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IP Alert: Federal Circuit Revives "Unclean Hands" Defense

May 1, 2018

On April 25, in Gilead Sciences, Inc. v. Merck & Co., Inc., a Federal Circuit panel upheld a district court decision barring patent owners Merck & Co. and Ionis Pharmaceuticals from asserting two patents against Gilead Sciences on the basis of an unclean hands defense.

The two patents at issue in the case covered technology jointly developed by Merck and Ionis relating to treatments for Hepatitis C. Gilead developed its own treatments, and subsequently sought a declaratory judgment that its treatments did not infringe the Merck-Ionis patents and that the patents were invalid. Merck and Ionis counterclaimed for infringement. After claim construction, Gilead stipulated to infringement. A jury subsequently found the patents not invalid and awarded damages of $200 million.

The district court then held a bench trial on Gilead’s equitable defenses, which included allegations of unclean hands. The Supreme Court long ago held that equitable defense of unclean hands may be applied in the district court’s discretion when a party’s misconduct “has immediate and necessary relation” to the equity sought in the current case. That is, the doctrine requires a party to have “acted fairly and without fraud or deceit as to the controversy in issue.”

The district court found unclean hands on two bases: pre-litigation business misconduct and litigation misconduct. The alleged pre-litigation business misconduct involved a Merck chemist-turned patent attorney, Dr. Durette, participating in a meeting with Pharmasset (a company ultimately acquired by Gilead) about its Hepatitis C treatments, despite a non-disclosure agreement between the parties that included a provision prohibiting anyone participating in the business meetings from being involved in prosecution of patents on the subject. Gilead alleged that Dr. Durette was intimately involved in prosecuting the two asserted patents procured by Merck and Ionis in direct violation of the agreement. In fact, after the meeting, Dr. Durette filed narrowing amendments that “targeted Pharmasset’s work” and resulted in Merck and Ionis obtaining patent coverage for which the accused treatments fell squarely within. The Federal Circuit agreed that there was a direct connection between the pre-litigation business misconduct and the relief sought in the litigation, i.e., enforcement of the patents, which satisfied the Supreme Court’s “immediately and necessary relation” requirement.

The Federal Circuit also upheld the district court’s finding of litigation misconduct based on two events: first, Dr. Durette’s allegedly intentionally false deposition testimony given under oath as a corporate representative that he did not participate in the business meeting with Pharmasset, and second, Dr. Durette’s testimony at both his deposition and trial in which he allegedly intentionally falsely testified about the reasons he filed narrowing amendments after the Pharmasset business meeting. The Federal Circuit agreed that false testimony was relevant to the invalidity issues in the litigation and again satisfied the immediate and necessary relation requirement.

After balancing the equities, the district court ultimately ruled in favor of Gilead, finding that both pre-litigation business misconduct and litigation misconduct attributable to Merck and Ionis merited barring the parties from asserting the patents against Gilead. The district court also found the case to be exceptional under 35 U.S.C. § 285 and awarded attorneys’ fees of almost $14 million based on the unclean hands finding.

The Federal Circuit found that the totality of evidence adequately supported the district court’s findings of clear misconduct in breaching commitments to Pharmasset and in the litigation itself. The court also agreed that the pre-litigation business misconduct tainted one of the two asserted patents, while the litigation misconduct “infected th[e] entire case, covering both patents-in-suit.”

The Federal Circuit’s decision is significant in two respects. First, it reaffirms that equitable defenses like unclean hands are not antiquated or useless; instead, they can be quite potent and should not be taken lightly. This is the first appellate case in years to have applied the unclean hands defense to a patent case (compared to the more common inequitable conduct defense), and notably the court applied it as a complete defense to Merck’s claim for monetary relief. Second, the decision serves as a reminder to parties entering into non-disclosure agreements or other similar arrangements to be vigilant in following and enforcing the provisions to which they have agreed. Failure to do so can be a costly choice, which is aptly demonstrated here. Instead of receiving $200 million in damages, Merck and Ionis are now on the hook for almost $14 million in legal fees (on top of their own).

For more information on this case, please contact Fitch Even partner Nikki L. Little, author of this alert.

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