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January 9, 2007

Having It Both Ways

MedImmune took a patent license from Genentech to make and sell its cash cow drug Synagis, used to prevent a respiratory tract disease in the very young. When faced with the perceived prospect of having to pay more royalties for a follow-on Genetech patent, MedImmune bolted - stopped paying fees, and sued for declaratory judgment of invalidity. The case headed north, to the Supreme Court, as the lower courts wouldn't touch it, because, the lower courts ruled, a licensee can't wiggle out by acting scared. In a narrow 8-1 holding, the Supreme Court ruled that a licensee may seek declaratory judgment of patent invalidity without breaching its licensing obligations.

MedImmune v. Genentech (SC 05-608)

Justice Scalia penned the 8-1 majority opinion.

The District Court granted respondents [Genetech's] motion to dismiss the declaratory-judgment claims for lack of subject-matter jurisdiction, relying on the decision of the United States Court of Appeals for the Federal Circuit in Gen-Probe Inc. v. Vysis, Inc., 359 F. 3d 1376 (2004). Gen-Probe had 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 because the license agreement "obliterate[s] any reasonable apprehension" that the licensee will be sued for infringement. Id., at 1381. The Federal Circuit affirmed the District Court, also relying on Gen-Probe. 427 F. 3d 958 (2005). We granted certiorari. 546 U. S. 1169 (2006).

True, the license requires petitioner to pay royalties until a patent claim has been held invalid by a competent body, and the Cabilly II patent has not. 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. Studiengesellschaft 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.

As long as those [licensing] payments are made [by petitioner MedImmune to respondent Genentech], there is no risk that respondents will seek to enjoin petitioner's sales. Petitioner's own acts, in other words, eliminate the imminent threat of harm. The question before us is whether this causes the dispute no longer to be a case or controversy within the meaning of Article III.

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.

Altvater v. Freeman, 319 U. S. 359 (1943), held that a licensee's failure to cease its payment of royalties did not render nonjusticiable a dispute over the validity of the patent... The Federal Circuit's Gen-Probe decision distinguished Altvater on the ground that it involved the compulsion of an injunction. But Altvater cannot be so readily dismissed.

We hold that petitioner [MedImmune] was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed. The Court of Appeals erred in affirming the dismissal of this action for lack of subject-matter jurisdiction. The judgment of the Court of Appeals is reversed, and the cause is remanded for proceedings consistent with this opinion.

Ruling narrowly, the court left lower court discretion intact.

We leave the equitable, prudential, and policy arguments in favor of such a discretionary dismissal for the lower courts' consideration on remand. Similarly available for consideration on remand are any merits-based arguments for denial of declaratory relief.

Justice Thomas dissented (05-608 Dissent), arguing most cogently that the High Court had unduly stretched Steffel v. Thompson, which offered remedy for government coercion, to business disputes.

We granted certiorari in this case to determine whether 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. ยง2201. 546 U. S. 1169 (2006). The answer to that question is yes. We have consistently held that parties do not have standing to obtain rulings on matters that remain hypothetical or conjectural. We have also held that the declaratory judgment procedure cannot be used to obtain advanced rulings on matters that would be addressed in a future case of actual controversy. MedImmune has sought a declaratory judgment for precisely that purpose, and I would therefore affirm the Court of Appeals' holding that there is no Article III jurisdiction over MedImmune's claim. The Court reaches the opposite result by extending the holding of Steffel v. Thompson, 415 U. S. 452 (1974), to private contractual obligations.

In Altvater v. Freeman, 319 U. S. 359, 365.366 (1943), the Court, quite unremarkably, held that a "licensee" had standing to bring a declaratory judgment counterclaim asserting the affirmative defense of patent invalidity in response to a patent infringement suit. But not to be mistaken, the Altvater Court expressly stated that "[t]o hold a patent valid if it is not infringed is to decide a hypothetical case." Id., at 363. So too, in Cardinal Chemical Co. v. Morton Int.l, Inc., 508 U. S. 83, 86 (1993), the affirmative defense of patent invalidity was raised as a counterclaim to a patent infringement suit. Although we held that a finding of noninfringement on appeal did not moot a counterclaim alleging invalidity, id., at 102.103, we stated that our holding was limited to the jurisdiction of an appellate court and reiterated that "[i]n the trial court, of course, a party seeking a declaratory judgment has the burden of establishing the existence of an actual case or controversy," id., at 95.

Against the foregoing background, the case before us is not a justiciable case or controversy under Article III.

While the ruling leaves presumption of validity unscathed, it greases the rails for contesting validity. The contractual terms of existing patent licenses, where this ruling was unanticipated, now have no finality, and are only as good as the limits of prior art search. Unbounded from contractual agreement, prior art search now becomes more important than ever, particularly for patent holders to persuade potential licensees of enforceability. Realistically, the only way now to consider an existing patent license having a prospect of finality is to perform a thorough prior art vetting.

For new patent licenses, licensing terms will undoubtedly change to incorporate this ruling. That may increase licensing costs, as a form of risk premium for potential later legal costs when validity is challenged. New agreements are likely to directly address this issue in a variety of ways. A licensor may insert provision to terminate the license under challenge, thus raising the stakes for a licensee as an infringer. The licensor may further insist on, basically, injunctive relief, if a challenge fails, further raising the stakes - the licensee agrees to cease production/distribution/sale of products covered under the agreement if a licensee validity challenge fails. Such provisions themselves are likely to suffer legal challenge.

Joshua Rich at MBHB observed, as this blog entry title suggests, "Now, the licensee can have its cake and eat it too - it can avoid the jeopardy of patent infringement damages by continuing to pay royalties, limiting its liability to only past royalties paid."

Charles Barquist at Morrison & Foerster: "MedImmune turns all fundamental assumptions about the stability and finality of a patent license completely on their head."

Dr. George Best of Foley & Lardner: "The court's action might be viewed as good because it makes it easier to challenge the validity of questionable patents. The decision, however, opens the door to additional patent litigation, including litigation between parties that thought they had resolved their disputes by entering into licensing agreements. That is a result that is not likely to be popular with many in the industry."

MedImmune will undoubtedly reverberate in notification and litigation practice. Again it seems that the Supreme Court has blithely ruled without taking into account the potential repercussions of its decisions - responsibility without accountability.

Posted by Patent Hawk at January 9, 2007 1:59 PM | Declaratory Judgment


Would anyone care to comment on how or if MedImmune v. Genentech would apply to royalties due pursuant to a patent sale as opposed to a patent license?

Posted by: Daniel Streibig at April 2, 2008 5:30 AM