Sommer Nicole Louie, the Inadequacy of Bankruptcy Protection for the Biotechnology Industry
| Publication year | 2011 |
THE INADEQUACY OF BANKRUPTCY PROTECTION FOR THE BIOTECHNOLOGY INDUSTRY
INTRODUCTION
This Comment will address the nature of companies engaged in the biotechnology industry and how these companies survive bankruptcy. Although much information exists on the interconnection between intellectual property and bankruptcy, less is known about the interplay between biotechnology and bankruptcy. Significant changes have occurred in the U.S. Bankruptcy Code ("Code") in the last three decades resulting in added protections to licensors and licensees with regard to patents for technological goods. Such protections are not sufficient for all intellectual property, however, especially biotechnology.
In general, start-up companies are susceptible to failure.1In our entrepreneurial culture, start-up companies represent ambition, optimism, and a certain level of adventurousness. Such companies are founded on ideas and little else, with few ever making it to a level of profitability.2Specifically, start-up companies specializing in "high-technology" have difficulty both getting off the ground and staying afloat.3Most high-technology companies end up in bankruptcy with little hope of reorganization due to the enormity of financial and developmental problems.4In the wake of failure, the entrepreneurs behind these companies generally walk away with little consequence to themselves for their company's failure.5In fact, most entrepreneurs will move on to the next start-up.6The phrase "high- technology" generally refers to advanced scientific and mathematical methods used in dot-com innovations and software creations. The phrase also refers to biotechnology, which is a unique type of business because an entrepreneur cannot walk away as easily from the company.7Rather, an entrepaneuer will likely experience the same problems and setbacks in his or her new start-up biotech company.8Unfortunately, this works as a deterrent to creative and scientific developments, something a new approach under the Code could help overcome.
Part I of this Comment will discuss the nature of the biotechnology industry and how the industry is driven by intellectual property.9Part II delves into the issues affecting biotechnology, including the industry's inherent risks.10Part III explores the interplay between bankruptcy law and intellectual property, with an emphasis on the inadequate protection the Code provides to patent licenses, and Part IV explains how the interplay has resulted in a circuit split.11Finally, Part V of this Comment will address the various solutions to the circuit split and proposes a novel approach to the problem which may solve the inconsistencies in the Code.12
I. THE NATURE OF THE BIOTECHNOLOGY INDUSTRY
A. Definition of the Industry
"Biotechnology" does not have a uniform definition among industry experts.13The term is too diverse and diffuse for any definition to be wholly satisfactory and complete. Perhaps the simplest definition is "[t]he application of biological knowledge and techniques to develop products."14This definition derives from the analysis of biotechnology's root words-"bio" and
"technology."15Bio means the use of biological processes, while technology refers to problem solving or the making of useful products.16The most widely accepted definition, from the Biotechnology Industry Organization, is "a collection of technologies that capitalize on the attributes of cells, such as their manufacturing capabilities, and put biological molecules, such as DNA and proteins, to work for us."17
A unique aspect of biotechnology is that it deals predominantly with patents, "the lifeblood of the biotechnology industry."18A patent is defined as "[t]he exclusive right to make, use, or sell an invention for a specified period . . . granted by the federal government to the inventor if the device or process is novel, useful, and nonobvious."19The patent application must meet five statutory requirements prior to a patent issuance.20The five requirements are statutory subject matter, usefulness, novelty, non-obviousness, and enablement and written description.21Once the invention has successfully met all the statutory requirements, a patent is issued and the patent holder has the right to exploit the patent and exclude all others from "making, using, offering for sale, or selling the invention . . . or importing the invention into the United States."22A patent is an extremely valuable right because it essentially gives the patent holder a monopoly under federal law for a statutorily specified period of time.23
One of the most important rights for a biotech start-up is the right to license its patent to others. A patent license is a covenant between parties in which a licensor may not sue a licensee for patent infringement.24A patent licensing agreement also confers other rights to a licensee, such as the ability to "use the intellectual property and technology for the purposes specified in the license agreement."25Venture capitalists are initially drawn to companies owning biotechnology patents.26"Patents . . . motivate inventors to devote their energies to discovery and realization of technological innovations."27
Therefore, the protection of patents through licenses is needed to encourage and fund scientific breakthroughs.28
B. The Importance of Patent Licensing Agreements
Patents are the main assets of the biotechnology start-up because they produce revenue for the company through licensing.29Technology licensing helps start-up biotechnology companies grow because "it allows two sources of resources to be tapped by providing a means by which those with technical superiority and those who have intimate market knowledge can join forces."30
Licensing agreements are unique; they are drafted dependant upon the circumstances between parties.31In many transactions, the licensor has an interest in ensuring the successful application of the technology, while the licensee is responsible for providing monetary compensation for the use of the technology.32Quite often, however, licensing agreements contain cross transfers of technology through which each party essentially becomes a licensor and a licensee.33In either case, the licensing agreements are structured to confer benefits to both parties.34
The benefits that accrue to the licensor include the ability to refocus limited resources on the company's core functions and the opportunity to apply new innovations to varied market areas.35Licensing agreements may also help the licensor geographically widen the area accessible to an innovation and decrease risks associated with introduction of a new product to the marketplace. 36Most importantly, licensing helps small start-up companies generate revenue for research and development while still maintaining some level of ownership over the company's intellectual property.37
The licensee experiences similar benefits from the licensing agreement. Like the licensor, the licensee can potentially "use the license as a basis for the generation of new products, improvements in existing products, or for entry into new markets," minimizing the licensee's investment of time and money.38
Finally, in many cases, the licensee is a competitor of the licensor, and the licensing agreement may provide access to tested and commercially successful technology without requiring the licensee to do its own research and development.39
II. ISSUES SPECIFIC TO THE BIOTECHNOLOGY INDUSTRY
A. Biotechnology Differs from Other Forms of Intellectual Property
Start-up biotechnology companies are affected by issues uncommon to companies producing other forms of intellectual property. First, the length of time needed to develop viable products often acts as a financing hurdle.40As one CEO of a biotech company points out, "[biotechnology] is a unique industry . . . because you have to be willing to start a company that will not produce sales from real products for a minimum of ten, and often fifteen, years."41The regulatory hurdles of the FDA alone can add years to the process.42Such hurdles include multiple preclinical and human clinical trials as well as a pre-market approval application.43In the biotechnology industry, there are currently 370 drug products and vaccines in the middle of the clinical trial process.44These products have the potential to cure some of our society's most devastating diseases, including Alzheimer's disease, AIDS, and cancer, yet most drugs fail to materialize on the market because of FDA hurdles and financial setbacks.45
Second, financing biotechnology companies presents significant challenges for entrepreneurs and investors.46An even more troublesome problem for biotech entrepreneurs and their investors is the high cost associated with research and development because bringing a product to market often requires hundreds of millions of dollars.47Given the risks associated with the industry, including the uncertainty of research and development efforts, most companies have difficulty acquiring the large amounts of financing necessary.48
Financing research and development has always been problematic because research and development are time-intensive and expensive.49Industry losses have increased over the years along with the number of biotechnology companies in existence.50As of 2003, there were 1473 biotechnology companies in the United States.51In that year, the biotechnology industry suffered $5.4 billion in losses.52Venture capitalists, the most important sources of financing for biotech companies, are most susceptible to this loss.53
Arguably, however, the real loss is felt by the public who will likely never benefit from the medical contributions of a new drug, treatment, or device created in the labs of these struggling start-ups.
B. Risks Inherent to the Biotechnology Industry
The biotechnology industry presents an excess of risks for investors. While biotechnology companies struggle tirelessly to develop cutting edge drugs and medical devices...
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