The Supreme Court has ruled that patent licensees do not need to breach their license agreements before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed. MedImmune v. Genentech, No. 05-608 (Jan. 9, 2007). The Court displayed its continued unwillingness to defer to the Federal Circuit and signaled a practical approach regarding challenges to patents. For patentees and licensees, MedImmune calls for extra care in drafting licensing agreements to clearly define licensees’ rights to challenge the underlying patents.

A controversy may exist even without threat of suit

In this case, Genentech asserted that a respiratory drug product from MedImmune infringed its patent. MedImmune denied liability but ultimately agreed to take a license from Genentech. Although MedImmune continued to pay royalties pursuant to its license agreement, it filed a declaratory judgment action arguing that Genentech was not entitled to royalties because the asserted patent was invalid, unenforceable, or not infringed. Genentech moved to dismiss the lawsuit for lack of subject matter jurisdiction, since federal courts cannot issue advisory opinions and have jurisdiction only where there is an actual controversy and cannot issue advisory opinions. In prior cases with similar facts, the Federal Circuit had found no controversy existed because a licensee in good standing cannot have any reasonable apprehension of being sued for infringement by the patentee. Accordingly, the Federal Circuit dismissed MedImmune’s challenge.

In an 8–1 decision, the Supreme Court ruled that an actual controversy existed. While MedImmune had contractually agreed to pay the royalties regardless of the patent’s validity, the Court stated that agreeing to pay a royalty “until a patent claim has been held invalid by a competent body” does not prevent a licensee from questioning the patent’s validity. Moreover, the Court noted that there was no legal or practical reason to require a licensee to breach the license agreement—exposing the licensee to liability or causing damages—before seeking a declaratory judgment regarding that license agreement. Previously, in Altvater v. Freeman, 319 U.S. 359 (1943), the Court had allowed patent licensees who had paid royalties “under protest” to seek a declaratory judgment about the patent’s validity. Signing a license agreement under protest creates a controversy “where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim.” However, in the Federal Circuit case, the court distinguished Altvater as applicable only when the “involuntary or coercive nature” arises from an injunction or governmental compulsion.

Writing for the majority of the Court, Justice Scalia disagreed, stating that Altvater’s facts did not require such a narrow rule. “The 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 the Constitution’s jurisdictional requirements for federal courts. This comment is particularly notable because Justice Scalia, who has authored some of the Court’s major decisions on justiciability, has written that federal jurisdiction requires the existence of an injury to a legally protected interest that is not conjectural or hypothetical. In MedImmune, Justice Scalia stated that MedImmune’s prospective injury was not merely conjectural or hypothetical, even though Genentech had never threatened to sue its licensee in the absence of a license agreement.

Licensees now have more leverage, and patentees will need to negotiate harder for covenants not to sue

As a result, patentees now have much less leverage over licensees who have not admitted the validity, enforceability, or infringement of the licensed patents. In his dissent, Justice Thomas argued that MedImmune entered into the license agreement and paid the royalties, and that the majority was thus wrong to interfere with “voluntarily accepted contractual obligations between private parties.” Genentech argued that licensing is a voluntary agreement whereby a licensee gains immunity from infringement suits in exchange for royalties and a waiver of any right to challenge the underlying patent. Furthermore, the license agreement required MedImmune to pay royalties until a patent claim was held invalid by a competent body.

The majority, however, disagreed with these arguments and echoed the decision in Lear, Inc. v. Adkins, 395 U.S. 653 (1969). Lear held that a licensee is not estopped from challenging a patent despite an agreement to pay royalties until a patent is held invalid. The rationale of Lear is that public policy favors “full and free competition in the use of ideas,” so licensees should have a prerogative to challenge a patent. After MedImmune, courts are unlikely to infer from a license agreement that a licensee has waived the right to sue over the scope or validity of the licensed patent.

Patentees thus should carefully consider whether to grant a license without an express covenant not to sue. Under the license in MedImmune, Genentech could not sue MedImmune for infringement so long as MedImmune paid its royalties and was in good standing. This gave MedImmune the option to decide when and where to challenge the patent in federal court. Because of this asymmetry in the ability to sue once a license is in place, a patentee may be better off initiating an infringement suit in lieu of licensing if infringement is believed to be present by the potential licensee. However, the higher costs associated with litigation are likely to play a major role in the feasibility of such a decision. Alternatively, a patentee might consider a more complex and robust licensing agreement.

As is common in intellectual property cases, the decision here raises new areas of uncertainty at the same time as it resolves other issues. It appears that some time will be needed before we can determine the extent to which the right of private contract will be allowed to prevail over the doctrine supporting a licensee’s right to challenge a patent. In addition, patent owners may pressure Congress to address the above-noted asymmetry.