For more than a century and a half, courts in the U.S. have applied what is called the doctrine of patent exhaustion. Under this doctrine, the initial authorized sale of a patented item terminates all of the patent owner’s rights in that item.
On February 19, the Supreme Court heard oral arguments in Bowman v. Monsanto Co., which deals with patent exhaustion. The Monsanto case poses the interesting question of whether patent exhaustion applies to the sale of self-replicating seeds.
Monsanto manufactures the herbicide Roundup, which kills plants by inhibiting the activity of an enzyme necessary for growth. Since Roundup would otherwise affect crops and weeds alike, Monsanto developed a genetic sequence that, when inserted into certain seeds, including soybean seeds, produces an enzyme that is unaffected by Roundup, allowing a grower to spray Roundup on his or her crops without harming them. The company markets seed containing that genetic modification as Roundup Ready seed.
Monsanto licenses Roundup Ready technology to third-party seed companies, which then sell Roundup Ready seeds to farmers for planting. Since the herbicide-resistant trait is carried into each successive generation of seeds produced from the genetically altered seeds sold to the farmers, Monsanto authorizes the third-party seed companies to sell Roundup Ready seeds only to farmers who enter into a licensing agreement whereby they agree not to use or sell the second-generation seed for planting. The licensing agreement, however, permits farmers to sell the crop they harvest to grain elevators as commodity seed (an undifferentiated mixture of several seed varieties from various farms which is collected and stored in a grain elevator), and it does not require farmers to place any restrictions on the grain elevator’s subsequent sale of that second-generation seed. The petitioner in this case, Vernon Bowman, a farmer who purchased Roundup Ready soybean seeds from a Monsanto-licensed third-party seed company, signed such a licensing agreement.
Many farmers, including Bowman, engage in what is called “double cropping.” Double cropping is a process whereby farmers plant a first crop, and then late in the season, plant a second crop. Since the time remaining before winter is short, and there is an increased risk of drought, the second crop is traditionally riskier than the first crop. In view of the increased risk, farmers routinely purchase cheaper commodity seed for the second crop.
Bowman planted Roundup Ready soybean seed that he purchased from one of Monsanto’s licensed third-party seed companies for his first crop. Then, he sold the second-generation seed to a grain elevator. Mr. Bowman then engaged in double cropping, and for his second crop, he planted commodity seed purchased from a grain elevator. As it turned out, the commodity seed included Roundup Ready soybean seeds.
Monsanto sued Bowman in federal district court for infringement of two of Monsanto’s patents that cover different aspects of the Roundup Ready technology. In response, Bowman raised patent exhaustion as a defense, arguing that Monsanto’s failure to restrict sale of the second-generation seed rendered its patents exhausted with respect to any subsequent use of that seed. The district court disagreed, granted summary judgment in favor of Monsanto and entered judgment against Mr. Bowman in the amount of $84,456.20.
On appeal before the Federal Circuit, Bowman argued “that Monsanto’s patent rights are exhausted with respect to all Roundup Ready soybean seeds that are present in grain elevators as undifferentiated commodity.” According to the farmer, the “[s]ales of second-generation seeds by growers to grain elevators, and then from grain elevators to purchasers (like Bowman) are authorized according to the terms of [Monsanto’s licensing agreements], and are thus exhausting sales … under the Supreme Court’s analysis in Quanta [Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008)].”
Monsanto countered that “licensed growers’ sales of second-generation seeds to grain elevators as commodity seeds did not exhaust Monsanto’s patent rights in those seeds ‘[b]ecause of the express condition [in the licensing agreement] that the progeny of licensed seed never be sold for planting.’” According to Monsanto, “a grower’s sale of harvested soybeans to a grain elevator is not an ‘authorized sale’ when it results in those soybeans subsequently being planted.” Monsanto argued that, “even if there was exhaustion with respect to commodity seeds, Bowman is nevertheless liable for infringement by planting those seeds because patent protection ‘is independently applicable to each generation of soybeans (or other crops) that contains the patented trait.’”
Affirming the district court’s judgment, the Federal Circuit ruled that the doctrine of patent exhaustion did not bar Monsanto’s claim of patent infringement, and that, “[e]ven if Monsanto’s patent rights in the commodity seeds are exhausted, such a conclusion would be of no consequence because once a grower, like Bowman, plants the commodity seeds containing Monsanto’s Roundup Ready technology and the next generation of seed develops, the grower has created a newly infringing article.” In essence, the Federal Circuit held that the doctrine of patent exhaustion does not apply when it comes to self-replicating technologies.
The Supreme Court granted certiorari and now must decide whether the patent exhaustion doctrine applies to the sale of self-replicating seeds.
At oral argument before the Supreme Court, Bowman’s attorney began by giving an overview of the patent exhaustion doctrine. Seconds into the argument, the questions began, with Chief Justice John Roberts asking: “Why in the world would anybody spend any money to try to improve the seed if as soon as they sold the first one anybody could grow more and have as many of those seeds as they want?” More questions followed, related to whether patent exhaustion could apply to the progeny of the seeds that were part of the first “authorized sale.”
Bowman presents an interesting issue as to the outer bounds of the doctrine of patent exhaustion. On the one hand, Monsanto sold its patented seeds to farmers, and the natural result of the sale was that those seeds would produce future generations of seeds. Should the patent law (as opposed to contract law) restrict future use of seeds that were a known byproduct of an authorized sale? On the other hand, as Chief Justice Roberts asked, why would a company like Monsanto invest in the development of seeds if its patent rights could, at least theoretically, be exhausted by the sale of a single seed?
We should have the Supreme Court’s answer before the end of June, when its current term expires.