Digene Corp. v. Third Wave Technologies, Inc.

536 F.Supp.2d 996

DIGENE CORPORATION, Plaintiff, v. THIRD WAVE TECHNOLOGIES, INC., Defendant.

No. 3:07-cv.-00022-bbc.

United States District Court, W.D. Wisconsin.

January 11, 2008.

As Amended February 21, 2007.

COPYRIGHT MATERIAL OMITTED

Mark A. Pals, Kirkland & Ellis, Chicago, IL, for Defendant.

OPINION AND ORDER

BARBARA B. CRABB, District Judge.

In response to plaintiff Digene Corporation's complaint suing defendant Third Wave Technologies, Inc. for infringement of one of plaintiff's patents, defendant filed an answer and nine counterclaims, in four of which it alleged that plaintiff had violated various provisions of the Sherman Act and the Robinson-Patman Act. (Of the remaining five, four related to plaintiffs infringement charges, which have been dismissed, and one alleged that this is an exceptional case under 35 U.S.C. § 285, for which attorney fees should be awarded to defendant. I leave this last issue for another day, as explained below.)

In its amended antitrust counterclaims, defendant asserted that plaintiff had both monopolized and attempted to monopolize the market for human papilloma virus (HPV) testing in violation of § 2 of the Sherman Act, 15 U.S.C. § 2. According to defendant, plaintiff's monopolizing acts consisted of selling its HPV test kits through exclusionary contracts imposing onerous termination fees, by either giving away equipment or renting it at low prices, making false statements about defendant's analyte specific reagents (ASRs) and engaging in sham litigation, as demonstrated by the bringing of this allegedly baseless lawsuit for patent infringement.

In addition to its § 2 counterclaim, defendant asserted a violation of § 1 of the Sherman Act based on plaintiff's alleged monopolization of the market for its HPV test kits, again by using its market power to exclude competition. Finally, defendant contended that plaintiff violated the Robinson-Patman Act by using free or low-cost gifts of equipment, cash payments for marketing and differential pricing of products in an effort to hinder competition.

I conclude that defendant has failed to show any violations of the Sherman Act or the Robinson-Patman Act. Plaintiff has had a natural, but short-lived dominant position in the market for high risk HPV testing because it was the first to market a test for this purpose and the first (and still the only company) to secure FDA approval, not because it has engaged in acts prohibited by law. Despite defendant's lack of FDA approval for its own test, defendant has proved to be a competitor in the HPV testing market, with a gradually increasing share of that market and the clear prospect of obtaining a greater share once it secures FDA approval. It has been able to, compete for many of the same customers that had been using plaintiff s test kits and it has no evidence that its failure to win more contracts is attributable to any illegal acts by plaintiff rather than to the customer's choice to purchase plaintiff's FDA-approved test. Therefore, plaintiff's motion for summary judgment on defendant's antitrust counterclaims will be granted.

From the facts proposed by the parties, I find that the following are material and undisputed. (The process of finding the undisputed facts would have been much easier if the parties had not proposed as "facts" their own or their opponent's assertions, e.g., "plaintiff asserts that defendant's multi-year contracts are compelling customers to enter into exclusive contractual relationships," and if they had eliminated redundant, proposals and ultimate issues of fact, e.g., "contrary to defendant's allegations, there is no dispute that plaintiffs contracts are not exclusive." Whether the contracts are exclusive is a decision that cannot be made until the underlying facts are determined.)

UNDISPUTED FACTS

Plaintiff Digene Corporation developed the first commercial test to detect high-risk types of the human papilloma virus (HPV) using genetic procedures. In 2003, it succeeded in obtaining Federal Drug Administration approval for its test kits. No other company has developed an HPV test that is approved by the FDA.

Defendant Third Wave Technologies, Inc. competes for sales against plaintiff, offering HPV analyte specific reagents (ASRs). The ASRs are raw materials and components that neither require nor have FDA approval but can be used by certain certified laboratories to create and validate their own diagnostic tests. Defendant has not obtained FDA approval for a test kit but is working toward that goal.

Since 2003, when plaintiff received FDA approval to market its HPV test kits for screening adjunctive to routine Pap testing for women over thirty, it has become increasingly common to combine HPV testing with routine Pap testing. Using both tests improves the effective diagnosis of cervical cancer to better than 99%.

Plaintiff's testing system is based on a technology platform known as Hybrid Capture 2, which can detect the presence of 12 HPV types. This in vitro diagnostic system includes the kit, which consists of the reagents and probes used to test for the presence of target DNA, and detection instruments. Plaintiff offers other equipment for automating the testing process, improving workflow and facilitating the process of large sample quantities (highthroughput). Plaintiff markets its testing kit to a variety of testing facilities, including commercial laboratories, such as Quest Diagnostics, Inc. and LabCorp, managed care organizations that perform their own clinical testing and private and public hospitals and clinics.

The equipment for running plaintiffs HPV test ranges in price from approximately $49,000 for a non-automated system to $199,000 for a fully automated system. Although plaintiff does not force customers to buy its equipment, laboratories that want to run FDA-approved tests must acquire five specific pieces of equipment from plaintiff that must be utilized to meet the FDA requirements. The customer could obtain the equipment from other companies but it would not be, validated by the FDA. The other equipment necessary to run the tests does not require such validation and is readily available from many suppliers.

As a general rule, plaintiff sells or rents its test kits to customers under long term contracts (usually at least three years). Doing so enables plaintiff to predict its manufacturing needs and protect its investment in the intellectual property it expends in training its customers' technicians and co-marketing the HPV tests (plaintiff's clinical sales representatives work to increase HPV referrals for their customer laboratories, meeting with doctors and other health care professionals in the laboratory's service area). Long term contracts offer customers renting equipment the opportunity to spread out the rental payments over an extended period of time.

At the outset of contract negotiations, plaintiff begins by determining its customers' anticipated test kit supply needs and helping them undertake long-term planning based on known costs. (The kits contain dated material with a limited shelf life.) Once plaintiff's representative has a sense of the volume of test kits a customer will be buying and for how long, it will offer the customer a price that takes those factors into account.

Under the typical rental agreements, plaintiff sets a per kit price that includes the cost of the equipment rental and takes into account the depreciated cost of the equipment over time. This practice of incorporating the cost of equipment into the monthly reagent fee is not unusual in the industry; most laboratories do not have the resources to purchase the equipment necessary to run molecular diagnostic tests. Also included in the per kit price are the costs of the technical support and training for laboratory technicians that plaintiff provides, as well as the cost of co-marketing.

Plaintiff's contracts with it customers vary considerably, Some allow termination for a number of reasons, including the availability of new technology. Most but not all, include provisions that require customers to pay fees or penalties upon termination. These fees may include liquidated damages for the value of equipment, plus return of the equipment, or payment for the price of test kits that would have been purchased during the remaining term of the contract. Generally, customers are free to terminate their contracts when they have purchased the minimum number of agreed-upon test kits.

Approximately 60.8% of plaintiff's test kit revenue comes from four customers whose contracts vary in duration. Plaintiffs biggest customer is Quest Diagnostics Laboratories, Inc. Its 2003 contract with Quest provided the laboratory "most favored customer" treatment in pricing, large discounts, termination on 90 days' notice (with Quest having to pay plaintiff', the remaining balance of rent payments on all rental equipment), fixed prices unless changed by mutual consent, cash payments for co-marketing and the agreement that Quest would purchase all its HPV testing kits from plaintiff. Plaintiff's 2007 contract with Quest kept the most favored customer provision, extended the length of the contract to four years, provided that all equipment would be purchased by Quest and continued the cash payments for co-marketing. The contract had no minimum purchase requirement.

Plaintiff's 2006 contract with AmeriPath had a three-year term, included price reductions for volume purchases and allowed the lab to use equipment owned by plaintiff at no charge. The contract provided that the use of the equipment was provided in consideration of the lab's agreement to purchase the products specified in the contract. The agreement contained no termination fee.

Plaintiff's 2000 contract with Kaiser Foundation Health Plan, Inc. allowed Kaiser to terminate the contract at any time after giving 90 days' written notice or within 30 days after receiving written notice of any...