Star Scientific: The Sore Loser In Their Reynolds Tobacco Patent Suit

Includes: RAI, RCPI
by: Microcap Speculator

After over a year wait, Maryland district court judge Marvin Garbis all but ended Star Scientific's (STSI) attempt to reap huge patent royalties from tobacco giant Reynolds American Inc. (NYSE:RAI). The lawsuit accused Reynolds of infringing a patent owned by Star Scientific for its so-called StarCure method of curing tobacco.

Judge Garbis ruled that the main patent claims were invalid because they were indefinite as a matter of law (in other words, there was not enough of a dispute to put this issue to a jury). He also found that the actual patent date was September 15, 1999, not the 1998 date when Star Scientific filed a provisional application. This is important because Reynolds claims that farmers were already using the method in the summer of 1999, and a patent cannot be granted if its teachings are already being practiced.

Of course, Star Scientific immediately posted a press release stating it will appeal. However, there are so many hurdles it must overcome that, taken as a whole, they seem insurmountable:

1. Star Scientific must convince the Federal Circuit Court of Appeals that Judge Garbis was incorrect in finding the claims indefinite as a matter of law. I understand the Federal Circuit reverses around 40% in patent cases, so this is an uphill battle but not a long shot.

2. Star Scientific must prevail on the inequitable conduct issue. Reynolds and Star had a mini-trial on this issue, which essentially claims that Star was dishonest in its patent application to the Patent and Trademark Office. I didn't follow that trial and have no opinion on its likelihood of prevailing. Star's press release says that the judge will rule on this issue within the next few weeks.

3. If Star prevails on the inequitable conduct issue and wins its appeal there will be a jury trial on: (a) whether the method was practiced by any farmers before September 1999; (b) whether Star disclosed the "best mode" of accomplishing the StarCure method in its patent; and (c) whether Reynolds infringed the patent. Star must win on all these issues, plus the appeal and the inequitable conduct ruling to establish infringement.

This epic battle will drag on for a few more years, but as far as I'm concerned, its over. Star lost. I don't see an investment case there even after it lost more than half of its value.


Disclosure: Author has no position in STSI or RAI.