On January 9, 2007, the U.S. Supreme Court reversed the Federal Circuit’s ruling requiring a patent licensee to terminate or be in breach of its license in order to seek a declaratory judgment that the licensed patent is invalid, unenforceable, or not infringed by the licensee. MedImmune, Inc. v. Genentech, Inc. et al., 05-608, slip. op. (January 9, 2007). Justice Antonin Scalia delivered the 8-1 majority opinion in this case, and Justice Clarence Thomas rendered the sole dissenting opinion. The broadened ability of a licensee to benefit from a patent’s exclusivity and simultaneously challenge its validity is expected to disfavor patent owners in licensing negotiations. Furthermore, this decision opens the door wider for recipients of “mere offers to license” to request a declaratory judgment of invalidity. Moreover, the pharmaceutical industry may well feel the immediate impact of this decision by permitting more patent challenges by generic drug companies.

MedImmune manufactures Synagis, a drug used to prevent respiratory tract disease. MedImmune entered into a license agreement with Genentech in 1997, covering an issued patent and a pending patent application. The issued patent (Cabilly I) covered chimeric antibodies, and the pending application claimed the coexpression of immunoglobulin chains in recombinant host cells. MedImmune agreed to pay royalties on the sale of a specified antibody that, if not licensed, “would infringe one or more claims of either or both [the currently issued patent and a patent that issues based on the currently pending patent application,] which have neither expired nor been held invalid by a court or other body of competent jurisdiction.” After a patent (Cabilly II) issued corresponding to the pending application in December 2001, Genentech informed MedImmune in a letter that it believed that Synagis was covered by the Cabilly II patent and that royalties would be due starting in March 2002. MedImmune disagreed that Synagis® was covered by the Cabilly II patent, and further, asserted that the Cabilly II patent was invalid and unenforceable.

Because MedImmune believed Genentech’s letter to be a clear threat to terminate the license agreement and enforce the Cabilly II patent against MedImmune if royalties were not paid, MedImmune chose to pay the royalties “under protest and with reservation of all of [its] rights” and pursue the present declaratory judgment action, rather than risking the possibility of having to pay treble damages, to pay attorneys’ fees, and to be enjoined from selling its blockbuster drug should Genentech instigate and prevail in a patent infringement action. Id. at 3.

The district court dismissed the declaratory judgment claims based on Federal Circuit precedent (Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004)) which held that a patent licensee in good standing cannot establish a case or controversy within the meaning of Article III of the Constitution with regard to the patent’s validity, enforceability, or scope because there is no “reasonable apprehension” of an infringement suit. The district court decision dismissing the claims for lack of subject matter jurisdiction was affirmed by the Federal Circuit.

The Supreme Court majority held that MedImmune’s paying royalties to avoid the “imminent injury” of a threatened enforcement action, including treble damages and legal fees, by Genentech did not render nonjusticiable a contractual dispute over the patent’s validity, and the case was remanded for further proceedings. Justice Scalia argued that a party should not be required to “bet the farm,” so to speak, in order to challenge the validity of a patent it has already licensed. Analogy was made to Supreme Court precedent allowing parties to challenge the constitutionality of laws without having to break them first under threat of criminal prosecution.

The Court confirmed its earlier decision in Lear, Inc. v. Adkins, 395 U.S. 653, 673 (1969) that a repudiating licensee need not comply with its contract and pay royalties during a successful challenge to a patent’s validity. The Court did not decide, however, whether a nonrepudiating licensee is relieved of its duty to pay royalties under a license during a successful challenge to a patent’s validity. Instead, the Court merely determined that MedImmune had alleged a contractual dispute that created an Article III case or controversy. The Court relied on its previous decision in Altvater v. Freeman, 319 U.S. 359 (1943), which involved the payment of royalties pursuant to an injunction, to avoid the risk of actual and treble damages in an infringement suit. There, the Supreme Court stated: [T]he requirements of [a] case or controversy are met 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.

Id. at 365. The Court reasoned that the Federal Circuit’s Gen-Probe decision reached too far in distinguishing its facts from the facts and decision in Altvater. “A licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business.” MedImmune at p. 13, n.11. The Court also rejected Genentech’s argument that a license agreement is a patentee’s “insurance policy” that prevents challenges to the patent as long as the licensee pays royalties under the license. (“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.”) Id. at 16.

Justice Thomas dissented, stating that the Court has previously held that declaratory judgment procedures cannot be used to obtain advance rulings on matters that would be addressed in a future case or controversy. He reasoned that neither Genentech nor MedImmune had a cause of action while the royalties were being paid. Accordingly, he asserted that MedImmune’s action was seeking an advisory opinion about an affirmative defense that might be used in some future litigation and that the Declaratory Judgment Act does not allow federal courts to render such advisory rulings. Justice Thomas further argued that the majority opinion wrongly “expands the concept of ‘coercion’ … to reach voluntarily accepted contractual obligations between private parties.” Id. at 7 (Thomas, J., dissenting).

The Court’s decision here is a significant change in the prevailing rule and is likely to result in more patent challenges by licensees, and in more difficulties in negotiating license agreements. Previously, because a licensee who wished to challenge the validity of the patent had to stop paying royalties, but then faced being adjudicated a willful infringer and liable for attorneys’ fees, treble damages, and an injunction, the rule prevented many licensees from challenging the patents. As a result of the current decision, it is likely that licensees will, at the very least, perceive themselves to be at a distinct advantage and will become bolder about challenging the underlying patents and/or will use this case as a means to negotiate or renegotiate more favorable license terms.

This decision also significantly lowers the bar for establishing subject matter jurisdiction for filing an action for declaratory judgment of patent invalidity by non-licensees. The Court noted its disapproval of the Federal Circuit’s “reasonable apprehension of suit” test, which in the past has greatly limited the number of validity challenges in response to a patent holder’s mere invitation to license. The new test to satisfy the case or controversy requirement is an admittedly less than bright line approach as to whether the facts alleged show a substantial controversy between adverse parties, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. Therefore, patent holders must now consider whether an offer to license will expose them to a patent challenge.

Moreover, the generic drug industry in particular will likely make quick and deliberate use of the MedImmune decision in seeking declaratory judgments of invalidity for those patents listed by the brand name company in the FDA Orange Book. In recent years, the right to seek such a determination prior to market launch had been curtailed by the Federal Circuit. This new decision potentially permits generic ANDA drug filers to get an earlier determination of infringement exposure, and in some cases, even trigger accelerated market launch by competing generics, thus making less expensive drugs more readily available to U.S. consumers.