First published in LES Insights
A covenant not to sue for patent infringement did not eliminate the court’s jurisdiction to hear a patent validity challenge as part of a license dispute between the parties.
To avoid requiring courts to render opinions that are merely advisory or preside over matters that have already been resolved, the U.S. Constitution provides Federal courts with jurisdiction only over live cases or controversies. Sometimes, but not always, a covenant not to sue may eliminate the ability to bring a patent validity challenge, such as when it extinguishes the case or controversy in a patent infringement suit. Recently, a Massachusetts court, in Esoterix Genetic Laboratories LLC v. Qiagen Inc., found that a covenant not to sue for patent infringement did not eliminate the ability to bring a patent validity challenge because it did not extinguish the case or controversy in a breach of contract suit arising from a patent license agreement.
The patents at issue, which are directed to methods and test kits for determining the effectiveness of pharmaceutical compounds for treating lung cancer, were originally owned by Genzyme. Genzyme granted DxS, Ltd. a nonexclusive license to manufacture and sell products practicing the patents in exchange for royalties on those sales. In particular, the license allowed sales of diagnostic kits for non-commercial, research use only, until the kits achieved regulatory approval for commercial use. Qiagen acquired DxS and assumed DxS’s rights as licensee under the license agreement. Genzyme sold its rights to the patents and its rights under the license agreement to LabCorp. LabCorp, in turn, created Esoterix, which owned the patents and served as the licensor under the license agreement.
Having respectively acquired the patent rights and a license, Esoterix sued Qiagen for breach of contract and patent infringement, alleging that Qiagen exceeded the scope of the parties’ license agreement by selling diagnostic kits for commercial, non-research use before obtaining regulatory approval. The court granted part of a motion to dismiss by Qiagen, holding that one of the licensed patents was directed to ineligible subject matter and was therefore invalid. Qiagen then asserted counterclaims seeking a declaratory judgment of invalidity of four additional licensed patents.
In response, Esoterix attempted to moot Qiagen’s counterclaims and prevent the patent validity challenge from proceeding by giving Qiagen a covenant not to sue on the patents-in-suit as to sales of test kits "for clinical diagnostic purposes or research purposes." The covenant further provided that it did not extend to rights under the license agreement and did not bar Esoterix from upholding the validity of the patents in response to a challenge by Qiagen. Esoterix argued that the covenant had the effect of eliminating any case or controversy between the parties regarding the licensed patents, including any case or controversy as to Qiagen’s invalidity counterclaims, relying on the constitutional requirement that the facts alleged must show there is a substantial, real, and sufficiently immediate controversy between parties having adverse legal interests for a court to have jurisdiction over a declaratory judgment action.
The Esoterix Decision
The court considered Esoterix’s argument that its covenant not to sue on the patents-in-suit removed any risk that Qiagen would be sued for infringement and thus eliminated any case or controversy supporting Qiagen’s counterclaims for declaratory judgment. As the court explained, however, the covenant not to sue did not eliminate the primary dispute raised by Qiagen’s counterclaims regarding whether it was obligated to pay royalties under the parties’ license agreement.
The court’s reasoning relied on the Supreme Court’s Medimmune decision, holding that a court has jurisdiction to consider claims by a licensee in good standing seeking a declaratory judgment that licensed patents are invalid or that the licensee is not required to make payments under the license because its products do not infringe. Although Medimmune did not involve a covenant not to sue, the court in Esoterix reasoned that Esoterix’s covenant promised nothing more than the license’s grant of immunity from infringement claims during the term of the license.
As the court further observed, the dispute over validity was "still very much alive" because the covenant explicitly reserved Esoterix’s ability to assert its rights under the license agreement and to defend against an invalidity challenge brought by Qiagen.
The court distinguished the present case from cases with patent infringement claims that do not involve related license agreements between the parties or claims for breach of contract. In those cases, a covenant not to sue for patent infringement divests the trial court of subject matter jurisdiction over claims that the patent is invalid because the covenant eliminates any controversy between the parties.
The court also distinguished the present case from another rather unique case where a licensor’s covenant not to sue failed to eliminate a case or controversy as to contractual claims, but the federal court found that it lacked statutory subject matter jurisdiction over the state law contract claims because there was no diversity of citizenship between the parties. In contrast, in this case, the court found that there was diversity between Esoterix and Qiagen and that the amount in controversy exceeded $75,000.
Strategy and Conclusion
This case illustrates that the effect of a covenant not to sue on the ability to raise validity challenges and other issues may depend on the situation and the express terms of the covenant not to sue, and that a covenant not to sue for patent infringement will not necessarily extinguish all related claims. In particular, while a covenant not to sue for patent infringement may eliminate patent invalidity challenges in some instances where no case or controversy remains, it may not eliminate patent validity challenges if the litigation also involves a breach of contract claim based on a license agreement where a case or controversy remains.
Further Information The Esoterix decision can be found here.