Articles

Medtronic Settles Medical Device Patent Litigation Against Doctor For $1.35 Billion

Walter Egbert

The assertion of United States patents drawn to sophisticated medical devices and procedures has grown steadily in recent years, with the frequency and magnitude of large settlements and damages verdicts for the alleged infringement of such patents bespeaking the increased importance of advanced health care technologies. More broadly, the fierce patent disputes that have increasingly erupted regarding medical devices are only a subset of a larger trend toward using patents in cutting-edge, booming markets for high-technology devices and services as a strategic tool for protecting market share and maximizing the revenues that patentees can obtain for use of their patented technologies by raising the stakes for accused infringers in “bet-the-company” patent litigation.

In the most recent and striking development in this area of patent law, a patent dispute between Dr. Gary Michelson and Medtronic, Inc. (“Medtronic”) came to a conclusion following four years of litigation when Medtronic announced last month that it would pay Dr. Michelson and his licensing firm Karlin Technology, Inc. a staggering total of $1.35 billion, including $550 million to settle all pending claims for patent infringement and breach of contract, and $800 million to acquire Dr. Michelson’s patent portfolio in spinal fusion technology. The total settlement in the Michelson case is believed to match or exceed even some of the most highly-publicized settlements for patent disputes in recent years. In 1990, Kodak settled with Polaroid for $909 million for claims regarding its instant photography patents; and in 2004, Microsoft settled with Sun Microsystems for $900 million to resolve patent issues related to Sun’s Java programming language.

Dr. Michelson, a Los Angeles spine surgeon, developed and patented technology relating to spinal fusion, a method of treating patients suffering from degenerative vertebral disc disease. Dr. Michelson’s technology is intended to protect the sensitive spinal nerves during procedures which involve the selective removal of vertebral tissue and the insertion of implants which cause the vertebral bones to grow together and relieve pressure on the spine. In 1994 Dr. Michelson sold certain rights to this technology to Sofamor Danek, which was acquired five years later by Medtronic.

In 2001, Medtronic Sofamor Danek, Inc., a subsidiary of Medtronic, sued Dr. Michelson and Karlin Technology, Inc. (collectively “Dr. Michelson”) in the United States District Court for the Western District of Tennessee,1 claiming that it had lawfully gained access to spinal fusion techniques that Dr. Michelson developed after his 1994 agreement with Sofamor Danek and that his refusal to allow use of his post-1994 inventions constituted breach of contract. In particular, Medtronic contended that Dr. Michelson breached certain provisions of agreements between the parties, including a violation of non-competition provisions, by attempting or threatening to license or assign spinal fusion implant technology to Medtronic’s competitors. Dr. Michelson countersued, alleging that Medtronic underpaid his royalties as well as infringing his post-1994 patents. Dr. Michelson originally sought $1.7 billion in damages. At issue in the lawsuit were six of Dr. Michelson’s patents,2 which claim methods and devices for artificial spinal fusion between vertebrae, including techniques for positioning vertebrae, removing bone tissue to create a space between vertebrae, and inserting spinal implants.

The lawsuit, which lasted four years, including a highly-contested dispute concerning discovery of Medtronic’s electronic documents, concluded in a three month long trial. The eight-member jury found that Medtronic breached several of the provisions of its agreements with Dr. Michelson, and awarded him approximately $110 million in damages for such breach. The jury also found Medtronic’s conduct with respect to the agreements to be “reckless, intentional, fraudulent or malicious” and awarded punitive damages of an additional $400 million. With regard to Dr. Michelson’s patent claims, the found patent infringement of all the claims submitted. Dr. Michelson was awarded a 10% royalty on Medtronic’s gross revenues for the implants, instruments, and methods comprising the infringing systems developed after 1994 (believed worth another $50 million). The jury determined that the infringement was willful with respect to one of the patents3 for the manufacture and sale of Medtronic’s Precision-Graft™ product. Significantly, the jury did not find for Medtronic on any of the original claims brought against Dr. Michelson. If allowed to stand, the jury verdict placed Medtronic in the position of paying over $40 million per year in running royalties, as well as at risk of being permanently enjoined from selling the products found to infringe -- an outcome that most observers believed would effectively halt Medtronic from selling any of its spinal products.

On April 22, 2005, Medtronic announced that it had entered a settlement agreement with Dr. Michelson, which went into effect on May 18, 2005, to acquire substantially all of the spine-related intellectual property of Dr. Michelson and all related contracts and rights. According to the settlement agreement, Medtronic agreed to pay Dr. Michelson about $1.35 billion, of which $550 million would be in consideration of settlement of the lawsuit, and another $800 million would represent payment for acquisition of the Michelson patents. The acquisition involved the transfer of ownership of over 100 issued U.S. patents, over 110 pending U.S. applications, and approximately 500 foreign counterparts, to Medtronic. The agreement also gave Medtronic ownership of future patents relating to technology developed by Dr. Michelson during the next 15 years.

At first blush, the size of this settlement agreement seems inordinately large. However, it reflects the increasingly-significant impact of an intellectual property portfolio on companies that operate within a lucrative and growing industry such as that for advanced medical devices. In this case, worldwide sales of the disputed spinal implants have been estimated at approximately $4 billion in 2004. Medtronic holds an estimated 45% of that spinal device market, generating $1.76 billion in revenues in 2004. Such sales represent 19.4% of Medtronic’s total revenue of $9.1 billion. The risk of a permanent injunction against Medtronic for infringement of post-1994 technology presented the potential for radically changing the competitive field in the multi-billion dollar spinal implant industry. In this context, the settlement agreement appears proportional and in all likelihood, prudent if sorely expensive for Medtronic.

In addition, the agreement underscores the pivotal role of acquisition of intellectual property by consensual license and purchase agreements, and the need to consider whether the intellectual property acquired covers both the current and forseeably-prospective technological needs of a company. Medtronic might not have paid Dr. Michelson such a premium price if it had resolved its disputes with him at an early stage, rather than in the context of a disastrous jury verdict and potentially-fatal injunction.

Disputes such as the high-stakes Michelson/Medtronic conflict, and the entry of similarly-large verdicts or settlements, seem likely to continue to arise in many lucrative and fiercely competitive high-technology industries, including not only the medical device and procedure market, but also the burgeoning software, circuit design, and business method patent realms, as parties increasingly recognize the strong negotiating and settlement advantage that can be gained by aggressive assertion of a patent portfolio and demands for injunctive relief based upon alleged infringement of those patents.

__________________________________________________________

1Medtronic Sofamor Danek, Inc. v. Gary Michelson, M.D. and Karlin Technology, Inc. CV 01-2373 GV.
2U.S. Patent Nos. 6,080,155; 6,270,498; 5,797,909; 6,210,412; 6,159,214; and 6,440,139
3U.S. Patent No. 6,159,214

The materials in this document are made available by Baker Botts L.L.P. for informational purposes only and are not legal advice. The transmission and receipt of information contained in the document do not form or constitute an attorney-client relationship. Persons receiving the information in this document should not act upon the information without seeking professional legal counsel. The materials in this document may not reflect the most current legal developments, verdicts or settlements, and should not be considered an indication of future results. If these materials are inconsistent with the rules governing attorney communications in a particular jurisdiction, and the materials result in a client contact in such jurisdiction, Baker Botts may be prohibited from assuming representation of the client contact.