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Seed Patents: How Innovation May Get Lost in the Grain Elevator

June 28, 2012
The Bowman v. Monsanto case currently on petition for a writ of certiorari to the Supreme Court highlights some unique aspects about protecting agricultural biotechnology innovation. On April 2, the Supreme Court invited the Solicitor General to file a brief to explain the views of the United States on the Federal Circuit's refusal to find patent exhaustion and whether an exception to that doctrine should be created for self-replicating technologies.

[caption id="attachment_8395" align="alignright" width="115" caption="From - images"]Seeds[/caption]

Before making recommendations about patent exhaustion, the government and the public must understand the role of patents in protecting seed innovation. Monsanto alone invested more than $980 million dollars last fiscal year in research and development (roughly 9-10 percent of sales). DuPont spent 60 percent (or $1.2 billion) of their research and development on increasing food production, and Dow invests over $1 billion annually in research and development around the world.

Biotech crops in particular undergo expensive and prolonged testing before they are allowed on the market and the company makes its first sale. Acquiring regulatory approval costs $35 million (which includes costs of approval in two important export markets) and the total cost of development from gene discovery to commercial approval is estimated to be $136 million.

How do you protect all of this investment? There are several approaches but a patent on the genetically modified seed is a critical component. Investment and the business model illustrate this principle.

First, imagine a world without patents. A company invests massive amounts of capital into more precise and scientific methods of crop breeding that produce higher yields, use less herbicides, and increase farmers’ profits. That company then puts that seed on the market. As there is no patent protection, once the first seed is sold, all future seeds are “sold” as well. The farmers would make the logical choice to buy the seed only once and save the seed from that crop for next year’s crop, and even make some money on the side by selling saved seed to each other. The innovator company effectively has one sale.

The innovator then has two choices to respond to this problem. Its first option is to sell the seed just once, at an extraordinary price, which no farmer could afford. Its second option is to no longer invest money into new scientific breeding techniques and shift its capital elsewhere – maybe into technology to create a better smart phone.  The choice seems logical.

Now, view the current world that allows subsequent generations of bioengineered plants to be protected by patents. The innovator company can protect its investment and ensure that nobody can grow patent-infringing seed without permission. In this scenario, the innovator and conventional seed companies must now all compete for their customers (farmers) on price, yield, cost-effectiveness, and the quality of the product. Competing on price, yield, cost-effectiveness and higher quality seems like a desirable outcome for the farmer and consumer… except when someone tries to find and/or create a loophole to patent protection.

Imagine such an enterprising farmer: of all the different kinds of soybean seed, the farmer chooses to purchase a company’s patented version, and has a successful growing season.  The farmer then hopes to squeeze in a second crop during the fall. He understands that, after delivering his spring crop to the elevator, he can go around the back and buy “feed” for farm animals. The farmer has a choice. Either purchase more seed from the patent owner or purchase “feed” from the elevator for pennies, plant it, and harvest it in time for Thanksgiving (thereby violating the patent). The profits pay for the turkey.

Bowman -- the defendant in the above-mentioned case -- is one such enterprising individual. He chose to take the risk and buy the “feed” seed, and instead of feeding it to his chickens (which would have been perfectly permissible), he planted it. Bowman has found a way to buy cheap seed (if he does not get caught) and profit.

However, Monsanto eventually heard about this scheme from one of Bowman’s neighbors and took Bowman to court for patent infringement. Bowman’s lawyer raised the patent exhaustion defense, claiming that Monsanto’s patent right “expired” somewhere on the grain elevator. Patented seed goes in at the top. When it comes out at the bottom, somehow, it is no longer protected by patents. A farmer could sell his crop to the grain elevator, and buy some of it right back, and patents would no longer apply.

The Bowman v. Monsanto case represents a choice for the Supreme Court and for the Solicitor General briefing the case. Does the patent exhaustion doctrine apply here after the first sale of the first patented seed, allowing enterprising individuals to avoid infringing patent rights for all future seeds? Or does the Court need to recognize that growing subsequent generations of patented seed is really no different from making infringing copies of other patented things? Nobody would seriously argue that, if Bowman had bought a patented smart phone, that patent exhaustion allows him to make millions of smart phone copies in his barn.

The final outcome of this case remains unclear. However, what is clear is that any outcome that upholds Bowman’s patent exhaustion defense will fundamentally change seed innovation. The Bowmans of the world will know that they can always ‘go around the back’ to avoid the law. Monsanto and other seed innovators will observe this market behavior and will rightfully project heavy losses in sales for their innovative seeds. These companies will be forced to cut back their research and development budget in seed technologies and explore other options, and we will just have to wait and see if new pest- disease- or drought-tolerant crops can be developed using grandpa’s breeding techniques. But, just maybe, we might finally get that really cool, farm-fresh smart phone we have always dreamed of.