Dow Chemical 2015 Annual Report Download - page 121

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owned subsidiary of the Company, and other subsidiaries of the Company (collectively, “DAS”) under a 1992 license
agreement executed by predecessors of the parties (the “License Agreement”). In its request for arbitration, Bayer alleged that
(i) DAS breached the License Agreement, (ii) the License Agreement was properly terminated with no ongoing rights to DAS,
(iii) DAS has infringed and continues to infringe its patent rights related to the use of the pat gene in certain soybean and cotton
seed products, and (iv) Bayer is entitled to monetary damages and injunctive relief. DAS denied that it breached the License
Agreement and asserted that the License Agreement remained in effect because it was not properly terminated. DAS also
asserted that all of Bayer’s patents at issue are invalid and/or not infringed, and, therefore, for these reasons (and others), a
license was not required. During the pendency of the arbitration proceeding, DAS filed six re-examination petitions with the
United States Patent & Trademark Office (“USPTO”) against the Bayer patents, asserting that each patent is invalid based on
the doctrine against double-patenting and/or prior art. The USPTO granted all six petitions, and, on February 26, 2015, the
USPTO issued an office action rejecting the patentability of the sole Bayer patent claim in the only asserted Bayer patent that
has not expired and that forms the basis for the vast majority of the damages in the arbitral award discussed below.
A three-member arbitration tribunal presided over the arbitration proceeding (the “tribunal”). In a decision dated October 9,
2015, the tribunal determined that (i) DAS breached the License Agreement, (ii) Bayer properly terminated the License
Agreement, (iii) all of the patents remaining in the proceeding are valid and infringed, and (iv) that Bayer is entitled to
monetary damages in the amount of $455 million inclusive of pre-judgment interest and costs (the “arbitral award”). One of the
arbitrators, however, issued a partial dissent finding that all of the patents are invalid based on the double-patenting doctrine.
The tribunal also denied Bayer’s request for injunctive relief. The arbitration award is not self-executing, and must be
confirmed by a court for it to be enforceable and to have the legal effect of a judgment. On October 16, 2015, Bayer filed a
motion in U.S. District Court for the Eastern District of Virginia ("federal district court") seeking to confirm the arbitral award
(the “federal court proceeding”). DAS opposed the motion and filed separate motions to vacate the award, or in the alternative,
to stay enforcement of the award until the USPTO issues final office actions with respect to the re-examination proceedings. On
January 15, 2016, the federal district court denied DAS' motions and confirmed the award. The USPTO has now issued office
actions rejecting the patentability of all four patents that Bayer asserted in the case. The USPTO re-examination proceedings
remain ongoing. DAS has appealed the federal district court's decision, and DAS has posted a bond to stay enforcement of the
award during the appeal.
The Company believes the arbitral award is fundamentally flawed in numerous respects and is confident that it will be vacated
on appeal once the applicable law is properly applied. The Company continues to believe that Bayer’s patents are invalid for
multiple reasons and that the damages awarded cannot be supported under prevailing patent law, including U.S. Supreme Court
precedent. In addition, the Company anticipates that the USPTO will conclude with a final office action declaring each of the
patents invalid in the pending re-examination proceedings which will provide a strong basis to vacate the arbitral award. As part
of the Company’s review of the arbitral award, the Company assessed the legal and factual circumstances of the case, the record
of the arbitration and USPTO re-examination status, and the applicable law to vacate the arbitral award. Based on this review
and the reasons stated above, the Company has concluded it is not probable that a loss has been incurred and, therefore, a
liability has not been recorded with respect to this matter. While the Company believes it is not probable that a loss has been
incurred, the existence of the arbitral award and the federal district court confirmation of the award indicates that it is
reasonably possible that a loss could occur. The estimate of the possible range of loss to the Company is zero to the
$455 million amount set forth in the arbitral award (excluding post-judgment interest).
The arbitral award will not impact DAS’s commercialization of its soybean and cotton seed products, including those
containing the ENLIST™ technologies.
Other Litigation Matters
In addition to the specific matters described above, the Company is party to a number of other claims and lawsuits arising out of
the normal course of business with respect to product liability, patent infringement, governmental regulation, contract and
commercial litigation, and other actions. Certain of these actions purport to be class actions and seek damages in very large
amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance
policies secured from many carriers at various times. These policies may provide coverage that could be utilized to minimize
the financial impact, if any, of certain contingencies described above. It is the opinion of the Company’s management that the
possibility is remote that the aggregate of all such other claims and lawsuits will have a material adverse impact on the results
of operations, financial condition and cash flows of the Company.