Intellectual property practitioners and owners are awaiting what could be a revolutionary decision from the United States Supreme Court in KSR International Co. v. Teleflex, Inc., a challenge to the Federal Circuit Court of Appeals’ teaching-suggestion-motivation test for determining obviousness. In the meantime, two recent patent decisions – while perhaps not as sweeping in scope – merit attention. One decision will affect past and future patent licensing. The other may rein in claims of inducing infringement and spark an independent reason to seek opinions of counsel as to noninfringement and/or invalidity.

Freedom to Challenge Existing Licenses?

Continuing its recent interest in reviewing important Federal Circuit patent decisions, the United States Supreme Court shook up the world of patent licensing with its January 9, 2007 decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. __, 127 S. Ct. 764 (2007). The 8-1 decision, authored by Justice Scalia (Justice Thomas dissented), reversed prior Federal Circuit case law that held a patent licensee who was not in breach lacked the “case or controversy” necessary to bring a declaratory judgment action challenging the licensed patent.

The Legal Landscape Before MedImmune

The Supreme Court’s landmark decision in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), held that a patent licensee is not estopped from contesting the validity of a licensed patent. Federal Circuit decisions had held, however, that challenging a patent’s validity under Lear required the licensee to (i) stop paying royalties, thereby breaching the license, and (ii) provide notice to the licensor that royalty payments have ceased because the relevant patent claims are invalid. Studiengesellschaft Kohle, M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997). The Federal Circuit more pointedly held in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1381 (Fed. Cir. 2004), that a licensee in good standing cannot establish a case or controversy regarding the validity, enforceability or scope of a patent because the license agreement “obliterate[s] any reasonable apprehension” that the licensee would be sued for infringement, thus precluding subject matter jurisdiction.

The Case Below

In 1997, MedImmune licensed an existing patent (Cabilly I) and a then-pending patent application, which in 2001 ripened into the Cabilly II patent. Genentech gave notice soon afterward that it believed MedImmune’s Synagis drug was covered by the claims of the Cabilly II patent, and that Genentech expected MedImmune to start paying royalties for Synagis sales. MedImmune believed the patent to be invalid and unenforceable. Not willing to risk termination of the license agreement, a possible injunction and potential enhanced damages that might result if it refused to pay royalties, MedImmune paid the royalties under protest and commenced a declaratory judgment action. The district court dismissed the action for lack of subject matter jurisdiction based on Gen-Probe. The Federal Circuit affirmed on the same basis.

The Supreme Court’s Opinion

After analyzing the Spartan history of its prior decisions addressing the Declaratory Judgment Act, the Supreme Court held that “[t]he rule that a plaintiff must destroy a large building, bet the farm, or (as here) risk treble damages and the loss of 80 percent of its business, before seeking a declaration of its actively contested legal rights finds no support in Article III.” 127 S. Ct. at 775 (footnote omitted). As a consequence, MedImmune “was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed.” Id. at 777. The Court remanded to the district court for a determination whether, notwithstanding the existence of subject matter jurisdiction, that court should exercise its discretion under the Declaratory Judgment Act to dismiss the case. One issue not determined is the extent to which the licensee estoppel doctrine might stop a case in its tracks despite the existence of subject matter jurisdiction. The Court expressly declined to decide the issue:

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. Cf. Studiengesellschaft Kohle, M. B. H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997) (“[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”). All we need determine is whether petitioner has alleged a contractual dispute. It has done so.

Id. at 769-770 (original emphasis). The extent to which licensee estoppel might limit licensees’ patent challenges – whether to validity, infringement or both – is thus a determination left for another day.

The Decision’s Likely Impact

Until the Federal Circuit or Supreme Court addresses the licensee estoppel issue, savvy licensors and licensees should anticipate MedImmune’s ramifications in negotiating new licenses. Licensors should consider structuring licenses to make challenges unattractive, such as (i) making the license terminable at will in the event of a challenge; (ii) providing for an escalating royalty during the period of a challenge and perhaps an additional escalation if the challenge is unsuccessful; (iii) bundling patents to reduce a licensee’s motivation to launch a challenge; or (iv) front-loading royalties to the extent possible. Licensees should, of course, seek to use whatever leverage they might have to resist such provisions and, if possible, preserve their ability to challenge the patent or at least limit the obligation to pay royalties to only those products within the scope of valid, enforceable and properly construed claims. Licensees should also evaluate whether they should challenge patents that are the subject of any current licenses.

Have Inducing Infringement Claims Lost Some Luster?

Plaintiffs in most patent cases assert not only direct infringement under 35 U.S.C. §271(a), but also indirect infringement under §271(b) (actively inducing infringement) and §271(c) (contributory infringement). A contributory infringement claim is selflimiting, because it requires that an infringing instrumentality have no substantial noninfringing uses. This limitation does not apply to inducing infringement. Moreover, an indirect infringement claim allows for some measure of extraterritoriality, as a foreign seller of an infringing instrumentality or of a thing made using an infringing method (35 U.S.C. §271(g)) can be held liable for infringement without importing, making, using, selling or offering for sale any infringing thing in this country.

Inducement Requires Evidence of Intent – But Intent to Do What?

Unlike direct infringement and contributory infringement, a claim of actively inducing infringement requires that the patent owner prove that the alleged inducer acted “knowingly.” In other words, the patent owner must prove intent. Until recently, however, the precise level of intent required remained elusive because of a split within the Federal Circuit. In Hewlett-Packard Co. v. Bausch & Lomb, Inc., 909 F.2d 1464, 1469 (Fed. Cir. 1990), the court stated that “[p]roof of actual intent to cause the acts which constitute infringement is a necessary prerequisite to finding active infringement.” This statement was commonly understood to mean that proof of intent to cause infringing acts is all that is required in order to establish inducement of infringement. That same year, the Federal Circuit held, in Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544, 554 (Fed. Cir. 1990), that “[t]he plaintiff has the burden of showing that the alleged infringer’s actions induced infringing acts and that he knew or should have known his actions would induce actual infringements.” The Federal Circuit recognized the ambiguity caused by the competing expressions of the intent standard. Insituform Techs., Inc., v. Cat. Contr., Inc., 385 F.3d 1360, 1378 (Fed Cir. 2004) (“there is a lack of clarity concerning whether the required intent must be merely to induce the specific acts or additionally to cause an infringement.”). Still, not until this past December did the Federal Circuit remove the “lack of clarity.”

DSU Clarifies Intent Required for Inducement

In DSU Med. Corp. v. JMS Co., Ltd., 471 F.3d 1293 (Fed. Cir. 2006), the Federal Circuit was confronted with an appeal from a trial in which the jury returned a verdict in favor of the defendant on induced infringement. The plaintiff, DSU, sought a jury instruction that mirrored the language from Hewlett-Packard. Following Manville, the district court instructed the jury that “[t]he defendant must have intended to cause the acts that constitute the direct infringement and must have known or should have known than [sic] its action would cause the direct infringement.” Id. at 1305.

In its decision, the Federal Circuit took the unusual step of deciding the inducement issue en banc (all other parts of the appeal were determined by the three-judge panel). Based in part on the Supreme Court’s understanding of the intent standard (in what is probably dicta) in Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 545 U.S. 913, 125 S. Ct. 2764 (2005), the Federal Circuit held that “the inducer must have an affirmative intent to cause direct infringement.” DSU at 1306. “Accordingly, inducement requires evidence of culpable conduct, directed to encouraging another’s infringement, not merely that the inducer had knowledge of the direct infringer's activities.” Id. (citing Grokster, 125 S. Ct. at 2780; Manville, 917 F.2d at 553). The district court below, therefore, correctly instructed the jury. DSU at 1306.

The Decision’s Likely Impact

Proving an intent to induce another’s infringement, as opposed to merely proving an intent to induce acts that constitute infringement, raises the bar for establishing inducement. The higher bar logically should make inducement verdicts more difficult to achieve. At the same time, the focus on intent to induce infringement may focus new attention on obtaining patent counsel opinions of patent noninfringement and/or invalidity. While recent case law has relaxed the need for such opinions to combat allegations of willfulness, using such opinions to support defense arguments that an alleged inducer did not have the requisite intent may trigger a new rise in their preparation.