Earlier this month, the U.S. Supreme Court handed down a decision that will make it easier for licensees to challenge the validity of their licensors’ patents. In MedImmune, Inc. v. Genentech, Inc., 2007 U.S. LEXIS 1003 (Jan. 9, 2007), the Court concluded that the mere fact that a licensee is paying royalties under a license agreement does not strip the licensee of standing to bring a declaratory judgment action seeking a declaration that the licensed patent is invalid.
MedImmune entered into a license agreement with Genentech in 1997 pursuant to which MedImmune agreed to pay royalties to Genentech based on sales of products embodying the technology covered in an issued patent and a pending patent application. Four years later, the patent application resulted in a second issued patent, and Genentech sent MedImmune a letter demanding that MedImmune pay Genentech royalties under the newly issued patent. (It is not clear from the Supreme Court opinion whether MedImmune was already paying royalties to Genentech under the first issued patent.) Although the Court’s opinion does not indicate whether the letter included any overt threats, the record is clear that MedImmune interpreted the letter as a “clear threat” to enforce the patent, terminate the 1997 license agreement, and sue for patent infringement if the requested royalty payments were not made. Significant to the Court’s decision was the fact that the product at issue accounted for 80% of MedImmune’s sales revenue since 1999. The Court also noted that had MedImmune refused to pay royalties, it would have been liable for treble damages for willful infringement, as well as attorneys’ fees.
Faced with this dilemma, MedImmune started paying royalties to Genentech. At the same time, MedImmune initiated a declaratory judgment action seeking to invalidate the patent under which it was paying royalties. The district court dismissed the case for lack of subject matter jurisdiction, holding that there was no “case or controversy” because there was no threat of legal action as long as MedImmune was paying royalties. The Federal Circuit affirmed, and the Supreme Court granted certiorari.
According to the Supreme Court, where the behavior that eliminates the threat of legal action is essentially coerced, a court still has jurisdiction to entertain a declaratory judgment action. As the Court stated, forcing the challenger to choose between abandoning its rights or risking prosecution “is ‘a dilemma that it was the very purpose of the Declaratory Judgment Act to ameliorate.’” Id. at *20 (citing Abbott Laboratories v. Gardner, 387 U.S. 136, 152 (1967)).
What is not addressed by the MedImmune decision is whether the Court would enforce a provision in a patent license agreement pursuant to which the licensee expressly agrees not to challenge the validity of the licensed patent. This type of clause is common in patent license agreements, but the MedImmune-Genentech agreement apparently did not include one (or if it did, it was not raised before the Supreme Court). In fact, the Court stated, “Promising 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.” Id. at *30. This author interprets that statement to mean that the MedImmune-Genentech agreement did not include a covenant not to sue. In light of the MedImmune case, licensors would be well advised to include such covenants in their patent license agreements. Whether such clauses are still enforceable, or whether they will be held to be unenforceable as against public policy in light of MedImmune, remains to be seen.
The other issue that was not addressed by the Court in MedImmune is what degree of coercion is necessary to find that there is a “case or controversy.” For example, what if Genentech had not sent a letter to MedImmune–what if MedImmune had simply begun paying royalties upon issuance of the second patent? What if the licensed product does not constitute a substantial portion of the licensee’s revenue, and, therefore, the licensee’s entire business is not at stake? These are issues with which lower courts will undoubtedly have to grapple as they attempt to apply the MedImmune holding to the facts of each case.
