US Supreme Ct: Naturally Occurring DNA is Unpatentable Product of Nature

Today, Supreme Court: Naturally Occurring DNA Unpatentablethe U.S. Supreme Court ruled that naturally occurring DNA is a product of nature and, as such, is not patentable. Association for Molecular Pathology v. Myriad Genetics, Inc., No. 12-398 (U.S. June 13, 2013). However, according to the Court, complementary DNA (cDNA)—which is a synthetic gene construct that contains the same protein-coding nucleic acid base pairs found in naturally occurring DNA but omits the non-coding regions of a gene—is patent eligible because it is not naturally occurring. The Court delivered its ruling in the context of a challenge to patents that Myriad Genetics obtained after discovering the precise location and sequence of the BRCA1 and BRCA2 genes, mutations of which can dramatically increase the risk of breast and ovarian cancer in humans.

Supreme Court: Naturally Occurring DNA UnpatentableThe Supreme Court has previously held that “anything under the sun made by man” can be patented if it meets the Patent Act’s criteria of novelty, usefulness, and non-obviousness. However, the Court has long recognized that a product of nature–in simplified terms, a naturally existing composition of elements and materials–is not patentable. Determining whether a claimed invention is really a product of nature has often proved difficult for lawyers, patent examiners, and judges.

In the present case, Justice Clarence Thomas, who wrote the Court’s majority opinion, held that merely isolating the specific BRCA1 and BRCA2 genes did not constitute a patentable invention: “Myriad found the location of the BRCA1 and BRCA2 genes, but that discovery, by itself, does not render the BRCA genes . . . patent eligible.” According to the Court, “Myriad did not create anything. To be sure, it found an important and useful gene, but separating that gene from its surrounding genetic material is not an act of invention.”

The Court determined that cDNA is not inherently unpatentable because it is not a product of nature:

cDNA does not present the same obstacles to patentability as naturally occurring, isolated DNA segments…. [C]reation of a cDNA sequence from mRNA results in an exons-only molecule that is not naturally occurring…. [T]he technician unquestionably creates something new when cDNA is made. cDNA retains the naturally occurring exons of DNA, but it is distinct from the DNA from which it was derived. As a result, cDNA is not a “product of nature” and is patent eligible under §101 [of the Patent Act], except insofar as very short series of DNA may have no intervening introns to remove when creating cDNA. In that situation, a short strand of cDNA may be indistinguishable from natural DNA.

Justice Thomas’s opinion notes three important limitations on the Court’s holding. First, there were “no method claims before this Court.” Thus, if Myriad had “created an innovative method of manipulating genes while searching for the BRCA1 and BRCA2 genes, it could possibly have sought a method patent. Second, the Court observed that the case did “not involve patents on new applications of knowledge about the BRCA1 and BRCA2 genes.” Third, the Court did not consider “the patentability of DNA in which the order of the naturally occurring nucleotides has been altered.” Instead, the Court’s primary holding was limited to the proposition “that genes and the information they encode are not patent eligible under §101 [of the Patent Act] simply because they have been isolated from the surrounding genetic material.”

by Shawn N. Sullivan, June 13, 2013.

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Spanish Plant Variety Rights Litigation Continues

Spanish Plant Variety Rights Litigation ContinuesAccording to news reports, an appellate court in Granada, Spain recently affirmed a lower tribunal’s denial of a request by Swiss multinational Syngenta for provisional measures against a company it claimed was infringing Syngenta’s European Community plant variety rights. Syngenta con Kumato vs Ekologic Seeds con Tomachoc, Teleprensa (May 9, 2013). Syngenta, however, notes that the case is not over.

Plant Variety Rights Litigation ContinuesSYNGENTA’S CLAIMS. Syngenta sought to prohibit Almería-based Ekologic Seeds from selling its “SHIR” (or “TOMACHOC”) tomato variety on the theory that SHIR was essentially derived from Syngenta’s KUMATO-branded tomato products, which are grown from hybrid tomato plants of the protected varieties SX387 and/or OLMECA.  However, in a November 15, 2012 decision, the Juzgado de lo Mercantil de Granada rejected Syngenta’s request.

RULING OF THE PROVINCIAL COURT. Syngenta appealed the lower court’s order to the Provincial Court of Granada. In an April 19, 2013 decision, the appellate court dismissed the appeal. According to accounts of the decision, the court found no evidence that Syngenta’s OLMECA or SX387 varieties were used in the breeding efforts that led to the development of the SHIR/TOMACHOC variety. In addition, European Union officials purportedly compared Ekologic’s products with those of Syngenta and  found  88.20% similarity. Such similarity is considered within the range of an acceptable degree of differences for a single group of varieties. The Provincial Court thus determined that the differences between the accused tomatoes and Syngenta’s protected varieties were “significant.”

CONTINUING CLAIMS. In the wake of the Provincial Court’s decision and publicity surrounding it, Syngenta has publicly noted that the appellate decision did not terminate its litigation against Ekologic in its entirety. Syngenta defiende sus derechos de propiedad sobre el Kumato, ElAlmeria.es (May 23, 2013). Syngenta declared that it intends “to defend vigorously its rights and all its products by all means at its disposal against any varieties that are capable of infringing intellectual property rights for its plant varieties.”

COMMENT REGARDING ESSENTIALLY DERIVED VARIETIES.  The European Union’s Community Plant Variety Rights system grants to the breeder of a new, distinct, uniform, and stable plant variety an intellectual property right whose validity and effect are uniform throughout the EU. See Council Regulation (EC) No 2100/94 of 27 July 1994 on Community plant variety rights, as amended. Among other things, the plant variety right gives its owner the right to exclude other persons from reproducing, conditioning, selling, importing, exporting, or stocking seed of the protected variety without the owner’s authority. Although another breeder may use a protected variety for the purpose of breeding, developing, or discovering a new variety, the owner of the protected variety’s exclusive rights apply to subsequent varieties that are “essentially derived” from the protected variety. As defined in the Community Plant Variety Rights regulation, a variety is deemed to be essentially derived from a protected variety when–

(a) it is predominantly derived from the initial variety, or from a variety that is itself predominantly derived from the initial variety;

(b) it is distinct … from the initial variety; and

(c) except for the differences which result from the act of derivation, it conforms essentially to the initial variety in the expression of the characteristics that results from the genotype or combination of genotypes of the initial variety.

At the time of this writing, the decision of the Provincial Court of Granada was not publicly available. When a copy becomes available, this post will be updated with a more detailed look at how the court addressed the vexing question of essential derivation.

by Shawn N. Sullivan, June 5, 2013.

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Senate Tax Report Details Apple’s Offshore Profit-Shifting Tactics

Apple's Offshore Profit-ShiftingThe report of the U.S. Senate Permanent Subcommittee on Investigations on Apple Inc.’s international tax strategy sheds light on how the company has exploited to maximum effect a number of gaps in the web of national tax jurisdictions. Subcommittee Memo on Offshore Profit Shifting and the U.S. Tax Code – Part 2 (Apple Inc.) (May 21, 2013). Among other things, Apple incorporated two major subsidiaries in Ireland. It transferred certain economic rights to its intellectual property to one of those subsidiaries, enabling that entity to pay a corporate income tax rate of 2% or less. According to the report, Apple’s other Irish subsidiary “has no declared tax residency anywhere in the world and, as a consequence, has not paid corporate income tax to any national government for the past 5 years.” The report states that, through these and other maneuvers, between 2009-2012 Apple succeeded in avoiding US$44 billion in U.S. taxes on otherwise taxable offshore income.

For a lawyer with an interest in international taxation, the report evokes a sense of awe at the skill with which Apple appears to have gamed the system. However, that sensation quickly fades when, as a taxpayer in a nation becoming increasingly mired in debt, one considers the long-term effects on the public fisc of the loss of those revenues.

 

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Beware Trademark Invoice Scams

Trademark Invoice ScamToday a friend asked me about two invoices his company recently paid for “trademark registration” by very official-sounding entities in the Czech Republic and the Slovak Republic. He essentially wanted to know how frequently the company would be billed for keeping its marks registered. Unfortunately, I had to explain that his company had been misled, and that scam artists have been fleecing U.S. and European companies with this stunt for the last 2-3 years.

The misleading elements of trademark invoice schemes vary. However, the targets are generally small businesses that have recently registered trademarks somewhere in the world. They receive an invoice that appears to be from a government agency, written in very confusing language evidently meant to look like legalese. The invoice demands payment of a fixed sum of money in exchange for something relating to registration of a trademark. In my friend’s situation, the “something” is explained in the small print of one of the invoices to be “registration of your international trademark application in our Internet database,” and in the other invoice to be “access of the client in the catalog on the provider’s portal.” From reading what others have reported on these schemes, it appears that the “registration” refers to including the trademark owner’s mark in the invoicing company’s privately-owned database. It does not mean that the mark will actually be registered in a public trademark office anywhere or that the fees will be used to maintain an existing registration.

Several official trademark offices have posted warnings about misleading trademark invoices:

OHIM Warning

USPTO Warning

WIPO Warning

There are similar schemes dealing with the registration of domain names. If you receive an invoice relating to trademarks or domain names, you should read it very carefully. If it contains the words “offer” or “solicitation,” the invoice is almost certainly not what it appears to be at first glance. Also, regardless of the language used in the invoice, you should research and attempt to contact the organization that sent it. You may also make an inquiry about the invoice with the public trademark office where you’ve registered your marks. And, of course, if you have access to legal counsel, have your attorney look into the validity of the invoice.

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Plant Variety Rights Case: Court Orders Claimant to Return Seized Items

Dutch Court Dismisses Plant Variety Rights Infringement ClaimsIn an opinion issued April 25, 2013, a Dutch court in the city of Roermond found no basis for plant variety rights infringement claims brought by the Anti-Infringement Bureau for Intellectual Property Rights on Plant Material (AIB), a Brussels-based association that represents major companies in the vegetable seed industry. See Anti-Infringement Bureau for Intellectual Property Rights on Plant Material v. Novisem B.V., No. C/04/l220l3 / KG ZA 13-63 (Roermond Civil Court Apr. 2013). AIB contended that Dutch vegetable seed company Novisem B.V. had infringed plant variety rights relating to  three celery varieties known as Diamond, Brilliant, and Prinz. Novisem is described by the court as “a breeding company engaged in development, production and sale of seeds of celery, chicory, gardening and pole beans.” The variety rights to the Diamond, Brilliant, and Prinz varieties are owned by two of AIB’s member companies, Nunhems B.V. and Bejo Zaden B.V.

Court Orders Return of Items Seized in Plant Variety Rights Infringement CaseOn March 18, 2013, after obtaining court approval, AIB effectuated a seizure of evidence at Novisem’s premises in Baarlo, the Netherlands. At that time, FreshPlaza.com quoted AIB’s managing director, Casper van Kempen, as saying that, “Cases like this cost time, but this seizure shows our determination to stop alleged infringements.” See Netherlands: Alleged infringement on plant variety rights seizure at seed company Novisem.

AIB contended, among other things, that the seizure showed that Novisem was unlawfully reproducing plants of the protected varieties for sale. Novisem defended that it was availing itself of the “breeder’s exemption” to plant variety protection, which permits a breeder to use protected varieties as the sources of initial variations to create new varieties of plants. AIB argued, however, that Novisem possessed significantly more plant material than was required for breeding purposes. Novisem presented to the court statements by its breeders, which contradicted AIB’s assertions. On this point and others, the court agreed with Novisem.

Dutch Court Orders Return of Materials Seized in Plant Variety Rights Infringement Case
Correction Notice Printed on AIB’s Website

In its April 25 ruling, the court found “no reasonable grounds” for the claim that Novisem had infringed the purported plant variety rights. The court ordered AIB to return to Novisem return all of plant samples and copies of data seized from Novisem, and to pay Novisem €15,575, representing Novisem’s costs and counterclaim damages. The court also directed AIB to place a correction on its website–a mandate that AIB fulfilled by posting the “Rectificatie” notice illustrated in this article.

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Hearing Scheduled on IRS Colleges & Universities Tax-Exempt Compliance Project

House Subcommittee Hearing on Tax-Exempt Compliance by Universities & Colleges
Congressman Charles Boustany

On May 1, 2013, Congressman Charles W. Boustany, Jr., MD (R-LA) announced that the U.S. Internal Revenue Service’s recent report on tax-exempt compliance by U.S. nonprofit colleges and universities will be the subject of a hearing on May 8 by the U.S. House of Representatives Subcommittee on Oversight of the Committee on Ways and Means. Hearing Advisory (May 1, 2013). The IRS report, profiled here in an April 29 article, summarized the Service’s findings from a study commenced in 2008. According to the report, the IRS detected a high incidence of noncompliance, particularly with regard to declarations of unrelated business taxable income. The Service also determined that institutions were setting executive compensation in the upper bounds of what was legally permissible.

In announcing the hearing, Chairman Boustany said,

Given the importance of nonprofit colleges and universities, it is critical that the Subcommittee continue its review of this segment of the tax-exempt sector. The IRS’s colleges and universities compliance project suggests widespread noncompliance. The Subcommittee has an obligation to explore the root of these alarming findings on the audit of our nation’s higher education providers. This hearing is an excellent opportunity to discuss the results of the compliance project and examine areas for improvement in oversight, with an eye toward comprehensive tax reform.

 

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New IRS Report on Tax-Exempt Compliance by Universities & Colleges

IRS Reports on Tax-Exempt Compliance of Universities and CollegesThe U.S. Internal Revenue Service has released its final report following a multi-year study of tax-exempt compliance by nonprofit universities and colleges. Colleges and Universities Compliance Project Final Report (Apr. 25, 2013). The IRS study, which began in 2008, included a comprehensive questionnaire sent to approximately 400 U.S. institutions of higher learning, followed by detailed audits of 34 institutions whose questionnaire responses and Form 990 information returns indicated possible noncompliance with regard to unrelated business taxable income and executive compensation.

IRS Report on Tax-Exempt Compliance by Universities and CollegesUNRELATED BUSINESS TAXABLE INCOME. Entities recognized as charities under Section 501(c)(3) of the Internal Revenue Code are exempt from U.S. federal income tax  on income that is derived from activities that are substantially related to the entity’s exempt purpose. However, with limited exceptions, charities are subject to unrelated business income tax (UBIT) on income that is not substantially related. In its universities report, the IRS disclosed that 90 percent of the institutions that were audited had understated the amount of UBIT for which they were liable, amounting to a total of US$90 million in unpaid taxes. The IRS attributed the understatements to a variety of errors by the universities, including (a) improperly reducing their net taxable income by net operating “losses” from activities that were, in fact, tax-exempt–a fact that rendered the losses ineligible to offset profits derived from unrelated business activities; (b) incorrectly deducting from their profits expenses incurred in activities that were not directly connected with the unrelated business activities; (c) errors in computation and substantiation; and (d) erroneously classifying as exempt or not reportable income that was actually subject to UBIT. The IRS identified the following as the revenue sources most often incorrectly characterized by the universities:

  • Fitness, recreation centers and sports camps;
  • Advertising;
  • Facility rentals;
  • Arenas; and
  • Golf.

IRS Reports on Tax-Exempt Compliance by Universities and CollegesEXECUTIVE COMPENSATION. Section 4958 of the Internal Revenue Code imposes “intermediate sanctions” in the form of punitive excise taxes on charities and their top management personnel if the organization on pays more than reasonable compensation to its “disqualified” persons–defined broadly as persons who, during the five year period leading up to the transaction, were in a position to exercise substantial influence over the affairs of an exempt organization.

By regulation, the Treasury Department has established a “safe harbor” procedure for determining executive compensation, which, if followed by the tax-exempt entity, entitles the entity to a rebuttable presumption that the compensation is reasonable.

To come within the safe harbor, the entity must–

  • Use an independent body to review and determine the amount of compensation;
  • Rely on appropriate comparability data to set the compensation; and
  • Contemporaneously document the compensation-setting process in writing.

In its report, the IRS observed that, “[a]lthough most private colleges and universities examined attempted to meet the rebuttable presumption standard, about 20% of them failed to do so because of problems with their comparability data.” In particular, the report concludes that many universities used inappropriate comparability data for the following reasons:

Institutions that were not similarly situated to the school relying on the data, based on at least one of the following factors:  location, endowment size, revenues, total net assets, number of students, and selectivity. Compensation studies neither documented the selection criteria for the schools included nor explained why those schools were deemed comparable to the school relying on the study. Compensation surveys that did not specify whether amounts reported included only salary or included total other types of compensation, as required by section 4958.

The report also notes that the IRS examined the audited institutions’ employee tax and employee returns. The Service identified multiple errors resulting in total assessments for unpaid taxes and penalties in excess of US$7.2 million.

Note: the photographs accompanying this article–of Hoover Tower at Stanford University, the McLauren Building at Massachusetts Institute of Technology, and the Duke University chapel–are used for illustrative purposes only, and are not meant to imply any involvement by Stanford, MIT, or Duke in the events described in the article. The IRS report does not refer by name to any specific universities or colleges.

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Plant Variety Rights: EU Officials Seize Unlicensed Strawberries

Plant Variety Rights Infringement - StrawberriesA fruit industry publication reports that in the last growing season, European Union officials invoked EU customs laws to impound the importation from Egypt of mass quantities of strawberries that infringed the plant variety rights of the University of Florida. See Italy: New seizures of unlicenced strawberries imported to the EU, Fresh Plaza (Mar. 1, 2013). According to Fresh Plaza, Ekland Marketing Company–the exclusive licensee of the University’s Festival, Sweet Charlie, Winter Dawn, and Fortuna strawberry varieties–worked closely with EU customs officials, who “detained dozens of loads of unlicenced strawberries produced in Egypt.”

As explained by Ekland’s Egyptian representative, “Egyptian fruit growers export 30 thousand tons of fresh strawberries each season. University of Florida strawberry varieties now have over 90 percent of the market share for Egyptian strawberry exports.” Although the number of licensed Egyptian growers has increased in recent years, many farmers still grow the protected varieties without a proper license. Johnny Loff, Ekland’s vice president, said that the application of intellectual property customs measures at EU entry points imposes a heavy cost on growers of infringing plants: “Because fresh strawberries are highly perishable, custom’s interdiction creates a huge problem for an unlicensed exporter.”

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Australian Federal Court Upholds Human Gene Patent

Australian Gene PatentA judge of the Federal Court of Australia held that naturally-occurring DNA and RNA sequences isolated from the human body may be patented under Australian law. Cancer Voices Australia v. Myriad Genetics Inc. [2013] FCA 65 (Austr. Fed. Ct. Feb. 15, 2013). The case involved a challenge to Myriad Genetics’s Australian Patent No. 686004 on the isolated BRCA1 gene and corresponding RNA, whose presence in humans indicates a predisposition to breast and ovarian cancer. Notably, Myriad’s US patent on the BRCA1 gene is currently the subject of a patent validity challenge in the U.S. Supreme Court.

Australian Gene PatentBASIS OF THE PATENT CHALLENGE. As explained by the court, Myriad’s patent claims related to “isolated” nucleic acids, which the court defined as “naturally occurring nucleic acid found in the cells of the human body, whether it be DNA or RNA, [that] has been removed from the cellular environment in which it naturally exists and separated from other cellular components also found there.” The challengers contended that Myriad had claimed an unpatentable “product of nature” because the patent did not indicate a substantial difference between the sequences of the claimed isolated nucleotides and the sequences of the same molecules as they exist in human cells. Their argument was that naturally occurring DNA and RNA, even in isolated form, cannot form the basis of a valid patent. The court disagreed.

PRODUCT OF NATURE” INQUIRY FOUND “UNHELPFUL. The court acknowledged that some patent authorities, including the U.S. Supreme Court, hold that “products of nature” are not capable of being patented. However, the court opined that, “in the field of biotechnology in which micro-organisms play a critical role in the development, manufacture and use of diagnostic and therapeutic products and techniques,” it is especially “unhelpful” to view the question of patentability in terms of whether the claimed invention is a “product of nature.” Indeed, Australian jurisprudence recognizes “a clear distinction … between the discovery of one of nature’s laws” –which is not patentable– “and of its application to some new and useful purpose”–which may constitute patentable subject matter.

Australian Gene Patent
Illustration from Australian Patent No. 686004

MANNER OF MANUFACTURE.” According to the court, the relevant inquiry for determining the patentability of Myriad’s claimed invention was whether the claims were directed to a “manner of manufacture” within the meaning of the applicable statute. Citing Re GEC’s Application (1943) 60 RPC 1, and National Research Development Corporation v Commissioner of Patents [1959] HCA 67 (1959), the court explained that “a product that consists of an artificially created state of affairs which has economic significance will constitute a ‘manner of manufacture.’” In the court’s view, this judicially-created definition “does not require the court to ask whether a micro-organism is ‘markedly different’ to something that already exists in nature for the purpose of deciding whether it constitutes patentable subject matter.” The court determined that the prerequisite of patentability–an “altered state of affairs” –may exist even if the isolated nucleotide sequences are identical to those that exist in nature. The court explained that,

In the context of biological material, an artificial state of affairs may manifest itself in different ways. The physical properties of the naturally occurring material may have changed as a result of it having been isolated. But even if the physical properties of the material have not changed, the removal of the material from its natural environment and its separation from other cellular components may still give rise to what might reasonably be described as an artificial state of affairs.

In my opinion the patentability of the isolated nucleic acids referred to in the disputed claims does not turn upon what changes have been made to the chemical composition of such substances as a result of them having been isolated. In particular, the question of whether these substances constitute patentable subject matter does not depend upon the type of chemical bond that may have been broken in the process of isolating them. It is inevitable that some bonds will be broken in the course of isolating nucleic acids, but it is not apparent from the evidence that these will necessarily include covalent bonds.

The court elaborated on the notion that isolation of a naturally-occurring gene by itself is sufficient to constitute a manner of manufacture:

[I]n the absence of human intervention, naturally occurring nucleic acid does not exist outside the cell, and “isolated” nucleic acid does not exist inside the cell. Isolated nucleic acid is the product of human intervention involving the extraction and purification of the nucleic acid found in the cell. Extraction of nucleic acid requires human intervention that necessarily results in the rupture of the cell membrane and the physical destruction of the cell itself. And purification of the extracted nucleic acid requires human intervention that results in the removal of other materials which were also originally present in the cell. It is only after both these steps are performed that the extracted and purified product may be properly described as “isolated” in the sense that word is used in the disputed claims.

CONCLUSION. The court found that its interpretation of the applicable law was supported by recent legislative history, the practice of the Australian Patent Office, and by a 2004 report of the Australian Law Reform Commission regarding gene patents. Accordingly, the court overruled the objections to Myriad’s patent and concluded:

There is no doubt that naturally occurring DNA and RNA as they exist inside the cells of the human body cannot be the subject of a valid patent. However, the disputed claims do not cover naturally occurring DNA and RNA as they exist inside such cells. The disputed claims extend only to naturally occurring DNA and RNA which have been extracted from cells obtained from the human body and purged of other biological materials with which they were associated.

 

by Shawn N. Sullivan, February 28, 2013.

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Montana House Passes Roadkill Dining Bill

Montana Roadkill Dining Law Passes HouseOn February 11, 2013, by a vote of 99 in favor and 1 against, the Montana House of Representatives passed a bill that would allow law enforcement officers in the state to issue permits authorizing the salvaging for human consumption of wild animals accidentally killed by motor vehicles. Montana HB 247. In tongue-in-cheek remarks before the chamber, Representative Steve Lavin introduced the measure as “the first true cleanup bill of this session,” and noted that the proposed law is “affectionately known as the ‘Roadkill Bill.’”

HB 247 provides in part that, “A peace officer may issue permits to applicants for the purpose of salvaging antelope, deer, elk, or moose that have been accidentally killed as a result of a vehicle collision.” As explained by Representative Lavin (who also serves as a state highway trooper), many large game animals are struck by automobiles each year. It has been a practice of many food banks that serve the poor to collect freshly killed animals, clean and dress them, and serve them as food for needy families. Technically, this practice is prohibited by Montana law. HB 247 would legalize such salvage.

The only vote against the bill came from Bozeman Representative JP Pomnichowski, who cited public health reasons for her opposition.

With the House’s approval of HB 247, the bill moves to the state Senate.

An ABC News story on the Montana bill points out that Georgia, Colorado, Illinois, and Indiana already have similar legislation in effect. Montana Bill Would Legalize Roadkill Dining, ABC News (Feb. 21, 2013).

 

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