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Will Bio-Rad’s patent fight stop 10x Genomics’ trajectory?

Zachary Silbersher

10x Genomics ($TXG) launched its IPO on September 12, trading up as much as 49% on its debut.  While the market is rewarding the company’s prospects, its lingering patent fight with Bio-Rad Laboratories ($BIO) continues.  Bio-Rad and 10x have been locked in a patent battle over technology allegedly covering most of 10x’s products.  The case, which has been pending since 2015, is now heading to appeal.  10x suffered a fairly significant loss at the jury trial, after which the court ordered an injunction against essentially all of 10x’s products.  Earlier this year, 10x launched a redesigned product to circumvent, Next GEM, to circumvent the injunction.  Yet, on the eve of 10x’s IPO, Bio-Rad hit 10x with another patent suit, now directly targeting 10x’s Next GEM product.  Can Bio-Rad’s patents stop 10x’s trajectory? 

            Bio-Rad’s new lawsuit

Bio-Rad has accused 10x’s Next GEM product of infringing U.S. Patent No. 8,871,444.  Similar to the patents asserted by Bio-Rad in its earlier suit, the ‘444 patent is not a homegrown patent.  Rather, Bio-Rad has taken an exclusive license to the ‘444 patent from Harvard and United Kingdom Research and Innovation, which allows it to sue 10x. 

(This in itself is an aggressive tactic by Bio-Rad, which should not be discounted.  Bio-Rad has affirmatively acquired IP for use against a competitor.  This is not necessarily a common tactic in all industries, and investors should be mindful of it when assessing the long-term implications of this fight.) 

The market response to 10x’s IPR shows that it may have apparently discounted Bio-Rad’s new patent case asserting the ’444 patent.  Patent cases come and go, and it is not uncommon for investors to avoid giving them overblown importance, especially in the early days of a suit.  Here, the case was just filed, and it could take three or four years before there is any real results that could implicate 10x’s Next GEM product.  Importantly, Bio-Rad has not moved for a preliminary injunction (at least, not yet).  Had that happened, or if that happens, then it would theoretically expedite the possibility that the court knocking Next GEM off the market within a matter of months. 

On the other hand, writing off the ‘444 patent case may be premature.  Bio-Rad is not simply taking a shot in the dark.  It has already prevailed at trial against 10x on different patents.  It has not only proven willful infringement, but also convinced the court to award an injunction.  Bio-Rad’s most recent complaint lays out a detailed case of more willfulness by 10x with respect to the ‘444 patent. 

This is not to say that, by proving infringement in its first case against 10x, that necessarily reads-through to infringement by 10x of the ‘444 patent.  But having prevailed once, it may be premature that Bio-Rad will not prevail again, and therefore, jeopardize the very product on which 10x just sold its company to the public.  10x can only redesign its products so many times before it makes more business sense to cut a deal with Bio-Rad.  Moreover, the new case is likely to be assigned to the same Judge who presided over the first case, thus carrying over all of those prior impressions regarding 10x’s purported willfulness. 

            10x’s appeal of the existing injunction

Meanwhile, 10x must continue to contend with the pending appeal of the first case.  10x previously asked the lower court to stay the injunction pending the appeaal.  The court refused.  10x has therefore renewed that request to the Federal Circuit. 

10x argues that the lower court’s injunction was too broad.  Five of 10x’s product lines were accused of infringement, and 10x claims that there is no dispute that, at best, Bio-Rad competes with only one of them.  (Bio-Rad claims that its ddSEQ product competes with 10x’s Single Cell 3’ Gene Expression product line.) 

The problem is that 10x appears to have already launched a redesigned product, Next GEM, which it claims does not infringe Bio-Rad’s patents.  Because the redesigned product was not at issue in the jury trial, it is not subject to the injunction.  That mitigates 10x’s argument that it will be irreparably harmed if the injunction is not stayed.

10x also claims that its design-around covers only three of its five product lines.  10x argues that two of its product lines, namely, Linked-Reads and Single Cell CNV, which are used for cancer research and studying generic mutations, would deprive the market of no available substitutes if enjoined.  The district court relied upon Bio-Rad’s representation that it intends to release new products soon to fill the gaps.  But it is arguably a thin reed to take a health-related product off the market before a purported competitor even launches a competing product.

 On the other hand, the CNV and Linked-Reads products do not appear critical to 10x’s business.  Rather, 10x’s Single Cell 3’ Gene Express—for which the redesigned product would be a substituted—comprised nearly eighty-percent of its business.  Again, that likely mitigates the impact on 10x’s business if the injunction is not stayed. 

10x also argues that an injunction would potentially devastate its company because it would touch all of its current products, whereas Bio-Rad’s competing ddSEQ product comprises only 0.2% of its sales.  Typically, this type of argument presents compelling evidence that the balance of hardships between the parties does not favor an injunction.  But because of 10x’s existing design-around is already on the market, this again mitigates the likelihood of irreparable harm in the event the injunction is not stayed.   

Moreover, 10x just launched an IPO that traded upwards of 50% of the opening price based upon the Next GEM product.  It is hard for it to maintain the argument that if the existing injunction on older products is not stayed, it will cripple its business.

Finally, 10x previously argued that taking its products off the market would be harmful to ongoing research studies, and thereby damaging to the public interest.  Numerous researchers, including the Broad Institute, submitted letters opposing the injunction on the ground that it would halt important research as well as suggesting that Bio-Rad’s replacement product was allegedly insufficient.   

This is an important point that could also jeopardize the injunction on appeal.  But the district court worked around it because Bio-Rad agreed to narrow the scope of the injunction.  The injunction does not prohibit 10x from continuing to sell consumables to existing customers, who may continue to use them with hardware controller instruments that were previously purchased.  Theoretically, that means the injunction does not impact existing research studies, which again, mitigates 10x’s claim that absent a stay of the injunction pending the appeal, it will suffer irreparably.

To persuade the Federal Circuit that it should stay the injunction pending the appeal, 10x also has to show that it is eventually likely to succeed on the appeal.  To that end, 10x attacks certain legal rulings made by the district court that allowed the jury to find 10x infringed Bio-Rad’s patents.  These are rather technical, legal patent issues related to claim construction and the appropriate scope of the doctrine of equivalents. 

While Bio-Rad prevailed before the jury, that verdict hinged upon critical legal rulings made by the district court.  If reversed, those rulings would undermine the jury verdict, and warrant either a reversal or a remand for another trial.  Those legal rulings are not slam-dunk issues for Bio-Rad, but rather technical legal issues that could go either way.   

For instance, Bio-Rad’s patents require microchannels that are “non-fluorinated.”  To avoid this limitation, 10x added a negligible amount of Kynar, a fluorine, its microchannels.  10x argues that a microchannel with fluorine, no matter how negligible, cannot be “equivalent” to one without fluorine.  Bio-Rad responds that a microchannel with a negligible amount of fluorine, which serves no purpose, can indeed be equivalent to a non-fluorinated microchannel.  For better or worse, this is a rather discrete legal issue for which there is limited precedent, and for which both parties bear some risk.  On the other legal issue, whether the preamble of a patent claim is limiting, and therefore, an element for the infringement analysis, is also one for which neither side can claim an overabundance of precedent favoring its position. 

The background of this case is also likely important to how the ultimate appeal plays out.  While courts have at times been hesitant to enjoin health-related products where there is no immediate substitute, the district court in this case did not appear to harbor that hesitancy.  The background of how this case came about may have informed the both the court’s and the jury’s view of the case, and may also read-through to the Federal Circuit.  It may also explain why Bio-Rad is affirmatively acquiring patents to use against 10x.

On the one hand, 10x argues it has invested considerably in this company, it has yet to turn a profit, and if the injunction goes into effect, it will impose material economic harm on 10x.  By contrast, 10x claims that because Bio-Rad is a much more established and diversified company, it will not suffer at all from a stay. 

At the heart of this question is whether 10x and Bio-Rad are truly competitors.  The lower court adopted a very broad view of this question, concluding that both companies compete in the broader “market for products that perform genetic analysis on a droplet platform.”  10x argues that that is akin to suggesting that microscopes compete with telescopes because they are both within the broader optical instruments market.  Given that the lower court’s interpretation of the market read-through to so much of its injunction decision, 10x has tractable reasons that the injunction should eventually be vacated or modified, even if 10x loses its appeal on the merits.

On the other hand, Bio-Rad points out that 10x’s circumstances are one of its own making.  The founders of 10x launched a droplet business called QuantaLife, which they sold to Bio-Rad in 2011.  Shortly thereafter, those founders allegedly left Bio-Rad to launch a different droplet business.  Bio-Rad claims they left it in the lurch.  Moreover, the jury found that 10x willfully and intentionally infringed Bio-Rad’s patents.  The lower court suggested this gave 10x a considerable first-to-market advantage that has hobbled Bio-Rad’s entry into the market.  (This may explain why this case has gone this far without settling.)

These facts are likely to be important to how well 10x fares on its appeal.  While showing willfulness is not technically a requirement for earning an injunction in a patent, it can indirectly inform any court’s analysis as they weigh what is ultimately “fair.” 

Ultimately, the Court’s decision on whether to stay the injunction is likely to depend upon how persuaded it is that the 10x’s new redesign alleviates much of its claimed irreparable harm.  (10x’s recent IPO may have already put those concerns to bed.)  It is not impossible, however, that the Court stays the injunction, or at the very least stays the injunction against the CNV and Linked-Reads products, but still upholds the injunction on the ultimate appeal.  The appeal itself is likely to take at least nine months, if not a year, and the Next GEM product may be more fully entrenched in the market by then.    

And yet, if 10x has really found a work-around the patents in the first lawsuit, and is killing it in the public markets by touting its Next GEM product, then the new lawsuit may now be what is most material to investors in 10x.