Grower Seed Licenses Not Anticompetitive

In Monsanto Company v. Scruggs, et al. (Fed. Cir., August 16, 2006) Scruggs asserted that Monsanto’s commercial practices regarding geneticlly modifed seeds violate federal and state antitrust laws, and constitute patent misuse. The specific practices that it attacked were Monsanto’s seed grower incentive programs, its seed partner license agreements, its grower license agreements, and its alleged refusal to sell Roundup Ready (R) cotton seeds without the Bollgard herbicide-resistant trait. Monsanto’s grower license agreements include an exclusivity provision, a no replant policy, a no research policy, and the payment of a technology fee.

Additionally, its grower license agreements between 1996 and 1998 stated that if a grower chose to use glyphosate herbicide in connection with Roundup Ready (R) seeds, then the grower must use Roundup ("1996 Roundup restriction"). At that time, Roundup was the only glyphosate herbicide approved by the Environmental Protection Agency for use with Roundup Ready (R) seeds. Monsanto’s grower incentive agreements give participating seed growers additional voluntary benefits if they choose to use Roundup herbicide exclusively on crops containing Monsanto’s Roundup technology. Monsanto’s seed partner agreements require seed growers who choose to use a glyphosate herbicide to use Roundup.

According to the opinion of the court by Circuit Judge Mayer,

On appeal, Scruggs reasserts that the exclusivity provision, no replant
policy, and technology fee payments required by Monsanto’s licensing agreements
with seed growers are illegal anticompetitive practices. Monsanto has a right to
exclude others from making, using, or selling its patented plant technology, see
Brulotte, 379 U.S. at 29-30, and its no replant policy simply prevents
purchasers of the seeds from using the patented biotechnology when that
biotechnology makes a copy of itself. This restriction therefore is a valid
exercise of its rights under the patent laws. Furthermore, Monsanto’s uniform
technology fee is essentially a royalty fee, the charging of which is also
within the scope of the patent grant. Lastly, the no research policy is a field
of use restriction and is also within the protection of the patent laws.

Scruggs also argues on appeal that Monsanto ties the purchase of its
seed to the purchase of Roundup through grower license restrictions, grower
incentive agreements, and seed partner agreements. It asserts that Monsanto
unlawfully ties the Roundup Ready trait [in soybeans] to the Bollgard trait
in cotton seeds. It does not point to sufficient evidence to establish that
Monsanto’s behavior constitutes illegal tying. The grower incentive program was
optional, not coerced. Additionally, Monsanto’s seed partners were not forced to
buy Roundup under the seed partner agreements. Furthermore, there is no merit to
the argument that Monsanto illegally tied the sale of cotton containing the
Roundup Ready (R) gene to the sale containing the Bollard trait; Monsanto sells
cotton without the Bollgard trait and there is no evidence that Monsanto
engineered a shortage of Roundup Ready (R) cotton.

Lastly, Scruggs asserts that the trial court’s decision should be sent back
for a separate patent misuse analysis, because the burden of proving patent
misuse is lower. However, patent misuse covers only activity falling outside of
the patent grant, and Scruggs did not point to any activity falling outside
Monsanto’s patent.

The dissent argues that Federal Trade Commission v. Indiana Federation of
Dentists, 476 U.S. 447 (1986), and Fashion Originators’ Guild of America, Inc.
v. Federal Trade Commission, 312 U.S. 457 (1941), compel a finding of patent
misuse; they do not. In those cases, the antitrust defendants argued that their
anticompetitive conduct should be excused on the ground that it provided
benefits and furthered a public policy unrelated to competition. The Supreme
Court rejected those arguments, holding that collusive agreements between
competitors do not become lawful simply because they may have some other
beneficial effects. In this case, Monsanto does not argue that it should escape
a finding of patent misuse because its contract provisions protected the public
or furthered EPA policy; rather, Monsanto’s argument is that its contract
provisions lacked any anticompetitive effect because EPA’s regulations
prohibited growers from using competing glyphosate herbicides for over-the-top
application. Therefore, even if growers elected to use such herbicides for
over-the-top application, they would not be legally free to use competing
brands. As the trial court noted, the record supports Monsanto’s argument;
Scruggs has not pointed to any evidence to the contrary. The record shows that
Monsanto’s competitors sought and obtained regulatory approval and that when
they did, Monsanto modified its contracts accordingly. In this unusual setting,
the rule of reason applies to the defense of patent misuse based on the alleged
tying arrangement, and under the rule of reason, Scruggs is required to show
that the challenged contracts had an actual adverse effect on competition. See
U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1185 (Fed. Cir. 2005).
Scruggs did not do so and therefore cannot use the challenged contract
provisions as a defense against Monsanto’s patent infringement claims.
Therefore, Monsanto’s behavior did not constitute patent misuse.

In his dissent by Circuit Judge Dyk, disagreed as to whether there were commercially feasible alternatives that could otherwise have sought regulatory approval:

There was evidence that manufacturers produced products that could have
been used "over the top," and that all that was lacking was regulatory approval.
In other words, Monsanto’s tying arrangements here did no more than enforce a
regulatory requirement. Substantial competitive risks inhere in such an
arrangement. Potential competitors are potentially discouraged from seeking
regulatory approval or attempting to have the regulation modified or eliminated.
To the extent that such efforts are discouraged, the proponent of the tie has
succeeded in eliminating competition.

Moreover, in this connection it is highly significant that Monsanto’s
grower license agreements did not simply require the use of a
government-approved herbicide; they explicitly required the use of "Roundup
branded herbicide." A potential herbicide competitor thus would be concerned
that, even if it secured government approval of its product, use of the approved
herbicide would still be barred under the contracts. The elimination of such
potential competition is not permissible under the antitrust laws.

The district court did not make a finding as to Monsanto’s market power in
the alleged tying product. Ill. Tool Works, Inc. v. Indep. Ink, Inc., --- U.S.
---, 126 S. Ct. 1281, 1293 (2006); see Monsanto Co., 342 F. Supp. 2d at 575-80.
I would vacate the judgment as to the alleged tie in the 1996-1998 grower
agreements, and remand for the district court to determine whether the relevant
contract provision in fact constituted patent misuse and, if misuse occurred,
whether it was purged. See Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10
(Fed. Cir. 1986).