Alert: MedImmune Decision Ushers in New Era of Litigation Relating to Patent License Agreements

January 11, 2007

In its January 9, 2007 decision, the U.S. Supreme Court got 2007 off to a roaring start with its eagerly anticipated decision in MedImmune, Inc. v. Genentech, Inc.  Although its full impact will not be known for several years as lower courts grapple with the decision, MedImmune could profoundly affect the way in which patent owners license their technology in the future and also promises a significant amount of additional litigation relating to both existing and future license agreements.

The case resolves a relatively discrete constitutional issue:  whether under the "case or controversy" clause of Article III of the Constitution, a patent licensee must cease paying the royalties called for under a license agreement or otherwise breach or terminate the agreement before filing a declaratory judgment action challenging the validity of a licensed patent.  In ruling that a licensee may bring a declaratory relief claim challenging the validity of a licensed patent while in full compliance with its obligations under the license, the Court likely expanded the rights of patent licensees and increased the uncertainty among licensors as to the sustainability of their existing licenses.  

MedImmune Dispute History

The dispute between MedImmune and Genentech began in 1997, when MedImmune licensed from Genentech technology covered by an existing patent relating to the production of chimeric antibodies and a pending patent application relating to the expression of immunoglobulin chains.  When the patent application resulted in an issued patent (known as "Cabilly II") in late 2001, Genentech advised MedImmune that the Cabilly II patent covered MedImmune's Synagis product (a drug used to prevent respiratory tract disease in infants and young children) and demanded that MedImmune pay royalties beginning March 1, 2002.  Although it believed the Cabilly II patent to be unenforceable, invalid and not infringed by Synagis, MedImmune paid the royalties demanded by Genentech under protest because of the enormous risk to MedImmune of losing a patent infringement suit that could result in an award against it of treble damages and an injunction that could bar it from selling Synagis (which accounted for more than 80% of its revenues).

While continuing to pay royalties, MedImmune commenced a declaratory relief action against Genentech in which it asserted that the Cabilly II patent is invalid and unenforceable.  Genentech moved to dismiss the complaint on the ground that no Article III "case or controversy" existed because as long as MedImmune paid royalties, it could not have a "reasonable apprehension" of being sued for infringement.  The district court agreed and granted Genentech's motion to dismiss the complaint, relying in large part of the Federal Circuit's decision in Gen-Probe Inc. v. Vysis, Inc., 359 F. 3d 1376 (Fed. Cir. 2004), which held that a patent licensee in good standing cannot establish an Article III case or controversy with regard to validity, enforceability or scope of the patent.  The Federal Circuit affirmed, also citing Gen-Probe.  MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005).

U.S. Supreme Court Decision

In an 8-1 decision, the Supreme Court reversed.  Justice Scalia, writing for the majority, repeated that the Court's decisions regarding the "case or controversy" standard generally provide that a dispute must be "definite and concrete," rather than merely seeking "an opinion advising what the law would be upon a hypothetical state of facts."  He then noted that MedImmune would unquestionably have had constitutional standing to bring a declaratory judgment action if it had refused to make royalty payments under the license agreement.  Next, Justice Scalia pointed out that a plaintiff threatened with action by the government does not have to actually expose himself or herself to liability to establish a case or controversy supporting a declaratory judgment action.    

Stating that the "only Supreme Court decision on point is, fortuitously, close on its facts to the case before us," Justice Scalia then discussed Altvater v. Freeman, 319 U.S. 359 (1943), in which the Court held that a patent licensee who was paying royalties under protest could sue the licensor for declaratory relief.  The majority rejected the Federal Circuit's attempt in Gen-Probe to distinguish Altvater on the grounds that the royalty payments in Altvater were not paid under the terms of a license agreement, but instead under the compulsion of an injunction.  The majority further stated that the Federal Circuit's own "reasonable apprehension of imminent suit" test for a case or controversy would be met under the circumstances of a licensee who pays royalties rather than risk an award of treble damages and/or an injunction. 

In concluding that the dismissal of MedImmune's complaint should be reversed, the majority held that Article III does not compel a licensee to "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."  

The majority also rejected Genentech's reliance on the common law rule that a party to a contract cannot challenge a patent's validity while at the same time continuing to reap its benefits, one of the primary policy arguments advanced by Genentech and various licensing companies which filed amicus briefs in support of Genentech's position.  As the Federal Circuit stated in Gen-Probe, a licensor voluntarily relinquishes its statutory right to exclude when it grants a license, choosing to avoid litigation as an avenue to enforcing its rights and that allowing a licensee to subsequently challenge the validity of a licensed patent "would effectively defeat those contractual covenants and discourage patentees from granting licenses.   In other words, in this situation, the licensor would bear all the risk, while licensee would benefit from the licensor's effective cap on damages or royalties in the event its challenge to the patent's scope or validity fails."  359 F.3d at 1382.  According to the majority, however, even assuming the common law rule precludes this suit, the consequences would be that Genentech will win this case on the merits, not that there is no Article III standing.

The lone dissenter, Justice Thomas, argued that MedImmune was doing nothing more than seeking "an advanced ruling[] on matters that would be addressed in a future case or controversy," which the Court had consistently refused to permit.  According to Justice Thomas, patent invalidity is "an affirmative defense to patent infringement, not a freestanding cause of action" - and thus not, by itself, eligible for declaratory relief.  Justice Thomas also distinguished Altvater, in part on the basis that the patent invalidity counterclaim was brought as an affirmative defense to an existing infringement action.  Finally, Justice Thomas criticized the majority for expanding the right to preemptively challenge anticipated governmental action, particularly arising out of the power to arrest and prosecute, to apply to coercion pursuant to private contractual actions.

Effects of MedImmune Decision

The Supreme Court's decision in MedImmune potentially gives patent licensees greater leverage when faced with a claim of infringement.  They can avoid the risk of an injunction and/or heightened damages by paying the royalties required under a license agreement while knowing that they can later attempt to nullify the license agreement on validity - or possibly other - grounds by filing a declaratory judgment action.  On the other hand, licensors will face much greater uncertainty regarding the long term enforceability of their licenses - particularly licenses entered into under threat of litigation - as they face the prospect of a licensee seeking at any time to invalidate the licensed patent(s). 

Lawyers who represent licensors will undoubtedly devise creative ways to attempt to avoid at least some of the effects of the MedImmune decision, perhaps by adding a provision to a license that gives the licensor the right to terminate in the event the licensee challenges the validity of the licensed patent or some other aspect of the license.  Such efforts will, in turn, likely spawn new litigation that will ultimately establish how far a licensor can go.

In the case of existing patent licenses, however, licensors will not likely be able to incorporate new provisions to address their greater exposure to declaratory judgment challenges, and a number of licensors will face lawsuits by licensees.  It is with respect to these existing license agreements (including settlement agreements resulting from litigation where the parties entered into a license) that the MedImmune decision may have its greatest impact.  Indeed, some commentators are already predicting a flood of declaratory relief actions seeking to challenge the validity of licensed patents as a way to limit future royalty payments.  At the same time, license provisions inserted by licensors in future agreements that seek to get around the MedImmune decision will undoubtedly also provoke legal challenges by licensees.  In either case, the MedImmune decision has ushered in a period of substantial uncertainty and litigation in the area of patent licenses.

U.S. Supreme Court Trend

Another notable aspect of the MedImmune ruling is that it continues a trend of the Supreme Court rejecting rules established by the Federal Circuit.  In recent years, the Supreme Court has reversed the Federal Circuit on patent issues such as the limits of prosecution history estoppel, Festo Corp. v. Shoketsu Kinzoku Kogyokabushiki Co., 535 U.S. 722 (2002); the reach of research activities that are exempt from infringement, Merck KGAA v. Integra Lifesciences I, Inc., 545 U.S. 193 (2005); the market power conferred on a patent owner in an antitrust tying context, Illinois Tool Works v. Independent Ink, __ U.S. __, 126 S.Ct. 1281 (2006); and the test for granting injunctive relief after a finding of infringement, eBay Inc. v. MercExchange L.L.C., __ U.S. __ , 126 S.Ct. 1837 (2006).  These decisions, together with MedImmune, would seem to indicate that the Supreme Court will reject the test established by the Federal Circuit in determining when a particular invention is obvious under 35 U.S.C. § 103 in another highly anticipated decision of the 2007 term, KSR International Co. v. Teleflex.

The KSR decision will have to wait for another day.  In the wake of MedImmune, both companies involved in patent licensing and their lawyers will be left to ponder the significant impact of the decision on patent licenses.