Supreme Court Ruling Leaves Issues Open Regarding Patent Licensing

Thursday, February 1, 2007 - 01:00

On January 9, 2007, the Supreme Court issued its decision in MedImmune, Inc. v. Genentech, Inc., holding that a patent licensee (MedImmune in this case) has standing to sue for a declaratory judgment of invalidity, unenforceability or noninfringement of a licensor's (i.e., Genentech's) patent even if the licensee is still paying royalties (albeit under protest) and is otherwise complying with the license agreement. The MedImmune decision overrules the Federal Circuit's previous holding in Gen-Probe Inc. v. Vysis, Inc., under similar facts, that a licensee complying with all of the terms of its license agreement has no standing to bring such a declaratory judgment action. The Supreme Court's MedImmune decision clearly will have a significant impact on patent licensor/licensee relationships, on parties negotiating patent licensing agreements, and on the litigation of patent disputes.

Setting the Stage: The Federal Circuit's Decision In Gen-Probe v. Vysis - The "Reasonable Certainty of Suit" Test For Jurisdiction In Declaratory Judgment Actions

Underpinning the Federal Circuit's opinion in Gen-Probe is its interpretation of declaratory judgment actions in patent infringement cases. The Declaratory Judgment Act vests United States courts with jurisdiction to declare the rights of litigating parties only where there is an "actual controversy." In determining whether a court has jurisdiction when a potential infringer sues a patentee for a declaration that a patent is not infringed, invalid or unenforceable, the Federal Circuit developed a two-prong test requiring (1) "an explicit threat or other action by the patentee creating a reasonable apprehension" in the potential infringer that it will face an infringement suit and (2) "present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity." Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1380 (Fed. Cir. 2004).

Focusing on the test's first prong, the Federal Circuit held that (1) the nonexclusive license (which Gen-Probe entered into to settle an unrelated patent suit because it believed that Vysis would sue it for patent infringement if it did not), which was not materially breached, negated any reasonable apprehension of being sued; (2) licensee estoppel applies because a licensee must, at a minimum, stop paying royalties (and thereby materially breach the agreement) before bringing suit, and Gen-Probe did not do that; and (3) Gen-Probe's payment of royalties under protest is not sufficient to create an actual controversy. Gen-Probe , 359 F.3d at 1380-82. The Federal Circuit reasoned that permitting Gen-Probe to pursue a declaratory judgment action without materially breaching its license agreement would have "undesirable results" - it would defeat the license's covenants so that "the licensor would bear all the risk, while [the] licensee would benefit from the license's effective cap on damages or royalties in the event its challenge to the patent's scope or validity fails." Id. at 1382.

After Gen-Probe the Federal Circuit briefly restricted declaratory judgment actions even further by requiring that the plaintiff's reasonable apprehension of being sued be "imminent." Teva Pharmaceuticals USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1334-35 (Fed. Cir. 2005). However, in its most recent decision, the imminency requirement was dropped. Plumtree Software, Inc. v. Datamize, LLC, 473 F.3d 1152 (Fed. Cir. 2006).

The Supreme Court's Decision - The Standard For Jurisdiction In Declaratory Judgment Actions Is Substantial Controversy Of Sufficient Immediacy Between Parties Having Adverse Legal Interests

The facts in MedImmune v. Genentech are similar to those in Gen-Probe. MedImmune entered into a license agreement with Genentech covering an existing patent and a then-pending patent application. When the pending application issued as a patent ("the Patent"), Genentech advised MedImmune it was expected to pay royalties on its sales of Synagis (a drug used to prevent respiratory tract disease in children which accounted for more than 80% of MedImmune's sales since 1999), which Genentech asserted was covered by the Patent. Although MedImmune believed that the Patent was invalid and unenforceable, and that its product did not infringe, it paid the demanded royalties under protest to avoid being sued. MedImmune brought a declaratory judgment action challenging the Patent's validity and enforceability.

Relying on the Federal Circuit's decision in Gen-Probe, the District Court dismissed MedImmune's declaratory judgment action on the ground that no case or controversy existed because MedImmune was not in breach of the license since it continued paying royalties (albeit under protest), and, therefore, could not have a "reasonable apprehension" of being sued for infringement. The Federal Circuit, relying on its own precedent, affirmed. MedImmune then appealed to the Supreme Court, which granted certiorari.

Justice Scalia, writing for an 8-1 majority of the Supreme Court, with Justice Thomas as the lone dissenter, rejected the Federal Circuit's "reasonable apprehension of suit test" as conflicting with Supreme Court precedent, including Altvater v. Freeman, 319 U.S. 359 (1943), the case cited by Gen-Probe in support of its argument that payment of royalties under protest is sufficient to create an actual controversy. Slip Opinion, p. 13 and n. 11. While recognizing that its own precedent does not "draw the brightest of lines between those declaratory judgments actions that satisfy the case-or-controversy requirement and those that do not" (Slip Opinion, p. 7), the Court summarized the applicable standard as "whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." Slip Opinion, p. 8. Noting that these standards would have been satisfied if MedImmune had refused to make royalty payments, the Court nevertheless went on to hold that case-or-controversy jurisdiction is also established when a plaintiff is "coerced" into paying royalties to avoid a private party's threatened enforcement action, as MedImmune's payment of royalties was "coerced" to avoid both the threat of being assessed treble damages in a patent infringement suit and the possibility of losing 80% of its business. How district courts and the Federal Circuit will apply this "old" standard to patent licensing cases remains to be seen.

Issues Left Open By The Supreme Court's Decision

The MedImmune decision leaves open a number of significant issues regarding patent licensing negotiations and enforcement.

Licensee Estoppel. One such issue is application of the doctrine of licensee estoppel set forth in Lear, Inc. v. Adkins, 395 U.S. 653 (1969). The Federal Circuit has held that Lear 's repudiation of licensee estoppel only applies when the licensee renounces the license, stops paying royalties and opens itself to the risks of an infringement suit with the potential imposition of an injunction and treble damages. See Studiengesellschaft Kohle, m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1568 (Fed. Cir. 1997). In MedImmune, however, Justice Scalia twice indicated that the Court was not expressing an opinion as to whether a nonrepudiating licensee is entitled to take advantage of the Lear doctrine. See Slip Opinion, pp. 5, 16.

The Supreme Court also rejected Genentech's attempt to liken the license to an "insurance policy" immunizing the licensee from suits for infringement as long as it continues to pay royalties and does not challenge the covered patents, the elimination of such challenges being part of the patentee's "quid pro quo" for entering into such a license. The Court found nothing in the license agreement itself "where the prohibition against challenging the validity of the patents is to be found" supporting Genentech's position. Slip Opinion, p. 16. According to the Court, language promising to pay royalties on patents that have not been held invalid "does not amount to a promise not to seek a holding of their invalidity." Slip Opinion, p. 16.

What is not clear from the decision is what patent licensors can do to avoid the consequences of MedImmune. Can the licensor require that the licensee not challenge patent validity unless the licensee repudiates the license and takes its risks in court? Will such a clause survive a Lear challenge in light of the issue left open by the MedImmune majority?

Effect on Jurisdiction of Declaratory Judgment Actions. Another question raised by MedImmune is its effect on Declaratory Judgment Act jurisdiction. The Federal Circuit has steadfastly denied jurisdiction based on the normal interchange during license negotiations absent a specific threat of an infringement suit. See EMC Corp. v. Norand Corp., 89 F.3d 807, 814-15 (Fed. Cir. 1996), cert. denied, 519 U.S. 1101 (1997). In MedImmune, Genentech made no such specific threat. Rather, it merely alleged that its Patent covered MedImmune's product and royalties were due. Such allegations previously have not been enough for the Federal Circuit to confer declaratory judgment jurisdiction. See Metabolite Labs. v. Laboratory Corp. of America Holdings, 370 F.3d 1354, 1369 (Fed. Cir. 2004), cert. dismissed, 126 S. Ct.2921 (2006). Yet, in MedImmune, although no threat of suit was made, it was clearly implied. Merely charging that the Patent covered the licensee's product was sufficient. Whether similar such charges, in light of MedImmune, will be enough in the license negotiating stage is another unknown issue.

Discretionary Dismissal of Declaratory Judgment Actions. Justice Scalia also made a point of the District Court's failure to consider dismissing MedImmune's claims on discretionary grounds, particularly in light of the District Court's "serious misgivings" about dismissing the action on the basis of Gen-Probe. The Supreme Court specifically cautioned the District Court against ignoring such considerations on remand, and directed the lower courts to consider "equitable, prudential, and policy arguments in favor of such a discretionary dismissal," as well as any merits-based arguments for denial of declaratory relief.

What did the majority mean in focusing the remanded action on the discretionary aspects of the Declaratory Judgment Act? Clearly, MedImmune's business was almost entirely (80%) tied to the allegedly infringing product and the risks posed by a repudiation of the license were huge. Left open by this focus are what facts a District Court should consider in exercising its discretionary authority.

Many questions remain unanswered by the MedImmune decision. What is clear is that license agreements in existence today are subject to challenge in manners never contemplated at the time of negotiation. Obviously, specific clauses need to be reviewed to determine which agreements might be vulnerable and what steps need to be taken to protect the income stream of such agreements. Moreover, new approaches need to be reviewed before undertaking a letter-writing campaign to potential licensees and before entering into license negotiations. Parties contemplating patent litigation may also wish to reassess their options with regard to possible claims and/or defenses. Parties considering settling patent litigation by entering into a licensing agreement also may wish to re-evaluate the pros and cons of doing so.

Nicholas L. Coch is Chairman of the Intellectual Property and Technology Law Department of Kramer Levin Naftalis & Frankel LLP. Mr. Coch's practice focuses on patent, trademark, unfair competition, trade secret and copyright litigation and transactions and antitrust aspects thereof. Dr. Mary W. Richardson is an associate in the Intellectual Property and Technology Law Department. Her practice focuses on patent prosecution and litigation.

Please email the authors at ncoch@kramerlevin.com or mrichardson@kramerlevin.com with questions about this article.