In an embarrassing blow to Merck, a federal court judge on Monday decided that Gilead Sciences (GILD) does not have to pay $200 million in damages that was recently awarded in a patent dispute because Merck displayed a “pervasive pattern of misconduct.”

At issue was testimony from a retired Merck patent attorney, who was found to have “lied” repeatedly when recounting events that took place more than a decade ago concerning patents for hepatitis C compounds, according to the 65-page opinion by US District Court Judge Beth Labson Freeman. At the time, Merck held exploratory talks with another company, Pharmasset, about a collaboration.

The judge concluded that the Merck lawyer, Philippe Durette, intentionally gave false testimony during a deposition and a recent trial about his role in those talks. His testimony helped a jury to decide that Merck was responsible for the early discovery work that later led to the development of the Sovaldi and Harvoni pills that are sold by Gilead. And she chided Durette for claiming to have a faulty memory.

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Moreover, Freeman decided Merck supported his “bad faith conduct” by directing him to continue work on Merck hepatitis C patents at the same time he was allowed to participate in due diligence meetings with Pharmasset employees. Freeman found that Merck’s misconduct was “egregious” and included lying to Pharmasset, misusing Pharmasset’s confidential information, and breaching confidentiality.

The issue was raised after a jury trial in March and Gilead was allowed to provide new evidence. (The 65-page opinion is dense, but rich with interesting details).

Patent lawsuits are a regular feature of the American courts, but this case has been closely watched for several reasons. For one, the lawsuit involved two titans of the biopharmaceutical industry, both of which are now slugging it out in the highly lucrative market for hepatitis C treatments. And the outcome of the case held the potential to sway their fortunes, at least to some extent.

After spending $11 billion to acquire Pharmasset in 2011, Gilead virtually struck gold when it launched the first of the Pharmasset hepatitis C compounds, called Sovaldi. The medicine initially sold for $1,000 a pill, $84,000 a year, before rebates, thanks to a patient cure rate exceeding 90 percent. A follow-on drug called Harvoni was later introduced, and combined sales exceeded $20 billion between 2013 and 2015.

Merck sought royalties from Gilead, claiming the Pharmasset compounds closely mimicked the hepatitis C compounds it was researching a dozen years ago, when talks with Pharmasset were held. Gilead filed a lawsuit in response, arguing the Merck patents were invalid. But the judge noted that Durette improperly revised Merck patent filings after participating in talks with Pharmasset and learning about its compounds.

Unaware of these issues, the jury decided that Gilead had infringed on Merck’s patents and was ordered to pay $200 million in damages to Merck. Given the sales generated by Sovaldi and Harvoni, this was a relatively modest sum. But the decision also meant that Merck could seek royalties from Gilead, although it was never clear whether these would be considerable.

A Merck spokeswoman wrote us that “the judge’s ruling does not reflect the facts of the case” and the drug maker plans to appeal. “The compounds and methods at issue in this case facilitated significant advances in the treatment of patients with HCV infection, and achieving these advancements required many years of research and significant investment by Merck and its partners,” she added.

As for Gilead, a spokesman sent us a note saying the company is “pleased” by the decision that “Merck’s patents are unenforceable against Gilead.” The biotech, she continued. “has always believed Merck’s patents are invalid and unenforceable, and we feel vindicated by today’s decision.”

In an investor note, Jefferies analyst Brian Abrahams wrote that the case is likely to generate numerous appeals that will take a year or more to play out. Gilead can be expected to argue that Merck’s patents are invalid and not infringed by Sovaldi, and that both the judge and jury erred in the initial findings during the case. Merck, meanwhile, will continue to deny it had what Freeman called “unclean hands.”

Abrahams posited that Merck may have a slight advantage in appeals courts since they usually give more deference to jury decisions based on facts, at least when it comes to damages and invalid patents. But he also pointed out that Merck “may have a hard time rebounding from the scathing view the judge had of Merck’s attorney’s conduct.”

Leerink analyst Geoffrey Porges calculated that a Gilead victory means the company can avoid a payment of about $700 million, representing a royalty rate of 4 percent.

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