New England Biz Law Update
The U.S. Supreme Court recently ruled that a patent licensee need not have to breach its license agreement in order to file a declaratory judgment action for non-infringement, invalidity, or unenforceability (MedImmune, Inc. v. Genentech, Inc.).
The court’s decision in January overturned a rule established by the Federal Circuit decision in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004). In Gen-Probe, the Federal Circuit ruled the existence of a license agreement categorically eliminates any apprehension of suit by the licensee, precluding the possibility of a case or controversy sufficient to satisfy the requirements of the Declaratory Judgment Act.
The MedImmune decision will have ramifications for licensee/licensor relationships, the number of patent suits, and the terms found in license agreements, in ways that all in-house counsel working on patent matters need to be aware of.
By allowing declaratory judgment lawsuits in situations where a licensee is paying royalties and continues to be in good standing, MedImmune alters the relationship between licensors and licensees. Licensees and licensors are likely to try a number of different strategies both in future license negotiations and in litigation until some of the questions raised by MedImmune are resolved.
Revised payment terms?
In-house counsel should be prepared for the possibility that licensors may now demand higher royalties because the incentive to compromise is reduced if the licensor knows the license is not a final resolution, and the licensee can turn around and file a declaratory judgment action challenging the patent. (The strategy of filing a declaratory judgment action while simultaneously paying royalties under the license is sometimes called “pay and sue.”)
On the other hand, licensees may be more willing to enter into patent licenses, since doing so will not limit their ability to challenge a licensed patent. Licensees may view licenses as a kind of insurance policy, giving them downside protection by limiting the scope of their liability if they unsuccessfully challenge a licensed patent.
Additionally, under Gen-Probe, if a license involved several patents, a licensee could not challenge even one of the licensed patents without risking the entire license. In this regard, MedImmune has restored the pre-Gen-Probe relationship between licensors and licensees, allowing a licensee to challenge only a subset of several patents licensed in a single agreement.
The Supreme Court specifically left open the question whether the district court could have (or should have) dismissed the declaratory judgment action on prudential grounds. In light of this uncertainty, licensors may still argue the “pay and sue” strategy is inequitable and district courts can decline jurisdiction in appropriate cases.
This may be more persuasive where a challenged patent is specifically covered by the license (i.e., the licensee had an opportunity to review the patent and decided to enter into the license agreement). But it may be less persuasive where, as in MedImmune, the license covers pending applications that later issue as the challenged patent (i.e., the licensee never had the opportunity to analyze the licensed patent), and a dispute develops over the validity or infringement of that new patent.
Impact on declaratory judgment law
The MedImmune decision may also have broad consequences for the Federal Circuit’s case law on declaratory judgment jurisdiction outside the licensing context. The Supreme Court’s ruling undermines the Federal Circuit’s “reasonable apprehension of suit” test for declaratory judgment jurisdiction by stating that it conflicts (or is in tension) with several Supreme Court decisions.
Thus, many of the Federal Circuit’s statements regarding declaratory judgments may now be open to question.
For example, the Federal Circuit has held that declaratory judgment jurisdiction does not exist “when a patentee does nothing more than exercise its lawful commercial prerogatives” by providing notice of the patent, even if that notice puts a party “in the position of having to choose between abandoning a particular business venture or bringing matters to a head by engaging in arguably infringing activity.”
Similarly, the Federal Circuit has stated that “[t]he offer of a patent license does not create an actual controversy. When there are proposed or ongoing license negotiations, a litigation controversy normally does not arise until the negotiations have broken down.” These holdings may now be open to question and may open the door to filings by aggressive declaratory judgment plaintiffs.
The decision may also increase the number of declaratory judgment actions challenging the validity of patents, particularly in areas such as biotechnology where patents may be particularly vulnerable to written description and enablement challenges under 35 U.S.C. §112. Indeed, the patent at issue in MedImmune is a biotechnology patent.
Charles Barquist is a partner in the Los Angeles office of Morrison & Foerster (www.mofo.com). His practice is focused on business litigation, including patents and other intellectual property, antitrust and unfair competition, and dispute resolution for technology companies. Jason Crotty is an associate in the San Francisco office of Morrison & Foerster. His practice focuses on intellectual property with an emphasis on patent litigation. They can be reached at [email protected] and [email protected].
Morrison Foerster represented Celltech R&D, Ltd., a British biotechnology company, which was involved in the MedImmune case. The district court granted Genentech’s and Celltech’s motions for summary judgment on MedImmune’s antitrust and unfair competition claims, and the Federal Circuit affirmed that ruling.
