How will startups get needed capital if the licenses they grant can be voided during court proceedings?

WASHINGTON—Steven Mendell says he isn’t worried about the future of his company, Xoma Corp. The seven-year-old Berkeley, California, biotechnology startup firmed up its funding by going public in 1986 and has an agreement with the pharmaceutical giant Pfizer Inc. to help it develop a line of monoclonal antibody-based products to treat septic shock infections.

But Mendell, Xoma’s chairman and chief executive officer, is concerned about other scientist-entrepreneurs who don’t have a dependable source of outside capital to keep their fledgling companies alive. That’s why the 48-year-old Mendell flew across the country earlier this summer to tell Congress it should close a loophole that threatens the ability of thousands of new firms to get their new ideas to market.

The problem, Mendell explained to the Senate Judiciary Subcommittee on Monopolies, is a 1985 ruling...

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