Patent Baristas

The Supreme Court added a little sizzle to the life of patent licenses with its decision in Medimmune, Inc. v. Genentech, Inc., et al. (S.Ct. No. 05–608). The ruling could give licensees a chance to get out of bad license deals by challenging the validity of the underlying patents.

The case asked whether companies can sue to invalidate another’s patent even when they don’t face an infringement suit, a case that may affect thousands of drug and biotechnology inventions. The case is about whether a company must stop paying royalties on a patent license to challenge the validity of the patent. MedImmune is paying licensing fees to Genentech for an antibody technology used in MedImmune’s pediatric respiratory drug Synagis, while at the same time challenging Genentech’s patent in court.

In an 8-to-1 decision, the Supreme Court ruled that MedImmune could sue Genentech for patent infringement even though MedImmune continues to pay fees to Genentech to use the disputed technology to develop the drug Synagis that treats childhood respiratory problems.

The Supreme Court held:

1. Contrary to respondents’ assertion that only a freestanding patent invalidity claim is at issue, the record establishes that petitioner has raised and preserved the contract claim that, because of patent invalidity, unenforceability, and noninfringement, no royalties are owing.

2. The Federal Circuit erred in affirming the dismissal of this action for lack of subject-matter jurisdiction. The standards for deter-mining whether a particular declaratory-judgment action satisfies the case-or-controversy requirement — i.e., “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” relief, Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U. S. 270, 273 — are satisfied here even though petitioner did not refuse to make royalty payments under the license agreement. Where threatened government action is concerned, a plaintiff is not required to expose himself to liability before bringing suit to challenge the basis for the threat. His own action (or inaction) in failing to violate the law eliminates the imminent threat of prosecution, but nonetheless does not eliminate Article III jurisdiction because the threat-eliminating behavior was effectively coerced. Similarly, where the plaintiff’s self-avoidance of imminent injury is coerced by the threatened enforcement action of a private party rather than the government, lower federal and state courts have long accepted jurisdiction. In its only decision in point, this Court held that a licensee’s failure to cease its royalty payments did not render nonjusticiable a dispute over the patent’s validity. Altvater v. Freeman, 319 U. S. 359, 364. Though Altvater involved an injunction, it acknowledged that the licensees had the option of stopping payments in defiance of the injunction, but that the consequence of doing so would be to risk “actual [and] treble damages in infringement suits” by the patentees, a consequence also threatened in this case. Id., at 365. Respondents’ assertion that the parties in effect settled this dispute when they entered into their license agreement is mistaken. Their appeal to the common-law rule that a party to a contract cannot both challenge its validity and continue to reap its benefits is also unpersuasive. Lastly, because it was raised for the first time here ,this Court does not decide respondents’ request to affirm the dismissal of the declaratory-judgment claims on discretionary grounds. That question and any merits-based arguments for denial of declaratory relief are left for the lower courts on remand.

The patents at issue, U.S. Pat. Nos. 4,816,567 and 6,331,415, relate to antibodies and to non-specific immunoglobulins formed by recombinant techniques using host cell cultures. The antibodies can be manipulated at the genomic level to produce chimeras of variants, which draw their homology from species, which differ from each other. They can also be manipulated at the protein level, since all four chains do not need to be produced by the same cell.

Genentech argued that the federal courts do not have jurisdiction over the case without a breach of contract or other actual dispute between the two parties. By paying royalties, MedImmune has acknowledged the validity of the patent and as a result there is no actual dispute in the case. Instead, it argued that MedImmune is essentially seeking an advisory opinion about how it would fare legally if it broke the contract, which the court cannot provide. Under the Constitution, the federal courts do not have jurisdiction to rule on hypothetical questions.

MedImmune, meanwhile, argued that to breach its contract with Genentech would expose it to potentially significant damages for patent infringement and could also result in an injunction halting sales of Synagis, which brought in over $1 billion in revenue in 2005. MedImmune says that it is paying the royalties only under protest and that federal law and previous court cases allow it to challenge the patent without suffering the negative consequences of halting royalty payments.

Genentech argued that MedImmune had no case since it was not seeking an interpretation of its present contractual obligations since (1) there is no dispute that Synagis infringes the Cabilly II patent, thereby making royalties payable; and (2) because while there is a dispute over patent validity, the contract calls for royalties on an infringing product whether or not the underlying patent is valid.

The Court didn’t buy this since MedImmune “disputes its obligation to make payments under the 1997 License Agreement because [petitioner’s] sale of its Synagis® product does not infringe any valid claim of the [Cabilly II] Patent.” App. 136. These contentions were repeated throughout the complaint. The Court also felt that the phrase “does not infringe any valid claim” (emphasis added) cannot be thought to be no more than a challenge to the patent’s validity, since elsewhere the amended complaint states with unmistakable clarity that “the patent is . . . not infringed by [petitioner’s] Synagis product and that [petitioner] owes no payments under license agreements with [respondents].”

The Court reasoned that the license required MedImmune to pay royalties until a patent claim has been held invalid by a competent body, and the Cabilly II patent has not, stating:

But the license at issue in Lear, Inc. v. Adkins, 395 U. S. 653, 673 (1969), similarly provided that “royalties are to be paid until such time as the ‘patent . . . is held invalid,'” and we rejected the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court. We 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. Cf. Studiengesell-schaft Kohle, M. B. H. v. Shell Oil Co., 112 F. 3d 1561, 1568 (CA Fed. 1997) (“[A] licensee . . . cannot invoke the protection of the Lear doctrine until it (i) actually ceases payment of royalties, and (ii) provides notice to the licensor that the reason for ceasing payment of royalties is because it has deemed the relevant claims to be invalid”). All we need determine is whether petitioner has alleged a contractual dispute. It has done so.

This case was about whether Article III’s limitation of federal courts’ jurisdiction to “cases” and “controversies,” reflected in the “actual controversy” requirement of the Declaratory Judgment Act, 28 U. S. C. §2201(a), requires a patent licensee to terminate or be in breach of its license agreement before it can seek a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed.

The question was really about if there was still a case or controversy within the meaning of Article III. Here, the Court wrote that “the declaratory judgment procedure is an alternative to pursuit of the arguably illegal activity.” Where a plaintiff has eliminated the imminent threat of harm by simply not doing what he claimed the right to do (i.e., sell the product without a license), that does not preclude subject-matter jurisdiction because the threat-eliminating behavior was effectively coerced:

Our analysis must begin with the recognition that, where threatened action by government is concerned, we do not require a plaintiff to expose himself to liability before bringing suit to challenge the basis for the threat—for example, the constitutionality of a law threatened to be enforced. The plaintiff’s own action (or inaction) in failing to violate the law eliminates the imminent threat of prosecution, but nonetheless does not eliminate Article III jurisdiction.

Justice Thomas, dissenting, felt that a patent licensee in good standing must breach its license prior to challenging the validity of the underlying patent pursuant to the Declaratory Judgment Act, 28 U. S. C. §2201. 546 U. S. 1169 (2006). He held the opinion that the Court has consistently held that parties do not have standing to obtain rulings on matters that remain hypothetical or conjectural and that this was such a case.

This case will cause both licensees and licensors to rethink their positions both prospectively and retrospectively. Historically, companies, especially smaller companies, have complained that they must pay licensing fees, rather than challenge the patents involved, because they can not afford the consequences of losing if a court ultimately rules the patents valid. Now, they can take a license and still have a court determine the validity of the patent in question.

One outcome of the case is that consumers may pay lower prices for certain products such challenges can get rid of questionable patents. In addition, licensees may pay lower royalty rates as licensors try to reduce the likelihood of a challenge by lessening the royalty payment burden.

In the current case, MedImmune said it would vigorously pursue its case in the lower court and Genentech said it remains confident in the validity of the patent.

See the full opinion here: medimmune-sct-05-608.pdf

See also:

MedImmune Asks: What’s A Patent Lawsuit Among Friends?

Genentech v. MedImmune Briefing

MedImmune v. Genentech

Supreme Court to Review MedImmune’s Bid to End License Payments on Synagis