MedImmune, Inc. v. Genentech, Inc., et al.
The Supreme Court’s decision in MedImmune, Inc. v. Genentech, Inc., et al., No. 05-608 (2007) has created a new course of action for licensees of bad patents. Previous case law, Gen-Probe Inc. v. Bysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), held that a patent licensee in good standing could not file a declaratory judgment action to determine the validity of the patent because the licensee could not establish an Article III case or controversy without a breach of the agreement. However, the Supreme Court in MedImmune held that a licensee need not breach its agreement in order to file a declaratory judgment action insofar as Article III is concerned. Background
Quite often companies take licenses to technology covered by questionable patent claims or by patent applications which have not yet been issued. When a patent application is eventually granted by the U.S. Patent and Trademark Office, the licensee may not believe that a court would consider the patent claims valid. In MedImmune, the parties entered into a patent license agreement which covered an existing patent and a pending patent application. Medimmune agreed to pay royalties on sales of “Licensed Products” defined as an antibody which would infringe one or more claims of a granted patent “which had neither expired nor been held invalid by a court.”
When Genentech’s patent application issued into a patent, Genentech sent MedImmune a letter informing MedImmune that it believed MedImmune’s Synagis, a drug used to prevent respiratory tract disease in infants and young children, was covered by the newly issued patent and that Genentech expected MedImmune to pay royalties. MedImmune thought the patent claims were invalid and considered the letter a threat by Genentech to enforce its patent. However, MedImmune - not willing to risk treble damages, attorney’s fees, and a possible permanent injunction enjoining the sale of Synagis - decided to pay the demanded royalties “under protest” and filed a declaratory judgment action to determine whether Genentech’s patent claims were valid.
The Supreme Court held in MedImmune that “[t]he rule that a plaintiff must destroy a large building, bet the farm, or (as here) 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.” MedImmune “was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed.”
However, the District Court on remand will consider whether the case should move forward since the Declaratory Judgment Act provides that a court “may declare the rights and other legal relations of any interested party,” not that it must do so. Therefore, Genentech will likely try to convince the District Court that it should grant a discretionary dismissal. Additionally, the Supreme Court noted that the District Court may consider any “merits-based arguments for denial of declaratory relief.”
This case and future declaratory judgment suits will likely determine the circumstances under which the courts will allow licensees to challenge validity of a licensed patent. One can immediately envision a few of the questions that future courts will face: 1) can a licensee enter into a license agreement with the intent of later filing a lawsuit seeking a judgment regarding patent validity, 2) during the life of a license agreement, if the patent case law changes bringing into question the validity of a patent claim can a declaratory judgment suit be filed, and/or 3) what fact patterns regarding the demand to pay royalties will rise to the level of being “coercive” enough to permit a declaratory judgment suit.
Recommended Action Items for Licensors and Licensees
In view of the decision in MedImmune, licensees should review their license agreements and their licensed patents in order to determine if it would be prudent to pay royalty fees “in protest” and file a declaratory judgment action. Similarly, licensors/patentees should analyze their patent claims to determine their strength. Patentees should confirm that they have filed well written, fully enabled applications and have obtained well drafted claims of varying scope. Patentees with overly-broad or otherwise invalid claims should consider filing a reissue application to narrow their claims to avoid potentially invalidating prior art. Quite simply, patents with strong claims are less likely to be challenged.
Finally, the decision in MedImmune should be considered when drafting new license agreements. Although wellestablished case law prohibits limiting the licensee’s right to challenge the validity of their licensed patents, one should consider testing the limits of this prohibition with creative language. For example, it is unknown whether a clause which automatically terminates the agreement upon the filing of a declaratory judgment action regarding invalidity of a licensed patent would be prohibited since such a clause could be considered a contractual term rather than a prohibition against a suit. In the future, licensors should also seek increased up-front payments rather than royalty payments over the length of the patent term to decrease the chance of a challenge to the patent. Licensors should attempt to contractually specify that increased royalties or payments would be due if the licensee files a suit and a court determines that the claims are valid.
In summary, licensors should decrease the likelihood that licensees will file future patent invalidity suits while licensees should evaluate whether a challenge to the patents they have currently licensed could be beneficial.