IP Briefs: The Shifting Landscape of Patent Licensing

The recent Supreme Court ruling in the MedImmune v. Genentech¹ case shifted the landscape of patent licensing in an important way. As a result of the ruling, a patent licensee now can challenge the validity of a patent without having to breach the license first. This ruling makes it easier for companies to protect themselves against patent infringement suits, and makes it harder for patent holders to enforce and license their patents.

Jennifer Carter, PhD

BACKGROUND

MedImmune had licensed a patent and a pending patent from Genentech related to the production of novel antibodies. The license required that MedImmune pay royalties to Genentech on valid, issued patents in exchange for permission to use those patents. Upon issuance of the patent for the application that had been pending, Genentech demanded royalty payments for the recently issued patent. MedImmune paid the royalties but said it was doing so under protest because it asserted that the patent was invalid and that its products did not infringe the new patent. MedImmune then filed an action under the Declaratory Judgment Act, asking the courts for "declaratory judgment," i.e., a ruling on the validity of the patent and whether it had been infringed.

THE RULING

The lower courts dismissed the case for lack of jurisdiction, so the case was appealed and made its way to the Supreme Court. The Supreme Court held that MedImmune was legally entitled to file for declaratory judgment even while continuing to pay royalties.

The Declaratory Judgment Act allows a party to petition the federal courts for a judgment about whether its rights have been violated. But such a declaratory judgment action can only be filed and ruled on by the court if there is a "case or controversy" between the parties.² Until recently, this meant that to file a declaratory judgment action regarding patent validity or infringement, a party needed to have a "reasonable apprehension of suit" by the patent holder—i.e., a reasonable fear that the patent holder might sue for infringement. Under this definition, since a licensee cannot be sued for patent infringement unless it breaches the terms of the license, a licensee would only have a "case or controversy"—and thus, the right to seek a declaratory judgment about a patent's validity—if the licensee first terminated or breached the license, such as by refusing to pay royalties. By terminating or breaching the license, however, a company would open itself up to a lawsuit for infringement or breach of contract by the patent holder, thus leaving the licensee at considerable risk.

In the MedImmune decision, the Supreme Court made an analogy to principles followed in cases against government action. In those cases, the courts do not require a plaintiff to transgress a law before challenging the constitutionality of the law in court, and a plaintiff's compliance with the law under protest does not eliminate the plaintiff's right to seek a declaratory judgment. Applying these principles to patent actions, the Supreme Court held that a patent holder does not have to infringe a patent before challenging the validity of the patent. The court did this by redefining "case or controversy," saying that a "case or controversy" exists when: (1) payment is demanded, such as pursuant to a license agreement or for infringement of a valid patent; and (2) the payment is made; but (3) the payment is involuntary or coerced. The Supreme Court found that the threat to MedImmune of treble damages and the loss of 80% of its business—which were the possible results of a patent infringement suit by Genentech—were coercive enough to preserve MedImmune's right to file a declaratory judgment action.

Genentech argued that MedImmune's suit was barred by the common law rule that a party to a contract cannot challenge the validity of the contract while continuing to reap its benefits. The Supreme Court noted that MedImmune was not repudiating the contract but was asserting that the proper interpretation of the contract did not prevent it from challenging the patents. Furthermore, the Supreme Court said that if the terms of the license agreement precluded the suit, Genentech would win its case on the merits rather than by obtaining a ruling that MedImmune did not have the right to file the suit in the first place.

In the course of its analysis, the Supreme Court criticized the Federal Circuit test for declaratory judgment jurisdiction in patent cases. The Federal Circuit test required that there be both: (1) an explicit threat or other action by the patent holder that creates "a reasonable apprehension of imminent suit" and (2) current infringement activity or concrete steps taken towards infringement.³ According to the Supreme Court, its prior decisions allowing declaratory judgment jurisdiction when a licensee paid royalties under an injunction⁴ and when an appellate court affirmed non-infringement of the patent⁵ contradicted the Federal Circuit test.

Thus, as a result of this Supreme Court ruling, patent holders now can be sued by licensees in good standing and as by prospective licensees who fear a patent infringement suit. This ruling provides a significant new protection to patent licensees and potential licensees who believe that they are being unfairly targeted by patent holders.

FURTHER CHANGES

Three months after the MedImmune decision, the Federal Circuit further altered the patent landscape by holding that an offer to license a patent, in certain circumstances, may allow a declaratory judgment suit to determine patent validity and infringement—even if the patent holder promises not to sue. In SanDisk v. STMicroelectronics,⁵ STMicroelectronics (ST) owned several patents that it wished to license to SanDisk. During the course of several meetings, ST offered to license its patents and presented in-depth analyses of SanDisk's infringement. During these negotiations, ST representatives stated that ST had "no plan whatsoever to sue SanDisk." SanDisk, however, concerned that ST might in fact sue, filed a declaratory judgment suit against ST asking the court to rule on the validity of the patents and whether they had been infringed.

Based on the MedImmune decision, the Federal Circuit abandoned its reasonable apprehension test and allowed SanDisk to bring its declaratory judgment suit. In the SanDisk decision, the Federal Circuit held that a "case or controversy" arises if a patent holder attempts to license its patent based on the activity or planned activity of a prospective licensee and if the prospective licensee contends that it does not require that license.

In spite of these rulings, the specific actions of a patent holder that would give rise to the right to file a declaratory judgment lawsuit are not yet well defined by the courts. It is now clear, however, that a prospective licensee does not need to risk an infringement suit by engaging in the identified activity before seeking a declaratory judgment. The concurring opinion in SanDisk pointed out that this decision implies that practically any offer by a patent holder to license a patent opens the patent holder to a declaratory judgment lawsuit.

In light of these recent decisions, patent holders must devise new strategies for patent enforcement and licensing. For instance, the concurring opinion in SanDisk suggested that holding negotiations under an existing confidentiality agreement may prevent a prospective licensee from being able to seek a declaratory judgment. It is still unclear, however, exactly how such a confidentiality agreement would affect a declaratory judgment suit, particularly since prospective licensees can now safely resist offers for confidential negotiations if they believe the patents to be invalid or not infringed, and licensees may file for declaratory judgments once the license is negotiated. Professionals representing licensors are now seeking to use various contract provisions in license agreements to impose adverse consequences if a licensee brings a declaratory judgment suit.

Jennifer Carter, PhD, is an associate in Perkins Coie LLP's licensing and technology group, Seattle, WA, 206.359.8069, jcarter@perkinscoie.com

REFERENCES

1. MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007).

2. 28 U.S.C. § 2201(a).

3. Altvater v. Freeman, 319 U.S. 359 (1943).

4. Cardinal Chem. Co. v. Morton Int. Inc., 508 U.S. 83 (1993).

5. SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. 2007).