Will Moderna prevail against Arbutus on its § 1498 defense?
Zachary Silbersher
Arbutus’ patent dispute with Moderna is nearing trial. In anticipation of that, the parties have exchanged cross-motions for summary judgment seeking to limit the issues to be heard at trial. This blog post will address Moderna’s most important summary judgment argument, namely, the lion’s share of its potential liability should be shifted to the Government under § 1498. (Future posts will address the parties’ other summary judgment arguments.) I previously blogged about Moderna’s § 1498 defense shortly after this case began.
Section 1498 is a World War I statute enacted so that, in times of emergency, the Government can freely and quickly procure goods and services from chosen contractors without those contractors fearing potential future patent liability. To that end, under certain circumstances, Section 1498 immunizes Government contractors from patent liability. That does not mean that patent holders are compelled to waive any claims to infringement by the Government contractor. Instead, patent holders must pursue those claims directly against the Government in a special court, the Court of Federal Claims. While Arbutus would not lose its claim for damages, it would lose the right to a jury trial as well as likely any claim to increased damages for willfulness.
To prevail on a § 1498 defense, Moderna must show two things. First, Moderna must show that it had “the authorization and consent of the Government” to engage in the purportedly infringing activity. In this case, that means Moderna must show that the Government consented to its distribution of a Covid vaccine that may infringe upon patents owned by third-parties, i.e., Arbutus. Second, Moderna must show that its provision of the Covid vaccine was “for the Government.”
Moderna originally moved to dismiss Arbutus’ case under § 1498. At the time, the district court denied Moderna’s motion primarily because it found that Moderna’s contract with the Government for Covid vaccines was not “for the Government,” but rather for the American people. The court nevertheless, permitted Moderna to raise the defense again later after conducting further discovery. Moderna did just that, collecting considerable evidence from the Government as well as serving expert reports on the issue of whether the contract was “for the Government.”
In its motion for summary judgment, Moderna points to a few purported facts that it argues are controlling on the “for the Government” prong. First, Moderna provided its Covid vaccine pursuant to an express contract with the Government. That contracts specified that Moderna was to “manufacture” the Covid vaccine doses “for the United States Government.” (See 1:22-cv-00252-JDW, ECF 516 at 12). Second, that contract, otherwise known as the C-100 contract, included Federal Acquisition Regulation (“FAR”) clauses whereby the Government expressly consented to and authorized the purportedly infringing activity. Third, the Government clearly benefited from the contracted—the Government saved billions of dollars in health costs, lives were saved, and the economy grew as a result.
Given this, Moderna claims there cannot be a factual dispute over whether its provision of the Covid vaccine pursuant to the C-100 Contract was “for” the Government or not. Indeed, Moderna argues, as a matter of policy, that if courts second-guess the Government’s express authorization taking on patent liability pursuant to a supply contract, then Government contractors will be reluctant to provide emergency goods and services, which is exactly what § 1498 was presumably enacted to counteract.
In response, Arbutus claims that Moderna is interpreting § 1498 in a manner it was never intended. Unlike the procurement of military equipment, which is the typical case where § 1498 applies, contracting for Covid vaccines were for the American people—they were the ones who received the doses, they were the primary beneficiaries. The Government itself did not distribute or even take possession of the vaccines. If everything the Government contracts for is deemed to be ‘for the Government,” then Government contractors would never face patent liability. That, according to Arbutus, was never the intent of § 1498.
On balance, Arbutus’ argument carries some water. The district court previously bought into Arbutus’ side of this argument, stating, “to credit Moderna’s argument . . . could mean that every government-funded product used to advance any policy goal articulated by the U.S. Government—such as IV needles to fight HIV to cancer drugs to fight the war on cancer—would be subject to a § 1498(a) defense.” (See 1:22-cv-00252-JDW, ECF 31 at 12-13).
Given that, Moderna is swimming upstream a bit in trying to reverse the court’s prior view on this issue. Moderna’s motion does not add substantial new evidence or facts that were not previously available on its motion to dismiss to support its argument other than expert testimony suggesting that the Government clearly benefitted from its contract procuring vaccines for the Covid pandemic. Yet, there doesn’t seem to be any real dispute whether the Government benefitted from the contract. The Government presumably always benefits, directly or indirectly, from any contract that it enters into. The caselaw, however, does not immunize every Government contractor from patent liability under § 1498, but rather draws a more discerning line.
Arbutus makes another argument that is worth noting, namely, that § 1498 does not cover claims for indirect infringement, which are the type of infringement claims Arbutus asserts against Moderna. This is a technical point. It is not in the statute, but Arbutus cites to caselaw supporting its argument. Interestingly, this argument would allow the court to resolve Moderna’s § 1498 defense in Arbutus’ favor without having to entertain the murky question of whether a Government contract for vaccines during a pandemic is for the Government or for the public.
Going back to the first prong of the § 1498 analysis, Moderna claims that “authorization and consent” is undisputed. Its contract with the Government for provision of its Covid vaccine, otherwise known as the C-100 Contract, included two specific FAR clauses. These FAR clauses are known as 52.227-1 and 52.227-1, Alternate I. The latter clause states, “[t]he Government authorizes and consents to all use and manufacture of any invention described in and covered by a United States patent in the performance of this contract or any subcontract at any tier.” The former clause is more narrow, but says something similar.
Moderna also points out that, shortly after Arbutus brought is lawsuit against Moderna, the Government filed a Statement of Interest in the case that stated, “[t]he inclusion of FAR clauses 52.227-1 and 52.227-1, Alternate I in the [C-100] Contract constitutes the Government’s express authorization and consent.” (1:22-cv-00252-JDW, ECF 49). Indeed, the Government further stated, “the effect of the Government’s ‘authorization and consent’ is to relieve Moderna of any liability for patent infringement resulting in performance of the [C-100] Contract and to transfer to the United States any liability for the manufacture or use of the inventions claimed in the Patents-in-Suit resulting from the authorized and consented acts.” Id.
Although it would seem Arbutus has no basis to challenge the first prong of the § 1498 prong, its response is quite surprising. It does not dispute that the FAR clauses and the Government’s Statement of Interest nominally demonstrate authorization and consent by the Government. Instead, Arbutus argues these clauses were procured by Moderna through fraud. Arbutus bases this fraud argument on discovery it collected presumably after Moderna’s motion to dismiss was denied.
Arbutus alleges that the Government was closely following Moderna’s prior IPR challenge against the ‘069 patent. When Moderna failed to invalidate that patent, the Government questioned Moderna about its potential patent liability to Arbutus precisely because the Government was contemplating including an authorization and consent FAR clause in the C-100 Contract. Arbutus cites to testimony from Moderna employees who purportedly admitted to believing Moderna’s formulation was covered by the 50 mole percent cationic lipid limitation in Arbutus’ patents. Because of that, Moderna tried to avoid infringement by taking a license to the patents from Acuitas. That venture failed because Arbutus disputed Acuitas’ rights to license the patents to Moderna.
After that, and perhaps most crucially, Arbutus claims there is evidence showing that Moderna tested alternatives to the 50 mole percent cationic lipid limitation, but those experiments failed. Arbutus further alleges that Moderna’s own documents show internal tests that purportedly demonstrated infringement as well as internal communications suggesting Moderna avoided conducting further tests that might further verify infringement. Arbutus even points to a purported email communication inside Moderna ordering a scientist to “fib a bit” in a presentation that might purportedly suggest infringement.
These are powerful allegations. Arbutus is suggesting that Moderna knew that it would infringe its patents when it contracted with the Government. And Arbutus further alleges that it did not tell the Government that it knew it would infringe when it entered the C-100 contract, even though the Government expressly inquired about potential infringement. (Moderna will presumably deny these allegations on its reply.)
Arbutus’ fraud argument also sheds light on the evidence it will likely rely upon to show willfulness. If Arbutus can successfully show that Moderna “willfully” infringed its patents, then it can potentially claim up to treble damages. Yet, do these allegations show willfulness? Moderna will likely argue that even though it conducted experiments to test formulations outside of Arbutus’ patents, conducting further experiments is just what pharmaceutical firms do all the time. But the emails and documents may nevertheless paint a picture that Moderna was seeking to design around the patents precisely because it believed it would otherwise infringe. Moderna could face risk on that in front of a jury.
Arbutus will likely be precluded from arguing willfulness if Moderna’s § 1498 motion is granted, and the case is transferred to the Court of Federal Claims. Given that, do Arbutus’ claims show that it defrauded the Government by entering into the C-100 contract without disclosing that it knew it would infringe patents that could shift nine or ten-figure liability onto the Government? The court may avoid this issue altogether if it finds that the “for the Government” prong is not satisfied, and therefore does not have to reach Arbutus’ fraud arguments.