US Supreme Court Holds Courts May Hear Challenges by Patent Licensees

US Supreme Court Holds Courts May Hear Challenges by Patent Licensees

Publications

Reverses Lower Court Decision Forcing Licensees to First Breach License and Risk Suit by Licensor

In a decision with potentially far-reaching consequences for patent holders and licensees, the US Supreme Court has ruled that a patent licensee need not terminate or breach its license agreement in order to give a federal court jurisdiction to hear a suit by the licensee seeking a declaratory judgment that the underlying patent is invalid, unenforceable or not infringed [MedImmune, Inc. v. Genentech, Inc., No. 05-608 (January 9, 2007)]. The Federal Circuit had previously held that unless a licensee first repudiated its license or breached it by, for example, ceasing royalty payments, the concrete "case or controversy" necessary to establish subject matter jurisdiction over a declaratory judgment suit between the licensee and its licensor would be lacking, and the licensee's case would be dismissed. License repudiation or breach, however, puts a licensee at risk of liability for treble damages and attorneys' fees for willful infringement, not to mention an injunction that might put it out of business altogether. By holding that federal courts may hear a licensee's challenge attacking the licensor's patent while the licensee otherwise retains the protection of its license, MedImmune marks a shift in favor of the licensee.

Background

According to the Court's opinion, MedImmune, Inc., entered into a royalty-bearing patent license agreement with Genentech, Inc. in 1997 for an issued patent relating to the production of "chimeric antibodies" and a then-pending patent application relating to "the coexpression of immunoglobulin chains in recombinant host cells." The "coexpression" patent application matured into a patent in 2001 (the "Cabilly II patent"). In the license agreement, MedImmune agreed to pay royalties on its products that were covered by any claim from either patent, provided the claim had neither "expired nor been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken."

Shortly after the Cabilly II patent issued, Genentech sent MedImmune a letter expressing its belief that MedImmune's Synagis® product infringed the patent, and that MedImmune therefore owed Genentech royalties under the 1997 agreement. As stated in the opinion, Synagis® "has accounted for more than 80%" of MedImmune's sales revenue since 1999. Viewing that the letter amounted to a threat of a lawsuit for patent infringement if it did not pay royalties and being concerned that it might face treble damages and attorneys' fees if Genentech prevailed in such a lawsuit, MedImmune began payments to Genentech "under protest and with reservation of all of [its] rights."

MedImmune subsequently filed a lawsuit that sought, among other things, a declaratory judgment that royalties were not owed under the agreement because Synagis® did not infringe any valid claim of the Cabilly II patent. Genentech filed a motion to dismiss the action, which the district court granted for lack of subject matter jurisdiction based upon Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004). In Gen-Probe,the United States Court of Appeals for the Federal Circuit had held that a patent licensee in good standing could not bring an invalidity action against the licensor because--so long as the licensee was paying the royalties claimed by the licensor--the licensee had no reasonable apprehension of suit, and therefore could not meet the "case or controversy" requirement in Article III of the US Constitution. MedImmune appealed to the Federal Circuit, which affirmed the district court for the same reason expressed in Gen-Probe.

The Supreme Court's Decision

The Supreme Court in MedImmune first noted that whether a constitutional "case or controversy" exists depends upon "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." The Court pointed out that it had previously held, in the context of threatened government prosecution for violating a law, that a declaratory plaintiff's decision not to risk violating the law may "eliminate[] the imminent threat of prosecution, but nonetheless does not eliminate Article III jurisdiction." Moreover, as a statutory matter the "very purpose" of the Declaratory Judgment Act is to ameliorate the dilemma of a challenger faced with the choice of risking prosecution or abandoning its rights. The Court noted that, although it had rarely considered the application of the Declaratory Judgment Act to situations in which the plaintiff's "self-avoidance of imminent injury is coerced by threatened enforcement action of a private party rather than government," lower federal and state courts have long accepted jurisdiction over such cases.

In the only Supreme Court decision it found to be on point [Altvater v. Freeman, 319 U.S. 359 (1943)], the Court held that "a licensee's failure to cease its payment of royalties did not render nonjusticiable a dispute over the validity of the patent." In Altvater, the patentee had sued the licensee to enforce territorial restrictions imposed by the license. The licensee filed a counterclaim for a declaratory judgment that the underlying patents were invalid, while continuing to pay royalties "under protest," pursuant to an injunction the patentee had obtained in an earlier suit. The Altvater Court concluded that "the requirements of [a] case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim." Although the Federal Circuit's Gen-Probe decision had distinguished Altvater on the ground that it involved a government sanction (i.e., an injunction), the Supreme Court rejected that distinction as a sound basis to disregard Altvater. In particular, the Court acknowledged that Altvater emphasized that the imminent threat of suit could come from the private action of the patentee for patent infringement while failing to mention the prospect of prosecution for contempt or other governmental sanction.

Genentech provided two additional arguments why no justiciable controversy existed, as required to support the district court's Article III jurisdiction. First, it argued that the 1997 license represented an "insurance policy" whereby MedImmune secured the right to be free from patent infringement suits in exchange for its agreement to pay royalties and not challenge the validity of the patents. The Court expressed skepticism about this argument, remarking that "[p]romising 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." Second, Genentech argued that the common-law rule that a party to a contract cannot reap its benefits while at the same time challenge its validity precluded MedImmune from asserting the declaratory judgment action. The Court harbored doubts about this argument because MedImmune, in its view, was not repudiating or attempting to impugn the contract, but rather attempting to show that no payment of royalties was required because the patents do not cover its products and are invalid. Ultimately, the Court determined that regardless of the validity or applicability of these contract arguments, they went to the merits of the case rather than to the existence of a case or controversy and thus the existence of Article III jurisdiction. Lastly, Genentech urged the Court to dismiss the declaratory judgment claim on discretionary grounds. The Court declined, stating "it would be imprudent for us to decide whether the District Court should, or must, decline to issue the requested declaratory relief," and left it to the discretion of the lower courts to consider such request on remand.

Conclusion

Although the imminent threat of an infringement suit may be essentially nonexistent where a licensee continues to pay all owed royalties under a license, the Court in MedImmune has established that the lack of such a threat does not necessarily deprive federal courts of a justiciable case or controversy. In light of MedImmune, so long as there is a real and immediate dispute over rights and obligations between licensor and licensee--which would likely ripen into a lawsuit if the licensee were to stop paying royalties--that should suffice to establish a case or controversy to support federal jurisdiction. MedImmune therefore establishes that a patent licensee may have standing to bring a declaratory judgment action to challenge whether a patent is valid, enforceable and/or infringed without having to stop royalty payments and risk a preliminary injunction, the loss of the license, and payment of treble damages and attorneys' fees if the challenge fails. Even if Article III jurisdiction is present, the success of a patent licensee's lawsuit will depend upon the merits, which in turn may be subject to the limitations imposed by the possible enforceability of contract-based prohibitions on the licensee's actions. While the full implications of MedImmune are not yet clear, the Supreme Court's decision confers a significant advantage on licensees compared to the Federal Circuit's previous position, and will undoubtedly lead to more litigation between licensors and licensees. It will remain to be seen how district courts use their discretion in deciding whether to take these sorts of declaratory judgment actions.

For more information on this or other intellectual property matters, please contact:

Edward C. DuMont
+1 202 663 6910
edward.dumont@wilmerhale.com

Henry N. Wixon
+1 202 663 6293
henry.wixon@wilmerhale.com

Alfred C. Server, M.D., Ph.D.
+1 617 526 6546
fred.server@wilmerhale.com