Patent Baristas

While the practice of savings seeds after a harvest to plant the next season is as old as farming itself, farmers have found that patent laws count in the end.

In Monsanto v. McFarling (05-1570, -1598), Monsanto went after the farmer for breaching a technology agreement over genetically modified crops that resist glyphosphate herbicide. Upon planting such crops, farmers can spray glyphosphate herbicide over their fields to kill weeds while sparing the resistant crops. Monsanto sells the glyphosphate herbicide under the trade name Roundup and sells seeds of the genetically modified crops, in this case soybeans, under the trade name Roundup Ready.

Monsanto’s U.S. Patent No. 5,633,435 claims a plant cell containing a DNA molecule that encodes a genetically modified enzyme. That enzyme allows plants to survive exposure to glyphosphate herbicide. Monsanto’s U.S. Patent No. 5,352,605 claims a plant cell containing a genetic promoter sequence that facilitates a plant’s production of the modified enzyme.

Monsanto distributed the patented seeds by authorizing various companies to produce the seeds and sell them to farmers. Monsanto required those seed companies to obtain a signed “Technology Agreement” from purchasers. The Technology Agreement licensed the ’435 and ’605 patents to farmers on several conditions and required that farmers promise not to violate those conditions – specifically, the farmers promised not to replant seeds that were produced from the purchased seeds or to supply those seeds to others for replanting.

The purchasers also paid a fee to Monsanto for the license. For the time periods relevant here, Monsanto charged a license fee of $6.50 per 50-pound bag of Roundup Ready soybean seed. Mr. McFarling also would have had to pay a seed company between $19 and $22 for each bag of the seed that he purchased.

In 1998, McFarling purchased Roundup Ready soybean seeds and signed the Technology Agreement for that year and paid the required fees. However, he saved 1500 bushels of seeds from his 1998 soybean crop and planted those seeds in 1999. He did the same thing the next year, saving soybeans from his 1999 crop and planting them in 2000.

The saved seeds contained the patented genetic traits, but McFarling did not pay the license fee for the 1999 or 2000 growing seasons. Hence, Monsanto sued him asserting that he had breached the Technology Agreement and infringed the ’435 and ’605 patents.

McFarling raised various defenses, including patent misuse and preemption by the Plant Variety Protection Act. The district court rejected those defenses and granted Monsanto’s motion in full except as it concerned damages for breach of contract and infringement of the ’605 patent.

On appeal, the CAFC affirmed the dismissal of McFarling’s antitrust counterclaim and the rejection of his defenses of patent misuse and preemption by the Plant Variety Protection Act.

The jury returned a damages verdict of $40 per bag of saved seed, well in excess of the $6.50 per bag for which Mr. McFarling had argued, but substantially less than the $80.65 per bag (for 1999) and $73.20 per bag (for 2000) urged by Monsanto based on the analysis of its expert. Mr. McFarling again moved to limit the damages award to what he contended was Monsanto’s $6.50 per bag established royalty for use of its patented technology. The district court denied the motion, adopted the jury’s verdict, and awarded Monsanto approximately $375,000 in damages.

McFarling argued that the damages should should have been limited to the “established royalty” for Roundup Ready seeds, i.e., the “Technology Fee” of $6.50 per bag that Monsanto charged licensees who purchased Roundup Ready seeds under its Technology Agreement.

By statute, damages for patent infringement are to be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” 35 U.S.C. § 284.

Monsanto agreed to let other soybean farmers use the patented traits in planting and growing soybean crops and to let them sell the harvested seeds as a commodity. In exchange, farmers agreed to pay Monsanto a Technology Fee and to refrain from planting Roundup Ready seed saved from a previous season’s crop and from selling Roundup Ready seed from their crop to others for planting.

The parties agreed that the amount of the Technology Fee was $6.50 per 50-pound bag of Roundup Ready soybean seed for the pertinent years, 1999 and 2000. Because that fee does not take into account the added obligation imposed on all authorized licensees under the Technology Agreement—to purchase seed from an authorized seed store—the CAFC held that the trial court was correct to refuse to treat the $6.50 Technology Fee as the established royalty for a license comparable to the infringing conduct.

The CAFC did not take kindly to McFarling being an infringer trying to get a sweet deal. Specifically, the court stated that:

Picking $6.50 as the upper limit for the reasonable royalty would create a windfall for infringers like McFarling. Such infringers would have a huge advantage over other farmers who took the standard Monsanto license and were required to comply with the provisions of the license, including the purchase-of-seed and non-replanting provisions. The evidence at trial showed that Monsanto would not agree to an unconditional license in exchange for a payment of $6.50, and the explanation—that Monsanto would lose all the benefits it gets from having the cooperation of seed companies in promoting Monsanto’s product and controlling its distribution—is a reasonable commercial strategy.

By insisting that the established royalty is $6.50 per bag, Mr. McFarling does not acknowledge the significance of the requirement that licensees not only pay the $6.50, but also purchase the genetically modified seeds from a seed company rather than replanting saved seed. He does not argue, even in the alternative, that the court should have limited the reasonable royalty to the total amount paid by licensed farmers for patent-protected seeds.

Monsanto’s experts testified that the no-saving-seed requirement (1) decreased the risk of under-reporting and the consequent reputation harm to Monsanto with farmers, (2) ensured Monsanto’s knowledge of the quality of seed planted each year, and (3) provided a bargaining chip for signing up new seed companies. It is difficult to assign a dollar value to those benefits, but the benefits nonetheless justify the jury’s finding that a reasonable royalty for a license to engage in conduct like Mr. McFarling’s would exceed the amount of the payments made by farmers who participated in the licensing program.

In determining the amount of a reasonable royalty, it was proper for the jury to consider not only the benefits of the licensing program to Monsanto, but also the benefits that Monsanto’s technology conferred on farmers such as Mr. McFarling.

In this case, we hold that the jury’s verdict was supported by evidence and was not grossly excessive, particularly in light of the evidence of the savings Mr. McFarling achieved by his infringement, the benefits to Monsanto from requiring farmers to adhere to the terms of its standard licensing agreement, and the benefits conferred by the patented technology over the use of conventional seeds.

In the end, McFarling reaped what he had sown.