CEO SUMMARY: Laboratory Corporation of America fought a patent infringement case against the holder of the homocysteine assay patent and lost after a five-year court battle. Now Competitive Technologies, Inc. (CTI), armed with its victory in federal court, is ready to negotiate royalty arrangements with laboratories, IVD manufacturers, and even physicians. Labs all over the United States are getting demand letters from CTI.
HUNDREDS OF HOSPITAL LABS and other labs throughout the United States are currently receiving a letter from Competitive Technologies, Inc. (CTI) which demands that royalties be paid for homocysteine tests performed as far back as 1998.
Any laboratory which performs homocysteine testing can expect to find itself facing a demand by Competitive Technologies. Although CTI had sent royalty demand letters to selected laboratories in recent years, it intensified its collection efforts during the past six weeks. That is why greater numbers of laboratories received demand letters in recent weeks.
CTI believes it has a strong legal club to use in enforcing its patent rights. Earlier this summer Competitive Technologies prevailed over Laboratory Corporation of America in a federal court case that took five years to conclude. Lower courts ruled in favor of CTI and licensee Metabolite Laboratories, finding that LabCorp infringed CTI’s homocysteine assay patents. A federal appeals court upheld the verdict of the lower courts and ruled against LabCorp.
The district court assessed damages of $3.6 million for breach of contract and $1 million for indirect infringement. The district court further granted the motion by CTI and Metabolite “to enjoin LabCorp from performing ‘any homocysteine-only test, including without limitation homocysteine-only tests via the Abbott [Laboratories] method’.”
Under a court-directed agreement dated December 2002, LabCorp has paid a 6% royalty to CTI and its clients on current homocysteine testing performed in its labs and covered under CTI’s patent rights. With the conclusion of this federal court case, Competitive Technologies is expanding its royal collection efforts.
Enforcing Its Patent
“In addition to LabCorp, we are pursuing licensing discussions and collection of royalties from other companies involved with homocysteine testing. The largest companies in the marketplace include Abbott Laboratories, Bayer AG and Axis Shield PLC,” stated John B. Nano, President and CEO of CTI. “We expect to reach licensing agreements with several organizations in lieu of formal dispute.”
CTI wants to calculate royalties based on a formula that is 6% of the “patient’s cost, before insurance reimbursement.” It is targeting homocysteine tests performed from January 1, 1998 through the present. In the demand letter received by one laboratory (reproduced in the sidebar on the facing page), it requests a $30,000 licensing fee and royalties “payable at the rate of $1.83 per test sold.” It also requests a “full accounting of all past homocysteine tests retroactive to January 1, 1998.”
The royalty potential of the homocysteine patent assay is substantial. CTI estimates that 20 million homocysteine assays will be performed in 2004. It believes the successful outcome of its patent infringement case with LabCorp in federal court gives it a legal precedent which bolsters its efforts to protect its homocysteine assay patent.
Royalty payments for patent-protected diagnostic assays is an emotional issue for pathologists and laboratory scientists, as is the increase in the number of high-priced proprietary esoteric tests. For hospital laboratories, which generally operate in support of a not-for-profit hospital or integrated health system, the extra expenses generated by these types of tests are feared as “budget-busters.”
The sudden demand by CTI to cough up royalty payments for homocysteine tests done over the past six years justifies these concerns. Most hospital labs have no financial reserve available to fund such payments.
Competitive Technologies holds the assay patent on behalf of the University of Colorado (developers Robert H. Allen, M.D. and Sally Stabler, M.D.) and Columbia University (developer John Lindenbaum, M.D.–died 1997.)
Patent Claims for ’658
U.S. Patent NO. 4,940,658 (the ’658 patent) “claims methods for detecting cobalamin or folate deficiencies in warm-blooded animals.” It was developed in research to benefit patients with sickle cell anemia and vitamin B-12 deficiency, among other diseases. The patent claim covers the process of determining cobalamin and/or folate deficiency, based on a correlation with elevated levels of homocysteine.
In the 1990s, clinical studies began to uncover a relationship between high levels of homocysteine and increased risk of heart disease. Based on these findings, clinicians began ordering higher volumes of homocysteine tests to use in evaluating a patient’s risk of heart disease. It was the determination of the federal court in the CTI/Metabolite vs. LabCorp case that the “new use” for homocysteine testing was still covered by the ’658 patent claim. Thus the ruling that LabCorp infringed the patent.
The arrival of royalty payment demand letters at laboratories throughout the United States triggers a new management challenge. Most laboratories probably lack a policy on this type of legal issue. Those that have a policy may find it lacks the detail and depth needed to provide effective guidance in this case.
Letters To 700 Labs
Competitive Technologies says that it has sent out more than 700 royalty demand letters to laboratories. That means the issue of paying royalties on homocysteine assays is one which must be addressed and cannot be sidestepped.
Further, this must be considered an early example of the trend which has been much-discussed, but little seen until now: the growing number of patent-protected diagnostic assays for which a royalty fee is included in the cost of each test performed. What remains unknown is how the healthcare system will pay for this added cost. Payers have not yet been required to deal with this issue on a large scale.