This article first appeared in the St. Louis Beacon, Oct. 29, 2012 - In something of a surprise, the U.S. Supreme Court has agreed to decide whether Monsanto Co.'s lucrative patent on Roundup Ready seeds extends to seeds that farmers purchase from grain elevators instead of Monsanto.
The court's agreement earlier this month to hear the case is surprising because the lower courts had ruled in Monsanto's favor and the Obama administration had told the court that it should not consider overturning that decision.
If the court were to limit the reach of Monsanto's patent on Roundup Ready seeds, it could hurt the company's bottom line. Bloomberg reported that Monsanto sold $1.77 billion of soybeans and genetic licenses last fiscal year. Gross profit from soybeans was $1.16 billion, 16 percent of Monsanto's total. A financial analyst told Bloomberg that a ruling against Monsanto could scare investors, but might ultimately have a minor effect if growers still bought new seeds to get the benefits of the newest varieties.
The Supreme Court's decision to review the case sets up a David and Goliath confrontation, with a small farmer challenging the genetic engineering titan.
A 74-year-old Indiana farmer, Vernon Hugh Bowman, mounted the challenge. Bowman is a loyal customer of Roundup Ready soybean seeds. He buys new seeds from the company every year for the first of two crops he plants each season. The first one is most likely to be successful, so he wants the best possible seeds. Bowman signs the agreements with Monsanto promising not to save the seeds from the crop for future planting.
But Bowman came up with a different approach for his second, more marginal crop each season. He bought seeds from the local grain elevator. Monsanto's agreement with farmers does not restrict them from selling seeds to the grain elevators. In fact, the company encourages the sale. The seeds from the Roundup Ready crops were mixed in the grain elevator with seeds from soybean crops without the genetic modifications. But 94 percent of soybeans are now grown from genetically modified seeds, so most of the seeds had those characteristics.
Bowman suspected that the seeds from the grain elevator would have the same properties as the Roundup Ready seeds - that they could be sprayed with Roundup without killing the crops. He was right. For the the next seven years, he planted seeds from the grain elevators and seeds he saved from his own second crop of the year.
Monsanto sued claiming that this violated its patent rights. A lower court judge sympathized with Bowman but said he had to enforce the law and ordered him to pay more than $84,000. A federal appeals court agreed.
(Update starts here) The legal question involves what is called patent exhaustion. This is the concept that the sale of a patented product exhausts – ends – the patent rights of the seller.
The question in the Monsanto case is whether Monsanto can exert its patent rights further downstream the sales chain to encompass the seeds from Bowman’s second generation soybeans.
The Federal Circuit Court of Appeals said it could. The court wrote that the “fact that a patented technology can replicate itself does not give the purchaser the right to use replicated copies of the technology.”
The distinction it makes is between the right to use a patented object and the right to make a new product from a patented object. “The right to use does not include the right to construct an essentially new article on the template of the original,” the court wrote. The seeds from Bowman’s second crop of the season were a new article that he was prohibited from using.
The legal problem for Monsanto is that this doctrine may be at odds with Supreme Court rulings. In 1942, the Supreme Court ruled that a company that licensed a product could not control the resale price of the product without violating anti-trust laws. In other words, the patent was exhausted with the first sale.
In a 2008 case the court ruled similarly that L G Electronics Inc. couldn't enforce its memory-technology against both Intel Corp. and computer manufacturers that use Intel chips.
The Federal Circuit got around the Supreme Court’s decisions by ruling that patent exhaustion applies only to “unconditional sales.” The Monsanto sale comes with conditions so the patent is not exhausted and the company can continue to apply the conditions on downstream sales, the court said.
The Supreme Court is asked to decide whether this so-called “conditional sales” exception to patent exhaustion allows Monsanto to control the seeds from Bowman’s second crop.
Monsanto had applauded the federal appeals court's decision in the Bowman case. After the Supreme Court announced it would review the decision, the company issued a statement saying the high court's decision will clarify language related to self-replicating technology used in farming. Arguments should be scheduled early next year with a decision by June.
Critics of Monsanto have long demonized the company for seizing control of food production technology and undermining the tradition of seed-saving in agriculture.
Monsanto points out that no company would invest the millions required to develop genetically modified crops without the ability to patent them. It also maintains that it takes a gentle approach to policing the use of its seeds.
The Center for Food Safety, a Washington group that has criticized Monsanto’s enforcement of its patent rights, reported in 2010 that the company had sued farmers in 27 states. Many cases are brought in federal courts in St. Louis because of the forum selection clause in Monsanto’s technology agreement. The center says this gives the company a “hometown” advantage.
Monsanto maps showed that the company filed a large number of cases against farmers in northern, central and southeast Missouri and throughout most of Illinois. Other states where Monsanto has collected large sums are the Carolinas, Indiana, Minnesota, Iowa, Kentucky, the Dakotas, Michigan and Ohio.
The study showed that Monsanto had won $23 million in judgments against farmers, with the average judgment around $170,000.
Monsanto’s website paints a different picture. On its website, the company has posted a five-part series written in 2008 explaining how it handles tips that a farmer is violating its agreement with Monsanto.
It runs a toll-free telephone hotline that receives anonymous tips from farmers about their neighbors. The numbers is 800-768-6387.
E. Susan Lockhart, Monsanto trait stewardship coordinator, said she received about two calls a day from growers.
She explained that the company tip line is anonymous and that the company does not trace calls. Monsanto explained that “the callers include growers naming neighboring farmers they suspect are planting saved seed or dealers calling in because they’ve heard something from one of their growers and feel obligated to report it.”
Scott Baucum, then Monsanto trait stewardship lead, explained that “people in small communities … do not want to get involved. So we provided a dignified way for them to call in and say, ‘Hey, I’m paying for this technology and I think somebody else ought to have to pay for it, too. It’s not fair to me that I have to obey certain rules and they don’t.’”
Lockhart added, “People need someone to call. They just can’t sit and stew about it. A lot of people that call have that personal sense of ethics that a line has been crossed. I feel really good about what I do; I don’t do this because I enjoy putting people on the spot or having investigators go out and check them. I’m helping to make the playing field fair.”
After getting a tip, Monsanto looks at the data in its records to see if a farmer is buying enough seed to cover all the acres farmed.
If Monsanto opens an investigation, the website said, it sends its information to Larry McDowell, owner and manger of the St. Louis-based investigative firm McDowell & Associates. McDowell’s investigators go to the farmer’s front door.
One investigator is quoted as saying: “The first and most important thing that we like to do when we get there is let them know who we are, who we work for, and the most important reason that we’re there, which is to talk to them about their farming operation and the possibility of saved Roundup Ready soybeans being planted on their farm.”
About half the farmers readily admit to saving seed and infringing on the patent, Monsanto said. Many others who deny it at first, later admit the infraction during follow-up interviews. Monsanto said it then tries to work out a settlement the farmer can manage.
Monsanto said it went to trial over seed patents just nine times from 1997 to 2008. It said it filed 145 lawsuits in 15 years of seed patent enforcement, and almost 700 matters have been settled out-of-court.
“Most of the cases are never filed,” said Baucum. “Most of the time we find that we’ll go knock on the farmer’s door and he’ll say, ‘Yeah, you caught me. Let’s get it behind us.’ And we just settle it with them.”
Monsanto says it gives the money it collects from farmers to the Commitment to Agriculture Scholarship affiliated with the American Farm Bureau. Over seven years the company gave $900,000 that went to 650 young people, it said.
(For the first in a five-part series Monsanto has written on its seed enforcement policy go to www.monsanto.com/newsviews/Pages/Why-Does-Monsanto-Patent-Seeds.aspx for the first one and find others in the sidebar.}