In an 8-1 decision, the Supreme Court ruled that a patent licensee need not terminate or be in breach of its license agreement before the licensee can file a declaratory judgment action that asserts the underlying patent is invalid, unenforceable, or not infringed. Medimmune, Inc. v. Genentech, Inc., No. 05- 608 (Jan. 9, 2007). In this decision, the Supreme Court reversed settled Federal Circuit law, and the effect of that decision is that patent licensees in good standing under existing license agreements can challenge the licensed patents without undertaking the risks associated with breaching a license agreement.

The patent licensee in Medimmune was a manufacturer and seller of a respiratory tract disease drug. The patentee had obtained a patent that it claimed covered the licensee’s drug and demanded that the licensee begin to make royalty payments under the parties’ license agreement. The licensee, on the other hand, believed the patent was invalid, and that its product did not infringe the claims of the patent. One of the licensee’s options was to continue to sell the drug and not make the requested royalty payments. That course of action would have exposed the licensee to the risk of a patent infringement action which, if the patentee were to prevail, could have resulted in an order to pay treble damages and attorney’s fees and to enjoin sales of the drug, which accounted for more than 80 percent of the licensee’s sales revenues. Rather than take this approach, the licensee paid the demanded royalties under protest and initiated a declaratory judgment suit.

The federal district court dismissed the suit for lack of subject matter jurisdiction. The Federal Circuit affirmed, based on its previous holding that a patent licensee in good standing cannot establish a case or controversy under Article III of the U.S. Constitution with regard to the validity, enforceability, or scope of the patent because the license agreement dispels any reasonable apprehension that the licensee will be sued for infringement. The Supreme Court acknowledged that in this case there was no risk that the patentee will initiate an infringement suit as long as the licensee makes royalty payments under the agreement. It reinforced the holding that the Declaratory Judgment Act requires 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. It noted that had the licensee stopped making the payments, there obviously would have been jurisdiction, and reasoned that “[t]he rule that a plaintiff must … 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.” The Supreme Court also rejected the patentee’s argument that permitting the licensee to challenge the validity of the patent without first terminating or breaking the agreement altered their deal. Examining the contractual provisions carefully, the Court stated that: “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.”

What This Means For You

The Medimmune decision means that absent specific contractual language, licensees in good standing can initiate declaratory judgment actions concerning a patent’s validity or enforceability (or on non-infringement) while avoiding the risks of an infringement suit. As a result, both patentees and patent licensees should examine their existing license agreements to determine whether those agreements have express provisions concerning the licensee’s ability to challenge a patent’s validity or enforceability. Patentees and patent licenses also must be aware of this possibility when negotiating future license agreements.

In addition, it remains to be seen how lower courts will apply Medimmune to declaratory judgment actions outside of the patent license context. However, its rationale that a licensee need not expose itself to risks arising from a termination or breach of a license agreement before seeking a declaration of contractual rights may have broader implications to other areas. Thus, even those clients who are not parties to a patent license agreement should recognize the possibility that Medimmune may permit parties to file declaratory judgment actions in situations previously thought not to meet the case and controversy requirement. Going forward, those clients should consider whether a contract should be drafted to limit a party’s ability to commence a declaratory judgment action.