US $ 1.3 Billion settlement too High?
In today’s fiercely competitive intellectual property market, patent disputes are a norm especially in the booming medical device industry. It is important for companies to patent their technologies or to acquire license of the patents in order to sustain a lucrative market share and to maximize revenues using the patented technologies. A recent dispute between Medtronic, a large medical device company in the U.S. and Dr. Michelson was settled for a staggering US $ 1.3 billion. This was the highest settlement related to patents, surpassing the thumping settlement of US $ 909 million between Kodak and Polaroid for claims with regards to instant photography patents in 1990.
Dr. Gary Michelson, a spine surgeon, developed and patented technology related to spinal fusion, a method used to treat Degenerative Disc Disease (DDD). In 1994, he sold certain rights to the technology to Sofamor Danek, which was acquired by Medtronic five years later. In 2001, Medtronic sued Dr. Michelson, citing breach of contract, claiming that he refused to allow the use of inventions developed by him since the 1994 agreement. They also claimed that he was ‘attempting or threatening’ to license technology to Medtronic’s competitors. In response Dr. Michelson countersued and sought $1.7 billion in damages, alleging that Medtronic did not use his inventions to full potential and underpaid his royalties by manipulating accounts.
The lawsuit lasted four years and concluded in a three month long trial. The jury found Medtronic guilty of breaching several provisions of its agreements with Dr. Michelson and awarded him around $110 million in damages. He was awarded a further $400 million for punitive damages as the jury found Medtronic’s conduct with respect to the agreement as “reckless, intentional, fraudulent or malicious”. In April, 2005, Medtronic announced that it had come to a $ 1.3 billion deal with Dr. Michelson to acquire all spine related intellectual property, contracts and rights. Medtronic paid $ 550 million in consideration of the lawsuit and $ 800 million to acquire all of Michelson’s patents. This agreement meant that Medtronic acquires over 100 issued U.S. patents, over 110 pending U.S. patents and about 500 foreign patents. Further any related technology developed by Michelson in the next 15 years would be owned by Medtronic. As part of the agreement Dr. Michelson agreed to spend six months ‘helping’ Medtronic understand the inventions it acquired. In addition the agreement relieved Medtronic of paying Dr. Michelson up to $ 40 million annually on royalty. Although this agreement seems excessively large, industry analysts believe it is a ‘strategic acquisition’. They feel it is not excessive over the long run given the size, rapid growth and critical importance of intellectual property ownership in the spine industry. The worldwide spinal implant industry was worth approximately $ 3.1 billion in 2004 and was growing at healthy rate of 16% per annum. Acquiring the valuable patent portfolio was fundamental to Medtronic’s domination of over 1/3 of spinal segment’s revenue and also helped improve Medtronic’s intellectual property position. Dr. Michelson was quoted as saying "I'm obviously very pleased that we can put this behind and move ahead and do something that is actually going to help somebody". He invested about $200 million of the money into a medical foundation which he founded. Some surgeons argue that most of Dr. Michelson’s ideas were not original, just that he was very skillful in filing patents. Some even claim he never ‘manufactured’ his ideas, instead he simply sketched them and filed with the patent office. Is there an analogy between Dr. Michelson and J. Lemelson?(read previous post on Jerome H. Lemelson to find out)
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