The recent decision by the U.S. Supreme Court in Medimmune, Inc. v. Genentech, Inc., et al., 05-608 (2007) held that a patent licensee was not required to violate or terminate its license agreement in order to file an action against the patent owner seeking declaratory judgment of non-infringement, invalidity or unenforceability of the patent(s) covered under the license. This decision by the Supreme Court signals a shift in power in the context of the licensor/licensee relationship regarding patented technology, a change that will have short and long term ramifications no matter on which side you find yourself. This decision overturned the precedential rule set forth by the Federal Circuit in Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), that held the existence of a license agreement eliminated any "reasonable apprehension" of suit to be brought against the licensee, thus precluding the possibility of an actual controversy sufficient to satisfy the requirements of Article III of the United States Constitution and of the Declaratory Judgment Act.
Setting aside the Federal Circuit's longstanding "reasonable apprehension" test in favor of allowing licensees to have standing to bring declaratory judgment actions has provided licensees substantial power in negotiating with licensors in the future. The Medimmune decision has effectively given the licensee an insurance policy because the licensee can now challenge the patent on grounds of non-infringement, invalidity and unenforceability while still paying royalties under a license agreement, thereby preventing the licensor from bringing suit for breach of the agreement. This shift in power provides the licensee enormous opportunities, in essence letting the licensee have its cake and eat it too.
The Medimmune decision has affected licensors negatively. Now licensees or potential licensees hold the trump card which they can dangle in front of the licensor at any time they wish without any apprehension of being sued for breach of the license agreement. This judicial insulation from suit granted to licensees changes the landscape for patent owners, particularly in regard to licensing their patented technology because patent owners must now consider the potential issues that may arise in light of entering into such license agreements.
Uncertainty May Still Exist
While on its face the decision in Medimmune appears to be straightforward and simple to apply, there does appear to be some uncertainty as to the overall impact and the broad sweeping scope that this decision may or may not have. Taking a closer look at the decision, the Supreme Court focused much of the opinion on evaluating the idea of "coercion." In holding that the licensee has the right to file for declaratory judgment without terminating or violating the license agreement with the licensor, the majority noted that the closest decision on point was Altvater v. Freeman, 319 U.S. 359 (1943), which held the licensee's failure to cease payments of royalties did not render non-justiciable a dispute over the validity of the patent. Medimmune, 05-608, slip op. at 11. The Supreme Court in that decision rejected the argument that as long as the licensee continued to make royalty payments, patent invalidity was only an academic and not a real controversy between the parties, noting that the fact that the "royalties were being paid did not make this a 'difference or dispute of a hypothetical or abstract character.'" Id. In Altvater the Court noted that the royalties "were being paid under protest and under the compulsion of an injunction degree." Id. The majority in Medimmune explained that its facts were similar to those in Altvater in that the involuntary or coercive nature of the actions preserved "the right to recover the sums paid or to challenge the legality of a claim." Id.
Thus, the idea of the existence of some coercion appears to have weighed significantly in the Court's ruling in favor of the licensee. Specifically in Medimmune, the products that were being offered by the licensee were all essentially subject to the patented technology and therefore the entire business was subject to an injunction if the licensee were forced to cease making royalties payments to the licensor. Thus, the question must be raised as to whether or not the Supreme Court has established a threshold as to what actions or facts rise to the level of "coercion" which allow a licensee to file for declaratory relief against the licensor. For example, if the licensed technology only accounts for a small percentage of the licensee's business, does the necessary coercion still exist? Perhaps, but this is just one uncertainty that will have to be resolved as the Federal Circuit begins to address upcoming cases in light of the Medimmune decision.
Impact of the Decision
The short term impact of the Medimmune decision will most likely be felt by the district courts which will likely see an increase in the number of declaratory judgment actions filed by licensees seeking to hold patents to be invalid or unenforceable. The long term effects are more difficult to predict, but one definite shift will most likely focus on the types of contracts that licensors grant to licensees. More exclusive licenses may be granted to provide additional assurance to licensees that they have exclusivity on a particular product thereby making it less likely for the licensee to seek finding the associated patents invalid by way of a declaratory judgment action. Other potential changes may include having patent owners seek to incorporate a provision to terminate a license agreement if the licensee files for declaratory relief seeking to invalidate a patent.
While it appears that the Medimmune decision has opened additional avenues for licensees, and in fact has somewhat insulated them from retribution from patent owners, it is still unclear whether all licensees will be able to seek declaratory relief. Rather, it may be that only those licensees whose predicament rises to the threshold of coercion are able to seek such relief, so that not every licensee is able to use the threat of a declaratory judgment action simply to seek a better deal with the patent owner by means of an exclusive license or a lower royalty rate in exchange for not filing for such relief. However, one thing is clear, the world of patent licenses has changed, an impact destined to affect patent owners and licensees everywhere.
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