Myriad words have been directed to analyzing the significance of the recent decision by the Supreme Court in MedImmune, Inc. v. Genentech, Inc. Many commentators concluded that the decision opened wide the door for licensees to challenge the validity of a licensed patent without first repudiating the license itself. They argue, therefore, that the decision is likely to have a huge impact on licensors and the value of patent licenses. But this conclusion overstates the case. The Court decided only:
…whether Article III’s limitation of federal courts’ jurisdiction to “Cases” and “Controversies,” reflected in the “actual controversy” requirement of the Declaratory Judgment Act, requires a patent licensee to terminate or be in breach of its license agreement before it can seek a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed.
In other words, MedImmune addressed only whether subject matter jurisdiction would exist to support a cause of action for invalidity if it were asserted by a patent licensee in good standing under the patent license. The Court specifically refused to address the issue of most concern to patent licensors/licensees and others who have followed the case; that is, the scope of licensee estoppel.
As a historical proposition in the patent context, licensee estoppel precluded the licensee of a patent from challenging validity of the licensed patent. In short, a licensee was not permitted to gain the benefits of a license and then challenge the rights of the licensor. The issue of licensee estoppel in the patent context always has been troubling because its application requires the balancing of the contrary and competing demands of plain-vanilla contract law with the federal case law governing patents. On the one hand, contract law generally precludes a contracting party from challenging or repudiating promises made under the contract simply because it is dissatisfied with the terms of the contract. In the patent context, however, there is a policy that requires “all ideas in general circulation to be dedicated to the common good unless they are protected by a valid patent” (emphasis added). It is the tension between these two competing interests that makes the analysis different in the patent context.
However, the MedImmune Court unequivocally refused to focus its analysis of the case on patent licensee estoppel. In fact, the Court specifically held that its decision did not, in any way, supercede prior Federal Circuit law governing licensee estoppel (“We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity—that is, on the applicability of licensee estoppel under these circumstances.”). 127 S.Ct. at 769-70. Nor did the Court address whether a license under which the licensee agreed not to challenge the validity of the license would prevent a challenge to validity.
There long has been an exception to the doctrine of licensee estoppel that applies to repudiating licensees. In Lear, the Supreme Court recognized the importance of the policy against permitting patent protection for ideas that were neither new or novel, and it limited the doctrine of licensee estoppel, refusing to apply it to repudiating licensees, thus permitting them to challenge the validity of licensed patents. 395 U.S. at 668. In other words, if a licensee ceased to pay under the license because it believed the patents to be invalid, it could, in fact, be relieved of its contractual obligations so as to challenge the validity of the patent in a declaratory judgment action.
In refusing to express an opinion on whether Lear should be extended to protect a non-repudiating licensee so as to similarly relieve it of its contractual obligations during a successful challenge to patent validity, the Supreme Court opened the door to such a finding on remand, even though such a conclusion would effectively put an end to the doctrine of licensee estoppel altogether.
For the moment, the controlling authority on licensee estoppel remains Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., a case that clarified the Lear standard, remains the position of the Federal Circuit, and was approvingly cited by MedImmune. That case holds that “a licensee…cannot invoke the protection of the Lear doctrine until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid.” Id. at 1568.
But the Federal Circuit, if again given the opportunity, may take a harder look at the scope of patent license estoppel, at least if it wishes to give any deference to the recent comments by the Supreme Court. The MedImmune opinion should be read in the context of the existing policy that clearly disfavors patent protection for invalid patents. If so, certain language in the opinion might be seen as a prod to the Federal Circuit to provide a vehicle for attacking potentially invalid patents for non-repudiating licensees rather than have licensees, risk everything to challenge obviously invalid patents. For example, the Court, while again confirming that it was taking no stance on the scope of Lear’s rejection of the doctrine of licensee estoppel for repudiating licensee, stated that “is hard to see how the common-law rule [of licensee estoppel] has any application [to MedImmune].” Its rationale was that MedImmune’s promise to pay royalties on patents “which have neither expired nor been held invalid by a court” did not extend to paying royalties on patents that were held to be invalid. This was not, in the Court’s opinion, the same as agreeing to refrain from challenging the patents. Here, as it has done in so many recent cases, the Court is encouraging actions that will eliminate patents of questionable validity.
This sort of encouragement is consistent with its earlier critical comments about the breadth of patent protection in general, and the special rules adopted by the Federal Circuit in patent cases, in particular. For example, the Supreme Court struck down the Federal Circuit’s presumptive entry of injunctions after findings of infringement in eBay, Inc. v. MercExchange, L.L.C., U.S. and, in the process, expressed its concern over the breadth of enforcement being given to patents of questionable validity.
The Supreme Court likewise expressed concerns during the oral argument in the pending KSR Int’l Co. v. Teleflex Inc. (No. 04-1350) over the Federal Circuit’s interpretation of the Graham v. John Deere Co., 383 U.S. 1 (1966) test for obviousness. It certainly suggested that the Federal Circuit’s test permitted an undue broadening of the protection of marginal patents. It is expected that the Supreme Court will rein in patent protection somewhat when it issues its opinion in KSR. With this recent guidance from the Supreme Court, it may be that the Federal Circuit will consider the comments of Justice Scalia when next addressing whether licensee estoppel should continue as a valid doctrine, or whether it should be modified in some fashion, including to permit non-repudiating licensees to challenge the validity of patents.
Despite the Court’s broad statements, the impact of MedImmune should remain relatively narrow in the patent context. Until the Federal Circuit addresses the issue left open by the Supreme Court (i.e., whether a non-repudiating licensee is estopped from challenging validity), the guiding law for district courts will remain Studiengesellschaft and still require patent licensees to repudiate the license to successfully challenge validity of a patent. For now, the fallout of MedImmune is simply that it permits a party to have subject matter jurisdiction to assert invalidity and nothing more. The ball, for the time being, remains in the Federal Circuit’s court. In the interim patent licenses should be mindful of the Supreme Court’s comments that the MedImmune license failed to include a provision forbidding the challenge to patent validity.