Can Merck resurrect its $200M Sovaldi patent judgment against Gilead at the Supreme Court?

Zachary Silbersher

Merck ($MRK) lost a $200M patent judgment against Gilead ($GILD) after the Court found that Merck engaged in business and litigation misconduct.  Merck is now appealing to the Supreme Court, asking to resurrect that judgment.  Will it prevail?

Gilead sells Sovaldi® for treatment of hepatitis C.  In 2013, Gilead commenced an action for declaratory relief against Merck.  Gilead alleged that it did not infringe two patents owned by Merck directed to treatment of hepatitis C.  Merck demanded a 10% royalty on Sovaldi, but Gilead refused.  The case went to trial, and Gilead lost.   

The jury found that Gilead owed Merck $200M.  Before that happened, however, the Judge tossed the verdict.  Based upon evidence that was before the jury, the Court concluded that Merck had obtained its patents through improper use of confidential information derived from Pharmasset, (a company subsequently acquired by Gilead.)  The Court also found that Merck essentially lied about doing so during the case.  The Court deemed this to satisfy Gilead’s defense of “unclean hands,” and as a result, held that Merck was not entitled to any damages.  Rather, Merck was ordered to pay Gilead’s attorneys’ fees.

The Federal Circuit affirmed the district court’s decision on appeal.  As a result, Merck has now taken the case to the Supreme Court.  At stake is Merck’s attempt to resurrect its $200M in damages, and the likely bigger prize of future royalties on Sovaldi®. 

Merck has now petitioned the Supreme Court to take up this case.  Merck is less concerned with wriggling out of its obligation to pay Gilead’s fees, and more concerned with resuscitating its $200M judgment.  To do so, it wisely frames the case as illustrating a legal issue over which the Circuits are splitting.  Rather than argue that the district court got it wrong, and that Gilead failed to prove unclean hands, Merck takes a different tact that raise its chances of being granted certiorari before the Supreme Court. 

Merck argues that, even if it has unclean hands, that should not have permitted the district court to toss its $200M judgment against Gilead.  That might sound a bit counter-intuitive.  Merck is indirectly admitting it engaged in misconduct in the course of acquiring the patent, but nevertheless arguing that Gilead should still pay $200M for infringing that patent?  Well, yeah, that’s basically what Merck is arguing 

Unclean hands was traditionally an equitable defense, rather than a legal one.  That meant that, if the defendant can successfully show unclean hands, that would preclude plaintiff from being entitled to equitable relief.  Equitable relief is typically an injunction, whereas legal relief is typically damages.  So, in this case, if Merck were seeking an injunction against Gilead’s Sovaldi® based on infringing Merck’s patents, then Merck would not be entitled to that relief if it has unclean hands. 

Here, however, Merck did not pursue any injunctive relief because it does not sell a competing product to Sovaldi®.  Thus, it was stuck with legal relief, in the form of damages.  That’s why it can conveniently argue that, regardless of whether Gilead proved that Merck came to court with unclean hands that Merck should still be able to walk away with $200M. 

Yes, it’s a bit rich of an argument.  But courts have technically split on this issue.  In other words, appellate courts have split over whether unclean hands can preclude legal relief, or just equitable relief.  So Merck is not completely off the reservation. 

Yet, the primary split among the Circuit courts identified by Merck are not concentrated in patent cases.  That could not happen, obviously, because there is only one Circuit court, the Federal Circuit, that has jurisdiction to hear patent cases.  Nevertheless, Merck has not identified this as an issue that different Federal Circuit panels are struggling with.  That waters down the force of its argument that it has identified a Circuit-split, which is one of the typical ways of convincing the Supreme Court to take up a case.

Thus, to bolster its argument, Merck points to a recent Supreme Court decision that addressed the doctrine of laches.  Under the doctrine of laches, a patentee can waive past damages if they effectively sat on their rights, knew about infringement, but waited years to bring suit.  See SCA Hygiene Prods. Aktiebolag v. First Quality Baby Prods., 137 S. Ct. 954 (2017).  Laches, like unclean hands, is also an equitable defense.  In SCA Hygiene, the Supreme Court held that laches cannot bar legal relief for damages.  Thus, argues Merck, this is an instance of an equitable defense being inapplicable to bar legal relief. 

That’s true.  But a principal reason behind the Supreme Court’s holding in SCA Hygiene was that the Patent Statute already provides a statute of limitations for patent damages.  Thus, the statute of limitations already provides a statutory date in the past before which damages cannot be recovered.  There is apparently no corollary to this argument for the application of unclean hands.   

All that being said, Merck’s argument has a basis in the history of the doctrine of unclean hands, which it traces throughout its petition for a writ of certiorari to the Supreme Court.  Yet, the consequences of Merck’s argument, if sanctioned by the Supreme Court, will have consequences far outside its dispute with Gilead.  Merck’s petition to the Supreme Court does not really address these consequences, but they are sure to be considered by the Court. 

At the outset, the idea of permitting Merck to collect damages in this case is a bit troubling.  Merck’s patent attorney violated a firewall, acquired confidential information on a compound being developed by a competitor, and then tailored patent claims to cover that compound.  (While Merck disputed those findings during the case, it is not disputing them in its appeal to the Supreme Court—and so, we can effectively presume them to be true.)  If you can recover patent damages that were the direct result of your breach of an NDA and a firewall, then what sort of moral hazard will that lead to?  And what effect will that have on the willingness of companies to enter into joint-research agreements?  And how will that compromise scientific research?

Also worrisome is that, if unclean hands is held to preclude to legal relief, will that lead to a slippery slope for other equitable defenses.  What about inequitable conduct?  What about equitable estoppel?  Inequitable conduct technically grew out of the unclean hands doctrine.  It basically renders a patent unenforceable if it was procured based upon misrepresentations to the Patent Office.  Given that most patent enforcement outside of the pharmaceutical space does not seek injunctive relief, a moral hazard could arise if patent damages could be collected even for patents obtained by fraud on the Patent Office. 

In short, Merck has pursued a smart legal tactic in its appeal to the Supreme Court, but it remains to be seen whether it will be enough to resurrect $200M in damages—and the bigger prize of future royalties on Sovaldi®.