United States: Licensee in Good Standing Barred From Bringing Declaratory Judgment Action

In a case involving a declaratory judgment suit, the U.S. Court of Appeals for the Federal Circuit vacated a district court’s ruling that the claims at issue were not infringed and invalid on the grounds that the lower court lacked subject matter jurisdiction. The Federal Circuit held that a patent licensee in good standing who continues to pay royalties may not file suit for declaratory judgment to challenge the licensed patents because there is no case in controversy. Gen-Probe Incorporated v. Vysis, Inc., Case Nos. 02-1617,-1618 (Fed. Cir. Mar. 5, 2004) (Rader, J.)

Gen-Probe was a licensee of U.S. Pat. No. 5,750,338 (the `338 patent) owned by Vysis. The patent relates to methods of capturing and amplifying viral DNA in blood samples. At the time the `338 patent issued, Gen-Probe and Vysis were litigating unrelated patents. An employee of Vysis informed an employee of Gen-Probe, orally and in writing, that its products may infringe the `338 patent. In order to resolve all of its "intellectual property issues at one time," including the litigation of unrelated patents, Gen-Probe took a license in the `338 patent.

Gen-Probe subsequently informed Vysis of its opinion that the claims of the `338 patent were invalid and unenforceable and filed a declaratory judgment action. However, to "preserve the status quo" and hedge its bets against potential damages should it lose the suit, Gen-Probe elected to fulfill its obligations under the license and continue to pay royalties.

Vysis filed a motion in the district court to dismiss the action for lack of subject matter jurisdiction arguing that as a licensee in good-standing, Gen-Probe had no reasonable apprehension of suit. The district court disagreed and, following a two-week trial, ultimately held that the claims of the `338 patent were invalid and not infringed. The district court relied on the history of litigation between the parties, the oral notification of possible infringement between employees and the letter of possible infringement to substantiate an actual controversy between the parties. Additionally, the district court cited Lear v. Adkin for the proposition that a license does not bar a licensee from challenging the validity of a patent.

The Federal Circuit reversed, holding that in order to find the requisite "actual controversy," the plaintiff must do so using a "totality of the circumstances" test. In patent cases, the Federal Circuit stated that there must be both an explicit threat or other action by the patentee that creates a reasonable apprehension on the part of the declaratory judgment plaintiff that it will face an infringement suit, and present activity that could constitute infringement or concrete steps taken with the intent to conduct such activity.

The Court noted that Vysis had relinquished its ability to bring suit against Gen-Probe by entering the license and that by continuing to make the required royalty payments Gen-Probe maintained its status as a licensee in good standing. Moreover, the Court stated that even though a licensee is not always barred from challenging the validity of a patent, Lear does not allow any licensee to do so for any reason. According to the Court, before a licensee may avail itself of the rights afforded by Lear, the licensee must cease payment of royalties and provide the licensor notice that the reason for the cessation is because it considers the relevant claims invalid. Here, Gen-Probe presented no facts supporting an actual controversy, and the Court found that it could not be under reasonable apprehension of a lawsuit.

Practice Note: The Federal Circuit felt that allowing Gen-Probe to prosecute its lawsuit without renouncing its license would discourage patentees from issuing licenses. As a licensor, a patent holder would carry greater risk in terms of its ability to recover only a reasonable royalty in damages, vis-à-vis a licensee hedging its bets by paying royalties while seeking to undermine the underlying patent.