MedImmune v. Genentech ruling creates patent licensing uncertainty

01.29.2007

Under the Supreme Court’s January 9, 2007 decision in MedImmune, Inc. v. Genentech, Inc., No. 05-608 (2007), federal courts do have subject matter jurisdiction over cases in which patent licensees in good standing seek a declaratory judgment of invalidity, unenforceability or non-infringement of the licensed patent, even while the license is in effect. The decision introduces uncertainty into the rights and obligations of parties to existing patent licenses and certainly has altered the dynamics of patent license negotiations going forward.

Background

MedImmune filed a declaratory judgment action asserting that Genentech’s “Cabilly II” patent was invalid, but it did not renounce the license it had taken to Cabilly II or cease paying royalties. The district court dismissed the case for lack of subject matter jurisdiction and the Federal Circuit affirmed, based on its ruling in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1381, 1382 (Fed. Cir. 2004), because the existence of the license obviated any “reasonable apprehension” by MedImmune that it could be sued by Genentech and, thus, there was no sufficient case or controversy under the Declaratory Judgment Act, 28 U.S.C. § 2201(a) and Article III of the Constitution. As in Gen-Probe, the Federal Circuit reasoned that the license constitutes a covenant not to sue, eliminating any actual controversy.

MedImmune appealed and the Supreme Court granted certiorari.

The Narrow Decision – Courts Have Jurisdiction Over Suits By Licensees

The Court reversed and remanded the case in its 8 to 1 decision in favor of MedImmune, with Justice Thomas the sole dissentor. The decision focused almost exclusively on the jurisdictional issue. The Court first analyzed cases where threatened government action coerced declaratory judgment plaintiffs not to take a particular action (e.g., entering into a property lease or distributing handbills, which were activities deemed illegal under the laws being challenged). The Court analogized the coercive effects of government actions that prevented the plaintiffs from taking a particular prohibited action to the coercive effect of a patent infringement suit if no license existed, i.e., MedImmune’s decision to license Cabilly II in the first instance was coerced by Genentech’s ability to sue for patent infringement in the absence of a license. The majority stated 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.” Opinion at 15.

The majority also commented on the license terms. For example, it stated that MedImmune’s “[p]romis[e] 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.” Opinion at 16 (emphasis in original). The majority also declined to apply the common law principle that a party to a contract “cannot at one and the same time challenge its validity and continue to reap its benefits.” Id. In sum, even if the common law rule did apply, it would mean that Genentech would win on the merits, not that the district court lacked Article III jurisdiction to hear the case. Opinion at 17.

The decision briefly mentioned Lear v. Adkins, 395 U.S. 653, 673 (1969)and its holding that repudiating licensees do not have to continue paying royalties until they are successful in their challenge to the patent. However, the Court declined to decide whether the Lear doctrine should be extended to the MedImmune situation, stating instead “[w]e express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity – that is, on the applicability of licensee estoppel under these circumstances.” Opinion at 5 (emphasis in original).

Some Patent License Implications

Existing Licenses: It is not clear whether the balance between licensors and licensees in existing contracts will change as a result of the MedImmune case. Certainly, however, one procedural hurdle to licensee challenges has been removed.

“No Challenge” or “Termination” Provisions: Although there is an open question regarding the enforceability of such provisions, licensors may consider terms barring licensees from challenging the validity or enforceability of licensed patents. (Many licenses already contain dispute resolution provisions concerning disagreements over the scope of the patent claims.) To date, the Federal Circuit has not specifically considered whether Lear has any applicability to such license provisions agreed to before litigation is initiated and, as noted above, the Supreme Court declined to express any view in the MedImmune case.

We do note, however, that the enforceability of “no challenge” clauses in consent judgments or in settlement of litigation have been consistently upheld by the Federal Circuit. Licensors may therefore find filing litigation against licensing targets more attractive on the theory that, even if the likelihood of negotiating a license is high, a “no challenge” clause included as part of the settlement agreement and/or consent judgment resolving litigation will be enforceable.

Licensors may also consider incorporating a license termination provision or an escalating or lump sum royalty provision, triggered upon initiation of a challenge to that patent by the licensee. Again, however, the enforceability of such provisions remains undecided at this time.

Licensee Recovery Of Royalties: Under the prevailing case law, even if the issue of Cabilly II’s validity is decided on the merits on remand, MedImmune will not be entitled to recover any royalties paid before a final judgment of patent invalidity or unenforceability is rendered.

Naked Patent Disputes: One frequent application of the “reasonable apprehension” requirement to determine subject matter jurisdiction in patent cases arises where a party contacted by a patent owner (and prospective licensor) about possible infringement brings a declaratory judgment action without having taken a license. The Supreme Court’s approach in MedImmune may be invoked by such declaratory judgment plaintiffs to urge a more liberal interpretation of the Declaratory Judgment Act than the Federal Circuit has employed to date. However, the many factual differences between a party that has taken a license and is practicing the invention, and a party that is merely contacted by a patent owner to discuss possible infringement, may well warrant a different result.