Star Scientific Loses New Trial Bid in Reynolds Tobacco Case

Star Scientific Inc. tumbled the most in two years after losing a bid for a new trial in its decade-long effort to extract patent royalties from Reynolds American Inc. on a way to reduce carcinogens in cigarettes.

While the U.S. Court of Appeals for the Federal Circuit in Washington today upheld the validity of two Star patents, the panel said there was no need to retry the infringement case against Reynolds that Star lost in 2009. Chief Circuit Judge Randall Rader said in the 2-1 opinion that a new trial wouldn’t change the outcome as “there was substantial untainted evidence before the jury to support a verdict of non-infringement.”

The patents cover a curing process that prevents “bacterial activity” in tobacco leaves, resulting in the lowest levels of cancer causing nitrosamines, according to Star. The money-losing company, which had less than $1 million in sales last year, has “not been able to monetize their only asset,” Martin Shkreli, chief investment officer of New York-based hedge fund MSMB Capital Management, said after the ruling.

“This is a complete loss for Star and basically makes their business worthless,” said Shkreli, who has trading positions that bet on the stock falling. “Investors have been down this litigation road with Star for five to 10 years and it’s never been fruitful.”

Shares Fall

Star whipsawed in Nasdaq Stock Market trading after the ruling was made public, rising as much as 32 percent before tumbling the most since June 2009. The shares fell $1.19, or 40 percent, to $1.81 at 4 p.m. New York time.

The Glen Allen, Virginia-based company said it’s considering options for “further appellate review.” Star said the validity ruling will allow it to pursue claims “against all prior and future infringers,” including another case it has against Reynolds that had been put on hold pending this appeal.

“We intend to vigorously protect our intellectual property, which we consider to be among our corporate crown jewels,” Star Chairman and President Paul L. Perito said in a statement today.

Star had claimed Reynolds was unable on its own to reduce nitrosamines in tobacco as much as Star could. Star said Reynolds then chose to use the technology without permission as part of an effort to “neutralize” competition. Reynolds denied the claim, challenging validity of the patents.

“We’re very pleased with today’s ruling,” August Borschke, chief patent counsel for R.J. Reynolds Tobacco, said in an e-mail. “R.J. Reynolds did not infringe Star’s patents.”

CigRx, Ariva

R.J. Reynolds Tobacco is the cigarette unit of Winston-Salem, North Carolina-based Reynolds American, the second-largest U.S. tobacco company. Reynolds makes Camel, Winston and Salem brand cigarettes.

The case initially had been thrown out in June 2007 after U.S. District Judge Marvin Garbis said Star deceived the U.S. Patent and Trademark Office to obtain formal rights to the invention. The appeals court reversed that order, setting the stage for the 2009 trial.

Star has said in regulatory filings it’s betting on increased sales of its CigRx products, which are used to decrease the desire to smoke, and is reviewing ways to market its Ariva and Stonewall Hard Snuff products.

The case is Star Scientific v. R.J. Reynolds Tobacco Co., 10-1183, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Star Scientific Inc. v. R.J. Reynolds Tobacco Co., 01cv1504, U.S. District Court, District of Maryland (Greenbelt).

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