March 1, 2007 (Vol. 27, No. 5)
Richard B. Smith
Supreme Court Holding in MedImmune v. Genentech Makes Licensors More Vulnerable
Ever so often a high court decision is rendered that signals a fundamental shift in the patent law landscape. The recent U.S. Supreme Court holding in the much-anticipated MedImmune v. Genentech, et. al. case may very well herald such a shift.
Prior to this decision, under the approach established by the U.S. Court of Appeals for the Federal Circuit, a patent licensee would not be able to challenge the licensed patent absent a related infringement action or threat of one arising from a termination or breach of the license. Although it has long been established that a patent owner cannot require a licensee to abandon forever its right to challenge a patent, the licensee could not challenge the patent while the license was in good standing and there was no immediate threat of being sued for infringement. That has now changed.
Patent validity, enforceability, or infringement can be challenged, for example, as a defense in a patent infringement suit. However, absent an infringement suit, a party could not simply go into court and ask a judge to declare a patent invalid, unenforceable, or not infringed unless that party qualifies to bring a declaratory judgment action under the federal Declaratory Judgment Act. Once deemed allowable, such an action would be used to resolve all the issues regarding infringement, validity, and enforceability of the challenged patent between the patent owner and the patent challenger.
Interpretations of the Declaratory Judgement Act
The Supreme Court has long recognized that a party may bring an action under the Declaratory Judgment Act where the controversy is definite and concrete as demonstrated by the facts alleged under all the circumstances. The Federal Circuit’s narrower interpretation of the Declaratory Judgment Act required a patent challenger to show that the patent owner made an explicit threat or took action toward the challenger that created a reasonable apprehension of being sued for infringement and that the challenger undertook some activity that could constitute infringement. The MedImmune case set the backdrop for a battle between these two approaches.
MedImmune v. Genentech, et. al.
MedImmune and Genentech entered into a license agreement in 1997 covering existing patents and follow-on patent applications, including the then-pending Cabilly II application, purportedly covering MedImmune’s lead product, Synagis® for respiratory syncytial virus (RSV). 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 beginning March, 2002, under the 1997 license agreement.
Although MedImmune felt that the Cabilly II patent was invalid, unenforceable, and in any event not infringed by Synagis, they paid Genentech royalties under protest and reserved their right to challenge the patent. MedImmune viewed the letter from Genentech as a clear threat to terminate the 1997 license agreement for breach and sue for patent infringement if it did not pay the royalty. However, MedImmune was never at actual risk of losing the license or being sued for infringement because they continued to pay royalties, albeit under protest.
To settle the dispute, MedImmune brought a declaratory judgment action against Genentech in the Central District of California, asking the 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 nonjusticible under the Declaratory Judgment Act, following the Federal Circuit’s decision in Gen-Probe, Inc. v. Vysis, Inc. that required 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 that MedImmune was a licensee in good standing under no threat or apprehension of suit.
MedImmune appealed the Federal Circuit holding to the U.S. Supreme Court. The Supreme Court refused to apply the Federal Circuit test, drawing instead on their long-standing precedent that looks to the totality of the circumstances to see whether there is a substantial controversy between parties having adverse legal interests and whether the controversy is sufficiently immediate and real to warrant the issuance of a declaratory judgment.
The Court was first satisfied that the requirements for a declaratory judgment action would have easily been met if MedImmune had refused to pay royalties to Genentech. The resulting dispute would be clear.
As to the actual set of circumstances, the Court considered the basis of the dispute. Genentech claimed a right to royalties, and MedImmune claimed that no royalties were due because the Cabilly II patent is invalid, unenforceable, and not infringed. The Court also considered an alleged threat by Genentech to sue for patent infringement and 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.
Although the Court recognized that MedImmune’s own act of continuing to pay royalties effectively eliminated the threat of being sued for infringement, they nonetheless decided that MedImmune need not put itself in harms way to challenge the validity or enforceability of the underlying licensed patent where the resulting dispute is otherwise well-defined. This holding comports well with the purpose of the Declaratory Judgment Act—i.e., one need not risk losing the farm to seek relief.
The Cabilly II patent challenge now goes back to the district court for resolution.
Changing the Balance Between Licensor and Licensee
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 qualify under the Declaratory Judgment Act to challenge the licensed patent, even where the license remains in good standing and there is no actual apprehension of being sued for infringement.
The Supreme Court’s holding thus means that 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 the underlying patents in court without first needing to put the license in jeopardy. Exactly what combination of MedImmune-like circumstances will be deemed sufficient to justify a declaratory judgment action will become more defined by court cases yet to come.
The holding clearly leaves patent licensors vulnerable and will likely force them 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 licensor could make the filing of a declaratory judgment action a basis for terminating the license, increasing the royalty rate, or otherwise adjusting the prechallenge license terms. A licensor may also try for agreement that the licensee pay all legal costs associated with any declaratory judgment action and/or bring the action in a licensor-favorable forum.
The enforceability of such provisions, however, is still an open question in light of the strong public policy favoring patent challenges. Adjudication of these provisions is certain to become the next big legal battleground between licensors and licensees.