Monsanto v. McFarling: CAFC Affirms “Reasonable Royalty” of 140% of Purchase Price

Monsanto v. McFarling (Fed. Cir. 2007).

Soybean.USDAMonsanto is one of the few patentees that sues individuals for patent infringement.  In Monsanto’s case, the infringers are farmers who allegedly save & replant Monsanto’s patented genetically modified seeds violation of their “Technology Agreement”. When McFarling was found liable, the Missouri jury assessed damages of $40 per seed-bag and the court issued an injunction.

Monsanto customarily requires a royalty payment of $6.50 per seed-bag in addition to $22 per bag for the soybean seeds themselves.  On appeal the CAFC focused on the proper royalty measure.  McFarling argued that $6.50 was the “established” royalty while Monsanto argued that the actual royalty rate is much greater.

The Court agreed with Monsanto that the nominal designation of $6.50 as a royalty was not the entire sum of the damages:

Picking $6.50 as the upper limit for the reasonable royalty would create a windfall for infringers like McFarling. Such infringers would have a huge advantage over other farmers who took the standard Monsanto license and were required to comply with the provisions of the license, including the purchase-of-seed and non-replanting provisions. The evidence at trial showed that Monsanto would not agree to an unconditional license in exchange for a payment of $6.50, and the explanation—that Monsanto would lose all the benefits it gets from having the cooperation of seed companies in promoting Monsanto’s product and controlling its distribution—is a reasonable commercial strategy.

In fact, the CAFC found that the royalty rate can easily be calculated as something above the total $28 dollars per bag paid.

[I]t would be improper to hold that Monsanto’s reasonable royalty damages are limited to $25.50 to $28.50 per bag.

The damage amount, instead of being based on the amount usually paid by farmers, legitimately includes (a) the harm being felt by Monsanto because of the infrinement as well as (b) the additional benefits garnered by McFarling. In particular, these include: reputational harm due to rogue planters, potential lapses in monsanto’s database of planting techniques; bargaining power; as well as McFarling’s increased yeald of $31 – $61 per acre.

Based on those advantages alone, it was reasonable for the jury to suppose that, in a hypothetical negotiation, a purchaser would pay a royalty of $40 per bag for the Roundup Ready seed.

Under CAFC law, a jury’s damage award will be affirmed unless “grossly excessive or monsrous, clearly not supported by the evidence o rbased only on speculation or guesswork.” Here the court found sufficient reasons for the verdict and affirmed.

Established Royalty: Typically, an “established royalty” is the best measure of reasonable royalty damages when “the patentee has consistently licensed others to engage in conduct comparable to the defendant’s.” The rule of established royalty rate does not apply here, however, because Monsanto apparently never allows for replanting — Thus, there are no “comparable” replanting licenses.

Blacklist: The court also noted that Monsanto may blacklist Mr. McFarling from buying its seeds. 

Notes:

  • Mark Lemley of Stanford argued on behalf of the Farmer, McFarling.
  • Several other issues are included in the decision.
  • Read the case.

 

44 thoughts on “Monsanto v. McFarling: CAFC Affirms “Reasonable Royalty” of 140% of Purchase Price

  1. On 17 June 2007, Red Devil Dogg looked in his crystal ball to assess Monsanto stock and conclued that “they are doomed and will lose at least 50% of their MARCAP in coming months (approx US$18 billion).” On that date, MON was $66/share. On 17 June 2008, MON closed at $143. Can you let us know what hedge fund you work for so we all know who to avoid?

  2. I just ran across this site. Some things I disagree with in the Monsanto Technology agreement with farmers, some are just as the technology is Monsanto’s. My question to anyone left out there is ….. Farmers grow the Soybeans for Monsanto and other seed suppliers that have “paid” Monsanto so they can use it in their seed. This year there is a shortage of seed for the 2008 growing season. Some seed Companys are going to farmers and buying seed for resale, from my understanding these farmers don’t have a “valid, written Seed production agreement with a seed Company that is licensed by Monsanto to produce seed”. It would look like to have a “valid agreement” the farmer and company would have done an agreement at purchase of the seed at planting time and not after Monsanto or other companys decided they didn’t have enough supply, which was after harvest. The problem here is the farmers they are buying the soybeans from didn’t have a “production agreement” to start with.

  3. red Devil dogg – as you say — you’re obviously trying to push Monsanto down to gain when you short the stock — the reality is that this technology is technology and protectable under US IP law if it is based on an invention. Since the vast majority of US growers abide by the law and don’t steal then Monsanto needs to enforce its rights or lose them. Monsanto probably gets more bad press out of this type of litigation but like any law enforcement – noone is above it. I would short the organic growers – food from them has been shown to kill some people when it is contaminated with certain E.coli – organic food has a record of harm – GM technology does not. Using organic waste to fertilize crops doesn’t make sense due to the known risk – some GM crops replace pesticides known to be hazardous to human health with solutions that are tested and shown to be of no detectable hazard — maybe this is not good for the litigation business – noone gets hurt – noone to sue? Your concerns are mis-directed

  4. I’m a hedge fund manager. I read many of these posts with great curiosity because of the Patent perspective. It is ultimately consequential in a negative way to the greater health of the company.

    I recently received a very compelling report from one of our advisory services. It linked the pet food crisis to rogue genetically modified food courtesy of the Chinese. It wasn’t Melamine. The report went on to further illuminate MON (It makes no presentation that MON was responsible for the pet food issue, only that they will suffer because of their position on GMO) and it’s hated business practices around the world and the precarious position it has put itself in RE tactics and exposure to GMO products — which in case you haven’t checked, the educated public of children bearing age absolutely hate. Been to a Whole Foods lately?

    I look forward to shorting this company. They are in the unenviable position of having zero chance at putting up an even remotely credible argument. In short, they are doomed and will lose at least 50% of their MARCAP in coming months (approx US$18 billion). This generally leads to management looking for new jobs.

    Thank you.

  5. To DJ –

    To attempt to address your hypothetical situation, we will probably not get a ruling on whether pollen or seeds blowing onto land where they are truly not wanted will constitute infringement because Monsanto will do its best to keep this one out of the courts.

    Keep in mind that farms that do not want GM crops such as organic farms or those wanting to sell to European markets will likely have some kind of claim in tort – maybe under products liability – against Monsanto for damages such as lost profits, costs of removal of the GM crops, and potentially costs for restoring organic certification. Monsanto does not want a decision on this basis. In addition, for a farmer who comes into court with clean hands in such a situation, even if Monsanto were to win on patent infringement, it would have little to no effect on the farmer. The infringement would not be willful, the percentage of the crops that used the patented invention would be small, and an injunction against the farmer using the invention is exactly what the farmer wants.

    Schmeiser doesn’t apply – the story he tells now, “I had some of Monsanto’s seed show up on my land and then I got sued for patent infringement,” leaves out most of the story. According to my recollection of the facts that were ruled upon, Schmeiser sprayed a section of his land with Roundup, watched the canola from that section grow, hid the seeds from that canola in a pickup truck covered with a tarp, then planted effectively all of his next year’s crop with the GM seeds.

    How did Monsanto find out? It’s likely that one of his neighbors called Monsanto on him. Monsanto had a program for rewarding farmers for ratting out their neighbors who were saving seed or breaching the Monsanto license. Reason #3057 for why people hate Monsanto.

    Scruggs and McFarlane don’t apply either. They were purchasers of Monsanto seeds that they saved in breach of their purchase license.

    Because your hypothetical is a net loser for Monsanto, even if they do win on infringement, they are likely going to pay off any farmer who falls under your hypothetical rather than let it get to court. So to get a ruling, we’re going to need an organic farmer who can afford to turn down Monsanto’s settlement offer AND can take on the expensive court case.

  6. ddg, I’m not sure what you’re talking about.

    If Lemley has lost a bunch of cases like this, I’d take it as an indication that the cases are longshots to begin with and that the litigants think he’s the best chance they’ve got of either pulling victory from the jaws of defeat or of getting a softer landing than they might otherwise get.

  7. I would have though Lemley would have given up by now. The man’s got the poison touch for cases. At least he keeps making good law through losing.

  8. Can anyone chime in on whether or not wind or bees can spread the invention to an innocent field and thus make it impossible to avoid infringement?

    Under patent law mere possession of a claimed invention is all that matters for infringement. Unlike copyright, non-derivation is not a defense to patent infringement.

    I applaud the exhaustion argument, but for some reason it is not working.

    To address the last few thoughtful posts we start to take back our Nation from these elements by working on the laws and their administration.

    We can here begin by determining if it is possible for a farmer to become an infringer because of wind or bees even if the he does not adopt any new technology, and, if the answer is yes, we need to do something about it. Because if a farmer can not say no, then, besides the original patent damages issue, none of us consumers will ultimately be able to say no to a modified gene pool in the plant foods we eat.

    I think the solution in patent law is to change 35 U.S.C. 271 to require an additional prong of proof of infringement for life inventions that can propagate due to wind, bees, etc. Perhaps the new prong for life inventions should require proof of something else such as access or derivation.

  9. D.W.A.P. wrote:
    “In short, every single agency of the executive branch of the Federal Government operates at the behest of business organizations seeking to maximize profits at the expense of everything else, even the lives of citizens. In my opinion the FDA would say anything and fund any study to provide any conclusion that Monsanto and/or ADM Corporation would desire. There is absolutely no indication that the FDA functions to the benefit of the public at large.”

    Boy, you said a mouth full! “We are doomed,” and that’s no joke!, but only if “We the People” are complacent! Let me say at the outset of my comment, I have a proclivity to feel put-upon by big businesses’ agendas.

    I would like to add this which is common knowledge, that many/most Congressmen have also sold out “We the People” to business organizations — it is not just the Executive Branch and its agencies that have sold out “We the People”! And it gets even worse – all three Branches are now dancing to business organizations’ tunes:

    The United States Supreme Court has also begun to sell out “We the People”! For a non-IP example, see Kelo v. New London, but I’ll focus on IP related issues, e.g., eBay:

    As described in a comment to the Patently-O article, “Patent Reform 2007: Apportionment of Damages” article (link to patentlyo.com) on this link: May 29, 2007 at 04:47 AM the USSC has begun to sell out “We the People” in favor of the agendas promoted by big business organizations. For example, put simply, the Supremes’ eBay ruling reserves a patent’s “exclusive Right” (injunctions) for big businesses, while denying a patent’s grant of “the exclusive Right” to independent non-manufacturing inventors.

    THE SUPREMES’ EBAY RULING CORRUPTED OUR CONSTITUTION.

    What the best big business shills have done to defend the eBay ruling is to cite other corruptions of our Constitution that have also occurred! Please note that STATUTES CANNOT AMEND THE CONSTITUTION — that is the plain unambiguous meanings of Article V & Article VI, Clause 2 of the Constitution.)

    All corruptions of the Constitution are a damn shame. Each corruption becomes more threatening to our way of life. Our country is on a slippery slope, but democracy is no easy trip, and it never has been. Our Constitution is the best in the world — few would deny that. It is our job, every American’s job, to tackle those corruptions, even when the Supremes screw up. That’s the beauty of our three body checks and balances system, and why we all should fight to regain our Constitutional footing every time we see a slip (this paragraph was paraphrased from “George Washington II” at Jun 01, 2007 at 08:13 PM)

    What can we do? For openers, how about this amended Preamble:

    We the People of the United States, in Order to achieve a more perfect Union, establish and maintain Justice, insure domestic Tranquility and freedom from the tyranny of big business, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and RE-ESTABLISH THE Constitution for the United States of America.

    To the intellectual community at large, I beseech:
    Where, when, how do we start to take back our Nation from the growing ghastly grasp of big business organizations that now infiltrate all three Branches of our Government?

  10. To Me:
    One has to understanding the funding sources for the research that essential exonerates GM food from responsibility for bee colony collapse. For christ’s sake don’t rely upon the FDA for anything. The agency has absolutely no credibility. It precludes meat producers from testing meat for BSE. link to organicconsumers.org

    Which, by the way is a subset of TSEs and to scare the crap out of you hundreds of Americans have died of nvCJD (the brain wasting disorder) in the United States over the past eight years. People who have never left the country. In fact tens of thousands of wildlife have been destroyed in an attempt to control the TSEs in this country. Yet,the FDA still keeps us from test the beef. Could it be that the beef industry is the largest revenue producer for Texas and we have a President beholding to Texas interests? That question is actually rhetorical.

    link to mad-cow.org

    In short, every single agency of the executive branch of the Federal Government operates at the behest of business organizations seeking to maximize profits at the expense of everything else, even the lives of citizens. In my opinion the FDA would say anything and fund any study to provide any conclusion that Monsanto and/or ADM Corporation would desire. There is absolutely no indication that the FDA functions to the benefit of the public at large.

  11. To Me:
    The question was not why the Bees are dying. The question evolves around the fact that it would greatly behoove companies like ADM and Monsanto to destroy natural pollenization processes. So I shall cut to the chase. I believe it should be a crime against humanity to intentionally introduce such technology into the market place punishable by the most extreme measures. That is there would be personal liability for the CEO to introduce such technology into the environement. The punishment I speak of is not simple imprisionment. It must be something more likely to induce behavoural changes is such individuals. What do you think?

  12. To Me:
    The question was not why the Bees are dying. The question evolves around the fact that it would greatly behoove companies like ADM and Monsanto to destroy natural pollenization processes. So I shall cut to the chase. I believe it should be a crime against humanity to intentionally introduce such technology into the market place punishable by the most extreme measures. That is there would be personal liability for the CEO to introduce such technology into the environement. The punishment I speak of is not simple imprisionment. It must be something more likely to induce behavoural changes is such individuals. What do you think?

  13. Edge and Anonymous–

    In bringing up patent exhaustion I was specifically thinking of Schmeiser, not McFarling. I know of Scruggs, which is also a U.S. case. I admit that I don’t even know if there is a patent exhaustion doctrine or its equivalent in Canadian patent law, and if so, exactly what that doctrine says. I was wondering if a Canadian patent exhaustion doctrine would have applied. Any Canadian practitioners out there?

  14. Would it be proper for Monsanto to create a plant letal to bees to prevent the use of what Monsanto considered its intellectual property. For example, would you believe it reasonable for a company like Monsanto to produce a plant the pollen of which is lethal to bees so that Monsanto could properly police the use of its intellectual property? Could this be why the bee colonies have been disappearing?

    On a flip note, would I be liable for patent infringement if bees took pollen from a patented Monsanto plant and used it to pollenate my plants?

    These are the paths down which we progress.

  15. Peter Papp,
    Patent exhaustion seems like a decent defense if it could be used in the same way as the first sale doctrine in copyright law. The way I remember patent exhaustion, however, is that the patentee must sell the product without restriction, thereby creating an implied license for the purchaser. In this case I believe that the purchaser was required to sign a “Technology Agreement” licensing the patented technology to the farmers. This restriction shielded the patents from exhaustion.

  16. @Peter Papp: Your point is certaintly fair — we don’t know what the jury looked at to arrive at $40/acre. But we do know that Monsanto put in proof that a farmer would save $40/acre by using the patented seed over traditional seed. Because there was no (quantifiable) established royalty, Monsanto’s proof of the monetary benefit to a farmer is enough to affirm the jury’s verdict of $40/acre. If there is discomfort in the fact that the jury may well have reached $40/acre in another manner, the problem is with the legal doctrine that substantial evidence in support of a jury’s verdict is enough to affirm the verdict, not with the court’s analysis.

  17. I have not thought about this cogently, so be kind. I throw it out for discussion–

    What about the concept of patent exhaustion? In Schmeiser, the genetically-modified seeds came from genetically-modified plants. Maybe a seed that grows as part of a genetically-modified plant should be considered to be an intrinsic part of that plant, and therefore one and the same, for purposes of the patent. So, once a genetically-modified seed is sold to a farmer, becomes a genetically-modified plant containing a genetically-modified seed, it has been sold once, and is exhausted.

    Thoughts?

  18. DJ, the “pollution” argument is a fact question, I think. If the factfinder believed Schmeiser, then I think he’d be off the hook. AFAIK, they didn’t believe that he was an “involuntary infringer.”

  19. There are no facts in the published opinion to show Schmeiser obtained his seed from other than re-use — as he did before the date of Monsanto’s invention. The Supreme Court of Canada in Percy Schmeiser v. Monsanto said “The origin of the plants is unclear.” Also, there is no proof Schmeiser sprayed his field with Roundup herbicide. “Schmeiser sprayed Roundup herbicide around the power poles and in the ditches along the roadway bordering four of his fields. The fact that these plants survived the spraying indicated that they contained the patented gene and cell.”

    Regardless of the Schmeiser case facts … I am still concerned about the justice that one can infringe under 35 U.S.C. 271 of AN INVENTION THAT CAN BLOW ONTO SOMEONE ELSE’S’ LAND AND POLLUTE AN OTHERWISE NON-INFRINGING COLLECTION OF SEEDS.

    I am not an expert at seed technology. I don’t belong to any special interest groups other than patent attorney associations. But it seems Percy Schmeiser has a point about becoming an infringer even if one does not want to. If this is so, then it seems we have an obligation as patent attorneys to do something about it. Am I missing something?

    Seems impossible to be downwind and not avoid infringement.

  20. Dennis’ post seems to give the impression that the damage amount cumulatively includes the harm felt by Monsanto and the additional benefits to McFarling. The DAMAGE AMOUNT does not legitimately include both factors in a cumulative way, but the JURY’S DETERMINATION of a reasonable royalty may legitimately consider both factors.

    Nobody’s Home, to be fair, the jury may well have arrived at the $40 (not 40%) number in part by considering the value of the intangibles, although there is no information presented in the decision that illuminates this issue one way or the other. The court merely stated that “In determining the amount of a reasonable royalty, it was proper for the jury to consider not only the benefits of the licensing program to Monsanto [which includes the value of the intangibles], but also the benefits that Monsanto’s technology conferred on farmers such as Mr. McFarling.” The jury of course did not concern itself with reversible error in Monsanto’s proof of the benefits to farmers. We don’t even know if McFarling presented any evidence on this issue at all. The opinion did not say that the proof was reasonable–it only implied that Monsanto did introduce evidence on this issue, and that the jury reasonably relied on that evidence as the trier of fact.

  21. Imagine what the comments would be like on this board if McFarling (independent inventor) had been the patent holder and Monsanto (big corporation) had saved his seeds and sold them.

  22. Percy Schmeiser planted a whole field of genetic modified canola, AND sprayed it with RoundUp (meaning it would have died had he not known all the plants were RoundUp Ready transgenics). Go read the Canadian Supreme Court case – Percy has made millions telling his story, but it sure didn’t square with the facts and the courts agreed that it did not.

  23. Mr McFarling probably deserves a penalty because he seems to have knowingly saved patented seeds obtained from Monsanto.

    Should McFarling be held responsible if his seeds were unknowingly polluted by Monsanto’s technology? This is what happened in the case of Canadian farmer Percy Schmeiser.

    Mr Schmeiser saved his old heirloom seeds and replanted year after year, prior to date of Monsanto’s invention. The problem was when pollen from his neighbor’s patented Roundup ready GM seeds by Monsanto blew over to his land and cross-fertilized with his heirloom seeds. Percy Schmeiser’s saved seeds then became polluted with patented genes. Checkout http://www.percyschmeiser.com

    I question if it is wise for Congress to say a farmer can infringe a patent under 35 U.S.C. 271 when pollen from the patented technology blew into his fields and polluted his seeds.

    We patent attorneys need to stand up for those liek Percy Schmeiser who are hurt buy this new and unjust law.

  24. To be fair, Dennis’s post may distort the opinion in two ways:

    First, it is Dennis’s language, not the court’s, to refer to “potential lapses in [M]onsanto’s database of planting techniques.” The substance is correct though.

    Second, the opinion did not say that the lack of information was worth 40% more than the cash purchase price for the patented seed and technology. The opinion said that because the information, together with the other two intangibles, has *some* value, Monsanto is not bound by the cash purchase price alone. The 40% number was not arrived at by valuing the intangibles, but rather by finding no reversible error in Monsanto’s proof of the benefits to farmers. The opinion said that that proof was reasonable in this case.

  25. I read the first two cases when they came out, but I haven’t had time today to go back and re-read them to check the facts. My recollection is that Monsanto found out b/c McFarling took his seeds somewhere to have them washed or something like that and the proprietor of the place sent some of the seeds to Monsanto for analysis.

    I don’t know if McFarling was actually a big or a small operation. I’d always assumed he was small-time, and Monsanto chose to sue him because they knew they could clobber him and thus make an example out of him. I thought I read in one of the earlier CAFC decisions that the original judgment against him was for an amount greater than his net worth, which would certainly accord with the small-time-operation view. Can anyone verify this?

  26. I read the first two cases when they came out, but I haven’t had time today to go back and re-read them to check the facts. My recollection is that Monsanto found out b/c McFarling took his seeds somewhere to have them washed or something like that and the proprietor of the place sent some of the seeds to Monsanto for analysis.

    I don’t know if McFarling was actually a big or a small operation. I’d always assumed he was small-time, and Monsanto chose to sue him because they knew they could clobber him and thus make an example out of him. I thought I read in one of the earlier CAFC decisions that the original judgment against him was for an amount greater than his net worth, which would certainly accord with the small-time-operation view. Can anyone verify this?

  27. Malcolm: “But whatever. I grow my own or buy local organic.”

    This will still affect you. Soybeans are grown for not just food, but also for the oil with thousands of industrial uses which you cannot insulate yourself from simply by buying local organic.

  28. “No doubt. He gambled on the novel IP theories and lost.”

    He stole the seed with every expectation of not getting caught. Later someone with deep pockets came in to support his defense, embarrass Monsanto, and try to get Monsanto IP overturned outside of a run of the mill patent suit is my theory – but I do not know.

  29. BF: The original damages award in the case was $780,000 based upon the liquidated damages clause in the Monsanto license agreement. The CAFC held the clause unenforceable because Monsanto used the same “one size fits all” multiplier for all of its seeds. The case cite is mentioned in this opinion.

  30. Would anyone know why there was no punitive damages in this case, and whether this was discussed during trial ?

  31. How did Monsanto find out? Not sure in this case, but a condition of Monsanto’s technology agreement requires purchasers to notify Monsanto of acts of infringement of which they become aware. They call it “seed stewardship”. Bulk-handlers also play their part in tipping off Monsanto as well.

  32. “Go read the facts and prior cases, Mr. McFarling was doing alot more than growing some soy on the back 40.”

    No doubt. He gambled on the novel IP theories and lost.

    That said, royalties for the “potential lapses in Monsanto’s database of planting techniques” is pushing it.

    But whatever. I grow my own or buy local organic.

  33. law.fordham.edu/publications/articles/200flspub6458.pdf

    Go read the facts and prior cases, Mr. McFarling was doing alot more than growing some soy on the back 40. These farmers run multimillion dollar operations, don’t fall for the poor hayseed defense.

    Why did Lemley defend THIS guy?

    As to sampling – most farmers plant in public right of ways (e.g. roadsides) where you can sample – they don’t own the land.

  34. Apparently McFarling is not just raising crops on the back 40. The case said that the damage award was $375,000 for two years of infringement.

  35. What I want to know is how Monsanto found out. Do they steal and analyze samples from the fields of their licensed farmers the year after the first sale, or what? Surely there are plenty of farmers out there who plant a first filial crop undetected. Damages seem a bit disproportionate, but who is the farmer McFarling? Is he an individual concern or a factory farm? I don’t think it befits corporations to duke it out with individuals, unless the individuals are rich powerful individuals or corporate individuals. I understand that the law wears a blindfold to deliver judgement, but not for determining damages.

  36. “potential lapses in monsanto’s database of planting techniques”

    Oh, please, give us all a break.

Comments are closed.