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Illumina Says IP Suit Ruling 'Unfortunate,' Will Continue Trying to Invalidate Affy IP

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Hitting the road after suffering a setback in an ongoing patent dispute with Affymetrix, Illumina CEO Jay Flatley told investors at two conferences last week that the official outcome in the case is “insufficiently determinable” and said the firm will try to invalidate the IP at the heart of the dispute.
 
The company will also try to prove that Affymetrix is guilty of inequitable conduct, unfair competition, and of violating US anti-trust regulations.
 
Additionally, Flatley, who called the verdict ”very unfortunate,” told investors that the court would hear these additional claims this summer and, if appeals become necessary, the case may drag out into the middle of 2008.
 
Last week, a jury in the US District Court for the District of Delaware said that Illumina has infringed five Affymetrix patents and must pay Affymetrix $16.7 million commensurate with a royalty rate of 15 percent for the period 2002 through 2005 (see BAN 3/13/2007).
 
Affymetrix sued Illumina in July 2004 in Delaware, where both firms are incorporated, over six patents, later dropping one from the case. A Markman hearing later established 15 claims in the five patents where Illumina allegedly infringed Affy’s IP (see BAN 9/5/2006).
 
In its March 12 verdict, the jury said Illumina infringed 12 of the 15 claims, which caused Affy to request $24.2 million in lost profits in addition to $12.2 million in damages based on a 12-percent royalty rate through 2005. The jury denied the request for lost profits and instead decided that Illumina must pay Affy a 15-percent royalty rate, or $16.7 million, on products sold between 2002 and 2005, according to court documents.
 
At Cowen and Company's Annual Health Care Conference in Boston last week, Flatley sought to convince investors that the verdict was only the first stage in an ongoing legal row between the array rivals.
 
"There will be next phases of this case," Flatley said. "This really was only the infringement and backward damages of this case. Going forward the next phases will include our charges of invalidity and inequitable conduct on these patents, and phase three will include our unfair competition and anti-trust claims."
 
Separately, Flatley told investors at the Cowen conference that an accounting technicality will prevent Illumina from recognizing revenue from sales Solexa’s sequencers (see Briefs). Illumina acquired Solexa in January.
 
In September 2004, Illumina responded to Affy's suit by alleging that the company’s patents are so broad as to be invalid. Last year, in an amended response, Illumina said Affy may have deceived the US Patent Office when it applied for the patents that Illumina has now been found to infringe.
 
Specifically, Illumina alleged in a January 2006 filing that Affymetrix officials had known before filing its patents that Russian and Yugoslavian molecular biologists and informaticists had been working on the technology claimed in the patents, yet "withheld material prior art" when applying for the patents, according to the amended response (see BAN 1/10/2006).
 
Illumina accused Affy of inequitable conduct for allegedly deceiving the patent office, as well as "unclean hands" for unethically suing Illumina for infringement. Illumina also contends that Affy has violated the Sherman Act, a 115-year-old law that prohibits parties from using patents obtained by fraud to obtain a monopoly.
 
Judge Joseph Farnan, who is overseeing the case, said last month that the court would rule on Illumina’s invalidity and enforceability defenses in subsequent trials, which are expected later this year. He also said that the court would address Illumina’s allegations against Affymetrix of unfair competition and antitrust violations.
 
Kevin King, president of life sciences business and executive vice president at Affymetrix, said in a statement that the company remains "confident of our position in the next phases of the trial." Affy declined further comment.
 
Because Affy and Illumina face several subsequent trials, Flatley told another investor group last week that the litigation may not conclude until sometime next year.
 

"We expect it will be sometime in the middle of 2008 before this case is ultimately resolved."

"In the invalidity and inequitable conduct phases, our challenge there was to show that there is prior art existing in advance of these patents and that in some cases that prior art was known and not submitted to the patent office," Flatley said at the Citigroup Small & Mid-Cap Conference in Las Vegas. "After those phases are concluded, then any appeals can begin. We expect it will be sometime in the middle of 2008 before this case is ultimately resolved."
 
Royalties and Settlements
 
Flatley noted that Affy's case was solely focused on Illumina products that were sold through 2005, including assays that have since been upgraded and may not be covered by any future royalty rate. He also hinted that while the products may have accounted for a significant portion of Illumina's revenue in the past, sales of Illumina's next-generation genotyping products, coupled with the launch of new platforms such as the firm's BeadXpress reader and Genome Analyzer sequencing platform, have lessened the impact of the disputed products on the firm's revenues.
 
"The products that were included in the trial that was completed include only products that were commercial through 2005," he said in Boston. "Interestingly, that doesn’t include Infinium II, which is the assay that is used on all of our high-volume BeadChips today."
 
According to Flatley the case covered Illumina's Infinium I assay, its GoldenGate assays, its expression assays, and its scanners. "As of today, the applicability of Infinium II has not been determined. Beyond 2005, these products are a much lower portion of our product line," he said.
 
Flatley added that because of the upcoming trials, Illumina views the "ultimate outcome in the case as insufficiently determinable," and that, pending review from the company's accountants, the firm's current view is that it will not begin putting funding aside for the $16.7 million worth of damages awarded by the jury last week.
 
"Future royalties will be determined subsequent to these additional phases of the case,” Flatley said. “Any projection of what those future royalties could look like is premature at this point."
 
He also said that Affy and Illumina had held talks in the past about potential settlements and future discussions between the two parties are possible. "We had numerous discussions prior to the trial about potential settlements and we were never able to determine a royalty rate that the parties could agree on," Flatley said. "For patents that we don’t believe that we infringe, we were really looking at what was the appropriate deferral of legal cost and a royalty that we thought we could live with going forward to avoid the risks of litigation."

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