COMMERCIAL INSURANCE INSIGHT

                           

Bowman v. Monsanto Co.: What really is being sown?

The U.S. Supreme Court unanimously upheld Monsanto’s patent of a genetically modified seed  against a claim of patent exhaustion by an Indiana farmer, who knowingly bought from a silo soybean seeds intended for consumption with the intention of planting them to produce Monsanto’s Roundup Ready seeds on an off-license basis by weeding out the untreated seeds through  application of Monsanto’s herbicide Roundup, to which Roundup Ready seeds were resistant. The Supreme Court’s Opinion chose not to expansively address the reach of patent protection to self-replicating biologics, limiting their decision to the facts of this case. If Mr. Bowman did not have intent to replicate the patented seeds the case may not have reached the Supreme Court; although the Court held that such reproduced seeds were copies of patent protected seeds and not subject to patent exhaustion. The case impacts farmers who like Mr. Bowman must pay almost twice as much for Monsanto’s seeds even to use them in more risky late season planting. In the New York State Assembly there is proposed AB 5323, which if passed would create an affirmative defense against infringement if there is a showing of a lack of knowing and intentional introduction of genetically engineered or modified organisms into the farmer’s plants, seeds, or on the farmer’s property, without the farmer’s knowing gain from that introduction. Inadvertent or unknowing usage of generic seeds that are stacked with other patented  traits might pose liability or expense to farmers. Such stacking is common.

The Supreme Court did not have to grant certiorari in this case. Roundup Ready seeds, which account for  about 90% of the U.S. soybean seed market, is effectively coming off patent in 2015. This domination of the soybean seed market accounted for farmer Bowman’s strategy of ultimately producing plants with only Roundup Ready (glyphosate resistant) seeds, by purchasing commodity seeds and applying Roundup (glyphosate) to eliminate non-Roundup Ready seeds. Monsanto’s lawyers had not thought of this strategy and did not  limit secondary sales and later plantings, nor  address the risk in its contract with Mr. Bowman. Mr. Bowman complied with his license agreement connected to his purchase of Roundup Ready seeds, so only the secondary purchase of commodity seeds were in issue. It is not clear if Monsanto  amended its contracts after suing Mr. Bowman to limit its downside from secondary sale of commodity seeds. Monsanto clearly would have lost money if Mr. Bowman won the case, but the loss could have been mitigated and Monsanto more than recouped its investment.

The back story to the Court’s decision is the regulatory system supporting the $40 billion annual biotech agricultural export system of genetically modified grains. It is dependent upon Monsanto and other patent holding signatories to the Accord that the Biotechnology Industry Organization (BIO) and the American Seed Trade Association (ASTA) crafted in 2010. Regulatory import approvals must be maintained with foreign markets to export. Accord signatories (“Proprietary Regulatory Property Holders”) agree under the Generic Event Marketability and Access Agreement (GEMMA) to give access to proprietary regulatory approvals and data, either cost-free until generic providers assume responsiblity; subject to a joint responsibility agreement; or cost-free only for seven years. In the case of Roundup Ready, Monsanto will stop responsiblity after the seven years (i.e., 2021). Generic producers will have to undertake the time and considerable expense of convincing U.S. and foreign governments of the safety of their seed, or reach an agreement with Monsanto, who controls the data. At present there is no simplified regulatory approval system for generic biotech agriculture as there is for pharmaceuticals. Product development and regulatory approval in the seed industry is between seven to ten years, so Monsanto has considerable leverage.

When Roundup Ready 1 (RR1) comes off-patent it will be the first time a major biotech plant patent has gone generic. Monsanto will only market Roundup Ready 2 at that point, so farmers are saving RR1 seeds for its one planting year life and will not run afoul of their contract with Monsanto. As engineered “terminator seeds” second generation RR1 seeds are sterile, so Monsanto’s licensing program was necessarily annually renewable. Dupont Pioneer has variety plant patents which it still can and will assert after Monsanto’s genetic patent on RR1 ends. Another limiting factor for farmers is that there is an increase in glyphosate resistant weeds which may make Roundup and therefore Roundup Ready seeds less useful to farmers, unless augmented by new products and genetically engineered seeds. Stacking old seeds coming off patent, with new traits, creates an evergreen effect for expiring patent holders.

An inside baseball aspect of the Bowman case is that Justice Kagan read the Opinion of the Court. She was no stranger to Monsanto or Roundup Ready, having submitted an amicus brief in support of a Monsanto’s position to the Court on behalf of the U.S. government as Solicitor General of the U.S. (Monsanto Co. v. Geertson Seed Farms).  While it was her  professional duty as a lawyer to do so and the brief concerned a procedural issue about the appropriateness of the lower courts’ award of injunctive relief based on their understanding of irreparable harm, it is surprising given the lopsided result in the Bowman case why she had not recused herself, to avoid any appearance of conflict and chose to deliver the Opinion in Bowman.

The Monsanto Roundup Ready alfalfa case for which Solicitor General Kagan offered the government’s brief, concerned a  District Court judge injunction against growing genetically modified alfalfa until the USDA conducted a proper environmental assessment of the cross-pollination risk and made a final determination whether to deregulate such alfalfa because it did not present a plant pest risk.

The risk of future court enjoinment was permanently stopped by Congress in March, 2013 when HR 933, the appropriations Bill that kept the government functioning, was enacted. Section 735 of that Bill, in what has been dubbed “The Monsanto Protection Act”, permits farmers and other users to continue to use such genetically engineered organisms by allowing the Department of Agriculture to issue temporary permits despite court injunctions, while it undertakes environmental impact analysis.

The U.S Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS) on May 10, 2013 surprisingly announced it would require environmental impact statements (EIS) for two genetically crops resistant to herbicides Dicamba (Monsanto/BASF) and 2,4-D (Dow). Both of these would augment Roundup by killing weeds that have become resistant to glyphosate. It will take a year or longer for the EIS, so if approved, planting will not occur until 2015, when Roundup Ready comes off patent. If approved, there will likely be lawsuits, but given Section 735 under H.R. 933, temporary permits could be issued despite any court injunction. Farmers could also continue to spray the herbicides, which the EPA has permitted since the 1940s. APHIS’ authority under statute is only to evaluate the plant risk from genetically engineered crops, not the risk to humans, for which the USDA and EPA have more authority. 2,4-D was along with the more active 2,4,5-T an ingredient in Agent Orange and some studies have found some linkage to non-Hodgkin’s lymphoma. Both herbicides are prevalent and long used without definitive evidence of human health risks.

Genetically engineered herbicide resistant seeds increase the appeal of the related herbicide and from a health standpoint may not present a greater human or animal exposure than the herbicide already applied to the plant. These genetically modified plants are pervasive in feed and food, given market shares of about 90% and possible seed contamination.

Will a generic Roundup Ready soybean seed market be an insurable market? Monsanto presented a homogenized risk, with extensive data, and a capital base to self-insure. The pervasiveness of the genetically engineered seeds and of glyphosate to a limited extent in drinking water, creates the classic toxic tort and environmental occurrence and allocation issue from a potential latency standpoint. For a generic manufacturer, on a market share allocation basis, Monsanto would likely continue to be the proverbial deep pocket. Recall and other regulatory expense risks would be inherent in new product production and distribution. Internationally, foreign countries may have their own companies manufacturer generics, if there is less resistance among their populace. This could reduce the importance of GEMMA for those countries. About a quarter of Roundup Ready seeds are exported to China. Generic manufacturers may also limit production and distribution to countries which are less litigious than the U.S. if there is sufficient scale. Monsanto may offer these countries low-priced or free seeds to maintain market control.

Generic bio-agriculture is an insurable exposure worth considering. In developed countries there is fear about such products which may enable a higher premium than merited by the risk.

I welcome your thoughts and questions.

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Brooks

Contact: bwcounsel@gmail.com