Medtronic to Pay $1.3 Billion to Settle Spine Patent Dispute

Michelson: Settling, big time.

Medtronic Sofamor Danek (Memphis), the spinal business unit of Medtronic Inc. (Minneapolis), has agreed to pay $1.3 billion to Gary Karlin Michelson, MD, a Los Angeles-based orthopedic surgeon and inventor, to settle a long-standing patent dispute. In settling the case, Medtronic gains access to Michelson’s portfolio of spinal product patents, currently valued at $800 million. The agreement also includes $550 million to settle all outstanding legal claims between the two parties.

Under the terms of the settlement and subject to certain exclusions, the ownership of all inventions related to the diagnosis and treatment of the spine conceived or acquired by either Michelson or his company, Karlin Technology, will transfer to Medtronic for 15 years. The transaction is expected to close within the next few months, subject to regulatory review.

Michelson licensed some of his patents to Sofamor Danek beginning in 1993. The company was acquired by Medtronic in 1999 for $3.2 billion. Shortly after the acquisition, Michelson sought to renegotiate royalty payments from Medtronic in light of its growing sales of spinal products. When Medtronic balked, Michelson began to shop his patents to other manufacturers.

In 2001, Medtronic brought suit, seeking $800 million for breach of contract. Michelson countersued for $1.7 billion. The case was settled in October 2004 when a federal jury awarded Michelson $510 million in punitive and compensatory damages. However, the financial aspect of that settlement will be replaced by the current agreement.

Michelson holds more than 600 U.S. and foreign patents related to spinal implants and surgical instruments. While he has his critics, many of whom consider him an opportunist who has used his patents to hold up the advance of spinal products, others credit him with developing methods and devices that are used in 60–80% of spinal surgeries performed today.

Following announcement of the settlement, Michelson said that he plans to work with Medtronic on innovative products for future growth while exploring new developments, including compounds that generate bone and cartilage growth. He is also considering the establishment of a medical foundation for back pain and spinal disease.

Medtech industry analysts generally hailed the agreement, seeing it as a strategic victory for Medtronic and a brilliant move that removes the burden of protracted litigation. The settlement provides Medtronic with a decided edge over its competitors, enabling the company to aggressively pursue the development of next-generation technologies in the high-growth spine market.

MSD’s Demane: Improved focus.

Michael Demane, president of Medtronic Sofamor Danek, said that the acquisition of Michelson’s patents “allows Medtronic to place its full focus on improving the lives of patients . . . and expanding our innovative portfolio of products for patients suffering from spinal disorders.” Demane said Medtronic has spent $25 million to $30 million over the last several years in legal fees associated with the ongoing patent dispute.

Medtronic Sofamor Danek holds an estimated 45% of the spinal device market and generated $1.76 billion in revenues in 2004—19.4% of Medtronic’s total revenue of $9.1 billion. The company’s 2004 revenues represent an increase of 31% over 2003 revenues of $1.35 billion.

© 2005 Canon Communications LLC

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