Every so often a high court decision is rendered that signals a fundamental shift in the patent law landscape. The much anticipated U.S. Supreme Court holding in MedImmune, Inc. v. Genentech, Inc., et al. may very well herald such a shift. Prior to the MedImmune decision, the U.S. Court of Appeals for the Federal Circuit had consistently found that a patent licensee did not have standing to bring a declaratory judgment action to challenge the validity or enforceability of a licensed patent absent the threat of suit for infringement arising from non-payment of royalties or some other material breach or termination of a license agreement. Although it has long been established that a patent owner cannot require a licensee to abandon its right to challenge a patent, it had not been the case that a patent licensee could remain in good standing and enjoy the benefits of the license (including freedom from the threat of suit by the licensor) and at the same time challenge the licensed patent. That has now changed.

In order to bring a declaratory judgment action to challenge the validity or enforceability of a patent, a party must satisfy the criteria for an actual controversy under the federal Declaratory Judgment Act, 28 U.S.C. 2201(a). Under well-established Supreme Court precedent, the presence of an actual controversy within the meaning of the Declaratory Judgment Act depends on whether the facts alleged, under all the circumstances, demonstrate the existence of such a controversy.

The Federal Circuit, by contrast, while paying lip service to the Supreme Court’s totality approach, had employed for the past decade and a half a more “pragmatic” twopart test for use in determining whether there is an actual case or controversy for Declaratory Judgment Act purposes in cases (continued on page 4) involving licensee challenges to the validity or enforceability of its licensor’s patents. Under the Federal Circuit’s narrower test, to establish an actual controversy, a patent challenger was required to demonstrate that (1) the patent owner made an explicit threat or took action toward the challenger that created a reasonable apprehension of being sued for infringement, and (2) the challenger undertook some activity that could constitute infringement. Applying this two-pronged test in a number of decisions involving declaratory judgment actions brought by patent licensees, the Federal Circuit found, in each case, that a licensee in good standing did not have a “reasonable apprehension” of suit and thus could not bring a declaratory judgment act to challenge the validity of its licensor’s patent. It is this line of reasoning that came under fire in the Supreme Court’s grant of cert. in MedImmune.

The License Agreement

In the MedImmune case, MedImmune and Genentech entered into a license agreement in 1997 with respect to certain existing patents and Genentech’s then-pending Cabilly II patent application, purportedly covering MedImmune’s very successful RSV drug, and lead product, Synagis®. After the Cabilly II patent issued in December 2001, Genentech sent MedImmune a letter saying that it believed Synagis was covered by Cabilly II and that royalties would be due under the 1997 license agreement starting in March 2002. Although MedImmune felt that the Cabilly II patent was invalid, unenforceable, and in any event not infringed by Synagis, it paid Genentech royalties “under protest” and reserved its right to challenge the patent. MedImmune later argued that it viewed the letter from Genentech as a clear threat to terminate the 1997 license agreement for breach and to sue for patent infringement if MedImmune did not pay the royalty under the license agreement. MedImmune was never in actual risk of losing the license, however, or of being sued for infringement because it continued to pay royalties to Genentech. To settle the dispute,

MedImmune brought a declaratory judgment action against Genentech in the Central District of California, asking the district court to declare the Cabilly II patent invalid, unenforceable and not infringed by Synagis. MedImmune also sought a declaration of contractual rights and obligations under the 1997 license agreement. The district court dismissed the suit as non-justiciable under the Declaratory Judgment Act, reluctantly following the Federal Circuit’s decision in Gen-Probe, Inc. v. Vysis, Inc. that requires a licensee be in material breach of a license before bringing a declaratory judgment action. On appeal, a panel of the Federal Circuit upheld the district court’s dismissal, affirming the application of its holding in Gen-Probe to MedImmune; i.e., that because MedImmune was a licensee in good standing under no threat or apprehension of suit, it had no standing to bring a declaratory judgment action.

The Supreme Court Decision

MedImmune appealed the Federal Circuit holding to the U.S. Supreme Court. The Supreme Court rejected the Federal Circuit’s “reasonable apprehension” test and took up the issue of justiciability in light of its own precedent. The Court was satisfied that the requirements for a declaratory judgment action would have easily been met if MedImmune had refused to pay royalties to Genentech because the resulting dispute would be clear. The Court then considered the actual circumstances of the dispute. MedImmune had consistently asserted that no royalties were due because the Cabilly II patent was invalid and unenforceable and the company had agreed to pay royalties only “under protest.” MedImmune had also alleged (and Genentech did not dispute) a threat by Genentech to enjoin MedImmune’s sales if royalties were not paid. The Court was satisfied that the factual and legal dimensions of the dispute were well defined by the license agreement and the relationship of the parties and, that but for MedImmune continuing to make royalty payments, the dispute would be fit for judicial resolution. Although the Court recognized that MedImmune’s continued payment of royalties effectively eliminated the threat of being sued by Genentech for infringement, the Court nonetheless found that MedImmune need not put itself in harm’s way to challenge the validity or enforceability of the underlying licensed patent where the resulting dispute is otherwise well defined. Indeed, requiring MedImmune to risk treble damages and risk of losing 80 percent of its business—essentially requiring it to “bet the farm”—does not comport with the purposes of the Declaratory Judgment Act or the Supreme Court’s Article III “case or controversy” jurisprudence. Consequently, the Court found that the Federal Circuit had erred in affirming the dismissal of the case for lack of subject matter jurisdiction. The Cabilly II patent challenge now goes back to the district court for resolution.

The Impact of the Decision

As a result of the Supreme Court’s decision in MedImmune, it now appears that a patent licensee, under the right set of circumstances, can bring an action under the Declaratory Judgment Act to challenge the Patent Licensing (continued from cover) licensed patent, even where the licensee remains in good standing and there is no actual apprehension of being sued for infringement. So, what does this mean for patent holders and licensees? It means licensees have a new weapon in their arsenal: under certain circumstances, a licensee can reap the benefit of a license while at the same time being free to challenge an underlying patent in court without putting the license in jeopardy. Exactly what combination of MedImmunelike circumstances will be deemed sufficient to justify a declaratory judgment action will become better defined by court cases yet to come.

The MedImmune holding clearly leaves patent owners vulnerable and will likely force patent owners to look for ways to discourage licensees from challenging their patents without creating an outright ban on such a challenge. The licensor may be able to negotiate license provisions that discourage the filing of a declaratory judgment action—for example, a provision automatically terminating the license if the licensee files a declaratory judgment action or a provision increasing the royalty rate or otherwise adjusting the pre-challenge license terms after such a challenge. A licensor may also attempt to require the licensee to pay all legal costs of the licensor associated with any declaratory judgment action or bring the action in a licensor-favorable forum. The enforceability of such provisions is an open question in light of the strong public policy favoring patent challenges. Given the stakes, adjudication of these provisions is certain to become the next big legal battleground between licensors and licensees.