On January 9, 2007, the United States Supreme Court ruled that a patent licensee may challenge the validity of a licensed patent while continuing to pay royalties on the licensed patent. MedImmune, Inc. v. Genentech, Inc., No. 05-608.
Under a rule previously established by the Federal Circuit, if a patent licensee continued to pay royalties under a license, the licensee could not challenge the validity of the licensed patent because there was no true "case or controversy." It became customary for district courts to dismiss these cases for lack of standing. The rule presented a licensee with a choice of continuing to pay royalties on a patent it believed to be invalid, or risking a sizeable breach of contract judgment for ceasing to pay royalties under the license agreement and termination of its license if its challenge ultimately proved unsuccessful.
In MedImmune, MedImmune and Genentech entered into a patent license agreement under which MedImmune paid royalties to Genentech. Genentech later claimed that a new respiratory drug being developed by MedImmune was covered by a Genentech patent and that MedImmune owed additional license fees to Genentech under their existing license agreement. MedImmune paid the license fees under protest. MedImmune's new drug became successful, and MedImmune brought a declaratory judgment action asserting invalidity and non-infringement of the Genentech patent. The district court, predictably, dismissed the lawsuit for standing because MedImmune continued to pay royalties. The Federal Circuit affirmed, and the Supreme Court granted review.
The Supreme Court compared the situation to that of a citizen who wishes to challenge the validity of a criminal law; a citizen is not required break the law before suing to challenge the law. The Court ruled that licensees need not breach their licenses by ceasing to pay royalties before challenging the validity of the licensed patents. The Court made clear that its reasoning and holding also apply to infringement determinations.
The MedImmune decision does not prohibit a provision in a patent license that bars challenges to the validity of the licensed patent. The practical effect and future enforceability of such a provision is unknown since the MedImmune license did not include this provision and the Supreme Court did not address this issue. It is likely, however, that licensors in the future may be more diligent about including this provision in their licenses.
Some commentators have remarked that MedImmune may be part of a recent Supreme Court move to reign in the rights of patent owners. Last session, the Supreme Court limited the ability of a patent holder to prevent others from making, selling or using its patented invention. Later this session, the Supreme Court is expected to issue a ruling that might make patents easier to invalidate on grounds that their inventions were "obvious."
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