United States: Merck's Damages Award For Infringement Thwarted By Gilead's Equitable Defenses Of Unclean Hands

In this ongoing, multi-faceted case, the parties recently received the US District Court for the Northern District of California's rulings on whether Merck's asserted patents were obtained with unclean hands and/or whether Merck waived its right to sue for infringement. The court determined Merck was barred from collecting the damages previously awarded for Gilead's undisputed infringement of Merck's patents. Gilead Sciences, Inc. v. Merck & Co., et al., Case No. 13-cv-04057 (N.D. California, Judge Beth Labson Freeman).

Gilead filed this case in August 2013, before the launch of its hepatitis C virus (HCV) products containing sofosbuvir (Sovaldi® and Harvoni®). Gilead sought a declaratory judgment that its products would not infringe Merck's patents directed to nucleoside prodrug compounds and methods for treating HCV using the claimed compounds.

In December 2015, both parties moved for summary judgment, and the court ruled on the motions one month before trial. Merck sought a judgment that patients and caregivers who use Sovaldi and Harvoni directly infringe the asserted patent claims, and Gilead's sales of these products induces and contributes to direct infringement by patients and caregivers. Gilead did not contest Merck's infringement allegations, and consequently, the district court granted Merck's motion on infringement. (ECF 214). Gilead sought a judgment of invalidity under 35 USC §§ 101 and 112, arguing that Merck's claims lacked utility, and further that the claims were not enabled because "the how to use prong of section 112 [requires] that the specification disclose as a matter of fact a practical utility for the invention." Gilead asserted that when Merck's patents were filed, prodrug delivery was unpredictable, and without reliable data, one of skill would not have accepted that the claimed nucleoside compounds would be effective in treating HCV. Merck countered that one of skill in the art would have understood the claimed compounds to be useful in treating HCV because the art disclosed using nucleoside analogs in HCV therapy and the US Food and Drug Administration (FDA) had approved 17 such drugs for treating viral infections, including HCV. The court found that Merck presented sufficient evidence that one of skill "could have accepted without question the alleged utility of the asserted patents," and denied Gilead's motion. Id.

In March 2016, following a two-week trial on the issue of validity, the jury found that Gilead did not prove by clear and convincing evidence that the asserted claims were invalid for lack of enablement or written description. (Gilead subsequently filed a renewed motion for a judgment as a matter of law, seeking to overturn the jury's determination that it had not proved invalidity of the asserted patents due to a lack of written description, lack of enablement and/or derivation of the invention by another (Pharmasset).) In spite of upholding the validity of the asserted patents,  the jury only awarded Merck $200 million for Gilead's undisputed infringement (a four percent royalty on $5 billion sales)—well short of Merck's proposed damages (10 percent royalty rate on a $20 billion royalty base). In order to collect its damage award, Merck had to prevail on Gilead's two equitable defenses that were heard in a follow-on bench trial.

First, Gilead argued Merck's patents are unenforceable due to unclean hands. "Merck's dishonesty and misuse of Pharmasset's information in obtaining its patents prevents Merck from asserting those patents against Gilead, under the doctrine of unclean hands." (ECF 368 at 2–8, 9–11). Specifically, Gilead contended that Merck's patent prosecutor, who prosecuted Merck's HCV patents, improperly attended a confidential 2004 licensing call between Merck and Pharmasset, the developer of Gilead's products. During the licensing call, Pharmasset disclosed the structure of their lead compound, as well as the fact that their own patent application would soon publish. Pharmasset asserted these disclosures were only made because it believed that the Merck participants were walled-off from Merck's HCV program, in compliance with the confidentiality agreement entered between the parties. At deposition, the prosecutor stated that Merck's own policy would have prohibited him from attending licensing discussions with third parties in an area where he was prosecuting because it would have tainted his judgment as to what claims to pursue on behalf of Merck. Further, at deposition, the prosecutor testified did not receive Pharmasset's structure, but at trial testified he had forgotten that he did receive the structure. Gilead characterized the prosecutor's testimony, and justifications as lacking credibility.

At trial, the prosecutor claimed that prior to receiving Pharmasset's structure, Merck concluded that there was no overlap between the prosecutor's work and Pharmasset's disclosure. And, after receiving the structure, the prosecutor recused himself from the Pharmasset due diligence, but not Merck's prosecution related to HCV. Following the call and publication of Pharmasset's patent application, Merck's patent claims were revised to capture "subject matter most important to" Merck, but Merck apparently never tested the type of nucleoside recited in the revised claims (Pharmasset's 2' methyl up, 2' F down nucleosides).

Second, Gilead argued that Merck waived its right to sue, and should not be entitled to collect damages. Specifically, Gilead asserted while Merck was attempting to cover Pharmasset's proprietary compounds as part of its patent strategy, it was also engaged in numerous licensing and acquisition discussions with Pharmasset between 2003 and 2011. (ECF 368 at 8–9, 11–12). Gilead believed these negotiations were inconsistent with Merck's intent to enforce its patent rights, and during the negotiations Merck never raised the threat of patent infringement suit against Pharmasset.

Merck responded that Gilead's unclean hands theory should be precluded because the jury explicitly decided that the compounds in the asserted patents were derived by Merck, and not Pharmasset. (ECF 409). Further, with respect to the salient facts surrounding the licensing call, Merck did not dispute that its prosecutor attended the confidential call, but alleges that he voluntarily announced his conflict, and Pharmasset none-the-less disclosed the structure of their compound. Additionally, Merck insisted its patent applications as originally drafted were broad enough to cover Pharmasset's compounds, and it was Pharmasset that used Merck's application to facilitate development of their compounds. In any event, Merck maintained that it was not improper to amend patent claims to cover a competitor's product, and Merck did not do so until after Pharmasset's patent application was published. In sum, Merck contended the facts here were not the type of egregious misconduct, nor was there the requisite intent by Merck, sufficient to support a finding of unclean hands. Additionally, according to Merck, once the structure of Pharmasset's compound was disclosed, Merck disclosed that its patents presented freedom to operate issues for Pharmasset. Consequently, Merck did not waive its right to enforce its patents against Pharmasset or Gilead.

On April 22, Gilead moved the court to reopen the record to allow additional evidence that responded to the patent prosecutor's testimony or strike the testimony from the record. (ECF 410). On April 29, the court heard the motion, and instructed the parties on additional submissions. On June 6, the court issued its findings of fact and conclusions of law as to Gilead's equitable defenses. The court found that Gilead failed to prove that Merck impliedly waived its right to enforce the asserted patents, either by a preponderance of or clear and convincing evidence – the standard for which was unclear. (ECF 422 at 1, 34-38). The court found Gilead did not offer evidence showing "that it or Pharmasset reasonably believed that Merck had relinquished its patent rights." Instead, the court found the nature of the business negotiations conducted between 2008 and 2011, including negotiations for a license to Merck's patents, demonstrated Merck's intent to enforce its patent rights. Additionally, the court found Merck did not have an affirmative duty to take action to enforce its patents until Gilaead's product launched in 2013, and therefore, Merck's earlier alleged "failure to take action cannot be interpreted as implied waiver."

However, with respect to Gilead's unclean hands defense, the court found Gilead demonstrated by clear and convincing evidence "a pervasive pattern of [egregious] misconduct by Merck and its agents constituting unclean hands." (ECF 422 at 1, 38–65). Specifically, the court found Merck engaged in both unethical business conduct and litigation misconduct, including "lying to Pharmasset [about Merck's counsel being firewalled in order to obtain confidential information], misusing Pharmasset's confidential information [to benefit the prosecution of Merck's asserted patents], breaching confidential and firewall agreements, and lying under oath at deposition and trial." The court noted Merck's "acts are even more egregious because the main perpetuator of its misconduct was its attorney." In balancing the equities between the parties, the court considered the "weight of wrongdoing by one party against the wrongdoing of the other." Although Gilead admittedly infringed the asserted patents, the court found "Merck's persistent misconduct involving repeated fabricated testimony and improper business conduct outweighs its right to maintain its suit against Gilead," barring Merck's recovery against Gilead for infringement.

Merck's Damages Award For Infringement Thwarted By Gilead's Equitable Defenses Of Unclean Hands

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