approval process so its actions fell under a statutory safe harbor (35 U.S.C. § 271(e)(1)). This case limits this widely utilized exemption from infringement liability for pre-FDA approval activities, so pre-market approval IP diligence gained greater importance for medical device companies, as well as for their acquirers and investors.

The Supreme Court’s 2017 ruling in Impression v. Lexmark continued to affect medical device companies, which often attempt to prevent the competition from selling replacement disposable components into their installed customer base (e.g., the razor blade model). The case relied on “patent exhaustion” and copyright “first sale doctrine” concepts, making it easier for competitors to recondition disposables and compete with follow on sales that would otherwise have been made by the supplier of the underlying device or capital equipment.

The trend continued of IPR’s being increasingly used as appendages to patent litigation. For medical device companies, this has made diverse patent claim scope even more important, especially now that the Patent Trial and Appeal Board in the US Patent and Trademark Office often invalidates the broadest claims but upholds the validity of a few narrower claims. Medical device companies should pay careful attention to meaningful dependent claim strategies and also strategically pursue narrow alternative independent claims, not simply strive to get the broadest claims possible.

[In 2019] there was an increase in litigation against foreign (Chinese) alleged knockoff artists and outright trade secret thieves. This may be due, in part, to the Trump administration’s more aggressive posture toward Chinese competition and willingness to invoke tariffs and criticize intellectual property theft. This appears to be more impactful in areas other than the medical device industry, possibly due in part to the regulatory (FDA) requirements to sell medical devices into the U.S. market.

MTI: Are there any changes on the horizon for 2020? If not, what actions should medtech companies take to further protect their IP?

von Hoffmann: Various proposals were considered by lawmakers in 2019 to change the law on patent eligibility. These may be revived in 2020, especially if the courts continue to strike down valuable intellectual property on this basis. Medical device lobbying groups may turn more attention to this issue after having succeeded on medical device tax repeal.

Medical device companies should continue to focus their IP budgets on patent applications and the competitive environment, but overall budgets also may be impacted by changes in the regulatory expense. The FDA has continued to take steps this year to implement its “Safety and Performance Based Pathway” for medical devices. The FDA has cited a desire to improve the 510(k) program to keep pace with important innovations in device development.

Overall, nothing in the fundamentals of a well-developed IP strategy has changed. For each new product under development, there are strong economic incentives to explore the same basic three questions that have long been a part of the IP process: Do you own it; can you build a barrier around it to exclude competition; and are you free to sell it. Less than a strong score in any of these categories can result in any of a variety of bad news, including unconstrained competition, an order to pay monetary damages, and a shutdown order taking your product off the market.

A degree of care (spend level on the three big IP issues) commensurate with the capital at risk and expectations of the stakeholders is probably more advisable than ever.

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