In its January 9, 2007, opinion in MedImmune, Inc. v. Genentech, Inc., the Supreme Court removed a significant barrier to licensees desiring to challenge the validity or enforceability of patents they operate under. In a near unanimous opinion (Justice Thomas was the sole dissenter), the Supreme Court held that a patent licensee need not breach its license, and thereby risk injunctive and enhanced monetary damages, before seeking a declaration under the Declaratory Judgment Act of patent invalidity, unenforceability, or noninfringement. This ruling reversed Federal Circuit precedent in Gen-Probe Inc. v. Vysis, Inc., which held that there was no case or controversy, and therefore no subject matter jurisdiction, over such patent challenges because a licensee in good standing cannot establish any “reasonable apprehension” of being sued by the licensor.
In 1997, MedImmune entered into a patent license agreement with Genentech. MedImmune agreed to pay royalties on sales of products covered by the claims of issued patents “which have neither expired nor been held invalid by a court.” The license covered an issued patent (Cabilly I) and a then-pending patent application (Cabilly II). Shortly after the Cabilly II patent issued, Genentech expressed its expectation that MedImmune would begin making royalty payments for sales of Synagis, which Genentech believed was covered by the claims of the Cabilly II patent. MedImmune disagreed, believing the Cabilly II patent invalid, unenforceable, and not infringed. MedImmune was reluctant, however, to risk the consequences of breaching the license, which could include an infringement suit by Genentech seeking enhanced damages and an injunction on sales of Synagis, which accounted for more than 80 percent of MedImmune’s revenue. Therefore, MedImmune paid royalties under protest, with reservation of all its rights, and filed an action seeking, inter alia, a declaration that the Cabilly II patent was invalid, unenforceable, and not infringed by Synagis.
The Lower Courts
While MedImmune’s declaratory judgment action was pending, the Federal Circuit decided Gen-Probe, vacating a declaration of invalidity and noninfringement of a licensed patent for lack of subject matter jurisdiction. The Federal Circuit held that licensee Gen-Probe failed to establish a reasonable apprehension of an infringement suit because it was in good standing under its license from the patentee.
Relying upon this precedent, Genentech moved to dismiss MedImmune’s complaint for lack of subject matter jurisdiction. The district court, although expressing “serious misgivings” about the Gen-Probe decision, granted Genentech’s motion. MedImmune appealed, factually distinguishing the Gen-Probe decision based, in part, upon the inherent uncertainty in licensing patents that have not yet issued. MedImmune further argued that “the Gen-Probe decision improperly resurrected the licensee estoppel that was abolished in Lear v. Adkins, and should be overturned.” Relying upon Gen-Probe, the Federal Circuit affirmed the dismissal, noting that MedImmune, like Gen-Probe (and unlike the licensee in Lear), “assiduously avoided” breaching its license and restating the policy reasons underlying both decisions:
The court in Gen-Probe discussed the inequity when the patent owner, having contracted away its right to sue, is in continuing risk of attack on the patent whenever the licensee chooses – for example, if the product achieves commercial success – while the licensee can preserve its license and royalty rate if the attack fails. This imbalance distorts the equalizing principles that underlie the Declaratory Judgment Act.
The Supreme Court Oopinion
Justice Scalia’s opinion begins with an acknowledgement that despite more than 60 years of Declaratory Judgment Act jurisprudence, Supreme Court opinions “do not draw the brightest of lines between those declaratory-judgment actions that satisfy the case-or-controversy requirement and those that do not.” One of the earliest cases stated merely that the dispute must be ‘“definite and concrete, touching the legal relations of parties having adverse legal interests.”’ A few years later, the Court offered a different, albeit less concise, statement: ‘“Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”’
Applying these principles and relying primarily upon the Court’s opinion in Altvater v. Freeman, the Court held that declaratory judgment jurisdiction existed notwithstanding the fact that MedImmune’s own actions, i.e., refusing to breach the license, “eliminate[d] the imminent threat of harm.” In Altvater, the Court allowed a licensee to proceed with a claim for declaratory judgment of patent invalidity while paying, under protest, royalties pursuant to an injunction issued in earlier litigation. The Federal Circuit distinguished Altvater in its Gen-Probe decision because royalty payments were made under compulsion of government injunction, not pursuant to an agreement between private parties. However, in discussing the consequence of failing to pay royalties, the Altvater opinion references no governmental sanctions, only “actual [and] treble damages in infringement suits” by the patentees. The distinction by the Federal Circuit, therefore, was not dispositive. Like the licensee in Altvater, MedImmune alleged facts that, under all the circumstances, showed a substantial and immediate controversy sufficient to establish declaratory judgment jurisdiction. The MedImmune Court expressly based its holding on the parties’ contractual dispute, declining to extend its holding in Lear: [In Lear,] we rejected the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court. 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. All we need determine is whether petitioner has alleged a contractual dispute. It has done so. Analyzing the license, the Court found no “prohibition [in the license] against challenging the validity of the patents. Therefore, jurisdiction exists for MedImmune’s claim that “the contract, properly interpreted, does not prevent it from challenging the patents, and does not require the payment of royalties because the patents do not cover its products and are invalid.”
Implications of MedImmune
While the MedImmune opinion represents a departure from the “pragmatic” two-part test employed by the Federal Circuit for determining declaratory judgment jurisdiction, it is not a momentous shift. It is a re-affirmation, acknowledged in Gen-Probe, of “the inherently fact-specific nature of the question of jurisdiction”:
The difference between an abstract question and a ‘controversy’ contemplated by the Declaratory Judgment Act is necessarily one of degree, and it would be difficult, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy.
Whether you are a licensee or licensor (or, more common, both) of patents, you should be cognizant of facts before, during, and after negotiating a patent license that could affect this jurisdictional question. Use the negotiation process to clearly define if, or under what circumstances, a licensee may challenge a patent, and the consequences of such a challenge. Below are some points to consider in light of the MedImmune decision.
• Expressly preserve the ability to challenge the validity, enforceability, claim interpretation, and ownership of patents.
• If you believe raising the issue expressly will reduce the likelihood of a license or result in onerous terms, address the strategy of relying upon the MedImmune decision and finding equitable reasons why jurisdiction should be found for challenging patents.
• Agree to pay royalties only on products that fall within the scope of properly interpreted, valid and enforceable claims. This presumes the ability to cease paying royalties for altered products, or when newly discovered prior art merits a narrower claim scope, or invalidity.
• Prohibit licensees from challenging validity, enforceability or claim construction of licensed patents. These provisions should be clearly tied to the consideration provided in exchange for the prohibitions.
• Prohibit or restrict other challenges to a patent; i.e., the sufficiency of the specification or proper inventorship. These provisions should also be clearly tied to consideration.
• If the license permits any such challenges to the patent, narrowly define the circumstances under which they are permitted and require continuing compliance with all other terms, such as paying royalties, making reports and marking products.
• If possible, define circumstances under which the licensee waives or is estopped from challenging the patents; e.g., after enjoying the benefits of the license for a certain period of time, or paying a cumulative amount of royalties, or introducing another patented product, or the patent is successfully asserted against a third party.
• Consider carefully how you notify licensees of newly issued patents that you believe create additional royalties or obligations.
• Preserve the ability to terminate the license, and sue for infringement and pursue all remedies, if the licensee challenges the patent (or foreign counterparts) for any reason.
• Consider licensing patents in a bundle to minimize the incentive to challenge a single patent.
FOR BOTH LICENSEES AND LICENSORS
• For cross licenses, consider bundling the patents and making the challenge provisions mutual to minimize risk.
• How will the Federal Circuit modify its declaratory judgment test? The Supreme Court held that as far as Article III jurisdiction was concerned, MedImmune was not required to break or terminate its license agreement before seeking a declaratory judgment attacking the underlying patent. MedImmune, 127 S. Ct. at 777. It also remanded the case for the lower courts to consider the policy arguments on whether they should affirm the dismissal or sustain jurisdiction on discretionary grounds. Id.
• What impact will the MedImmune decision have on other attempts to exercise declaratory judgment jurisdiction? Should a potential infringer/licensee now be permitted to challenge a patent if it is merely offered a license without being accused of infringement? Or if the patent is merely called to its attention? Or if the patent owner initiates litigation against a third party? Or against the licensee in a foreign country but not in the United States?
The best approach now, due to the expanded uncertainty, is to clearly define in license agreements the conditions under which the licensed patents (or other rights) may or may not be challenged.