MedImmune, Inc. v. Genentech, Inc. (U.S. Supreme Court – January 9, 2007)
Under Federal Circuit law, a patent licensee must breach a license agreement before it can challenge the validity of the patent for which it has a license. This rule, which the Federal Circuit reasoned is necessary because of the “case and controversy” requirement under Article III of the Constitution, has placed patent licensees in a very tough position: either keep paying license fees for a technology that the licensee may feel is not deserving of a patent OR breach the license and seek a declaratory judgment. If the licensee chooses to breach the license agreement while continuing to use the patented technology and then loses a challenge of the patent’s validity, the licensee may have to pay treble damages and may lose the right to use the patented technology, which could be devastating if the licensee depends on the technology for its business.
The U.S. Supreme Court recently helped patent licensees by holding that a patent licensee is not required, insofar as Article III is concerned, to break a license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed. Nevertheless, the decision still leaves many issues and questions unanswered.
For example, the Supreme Court reasoned, “Promising to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity.” Thus, if a license agreement did contain a clause in which the patent licensee promised not to seek a holding that the patent is invalid, a court could determine that such a clause is either enforceable or invalid on its face.
If such a clause is held enforceable, patent holders are likely to begin demanding that licensees promise not to contest the validity of the licensed patents. Of course, this would not assist patent holders that already have license agreements. If a covenant not to contest the validity of the patent is not enforceable, practitioners are likely to look for other means to encourage licensees not to contest the validity of a licensed patent. For example, if a licensee pays a one-time license fee upfront, the licensee is less likely to challenge the patent’s validity because the licensee has no further obligation.
This Supreme Court decision has arguably shifted the status quo in favor of licensees, which may, among other things, cause patentees to demand higher royalties to license their patented technologies. Before this decision, a licensee had to take a larger risk if it desired to challenge a patent and continue using the patented technology. First, the licensee had to breach the license agreement. If the licensee won the validity challenge, it would have gained what it sought—the right to use the technology without paying royalties. If, however, the licensee lost the validity challenge, the licensee could have faced treble damages and lost its right to use the patented technology. In view of MedImmune, however, a licensee may now conceivably challenge a patent’s validity with nothing to lose other than litigation costs while possibly gaining the right to use the technology without having to pay royalties.