Originally published February 2006
On February 21, 2006, the Supreme Court granted certiorari in MedImmune, Inc. v. Genentech, Inc., U.S. Supreme Court No. 05-608 (Fed. 21, 2006), to decide whether a patent licensee must refuse to pay royalties before suing the licensor/patentee for a declaration that the patent is invalid, unenforceable, or not infringed. Thus, the Supreme Court will review the rule established by the Federal Circuit in its 2004 decision in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), that Lear, Inc. v. Atkins, 395 U.S. 653 (1969), does not allow licensees in good standing to challenge licensed patents. According to the Federal Circuit, the licensee must breach the license by refusing to pay royalties before it can exercise its rights under Lear to challenge the validity of a licensed patent. The Federal Circuit reasoned that without such a breach there is no actual controversy, and the federal courts lack jurisdiction, under both Article III of the Constitution and the Declaratory Judgment Act, 28 U.S.C. § 2201(a).
Background: In Lear, Inc. v. Adkins, the Supreme Court held that a licensee to a patent license agreement may not be estopped from asserting that the licensed patent is invalid and may assert invalidity as a defense to a suit for unpaid royalties on a license, notwithstanding the fact that the license provided "royalties are to be paid until such time as the ‘patent . . . is held invalid.’" 395 U.S. at 673. The Supreme Court addressed the question whether the licensee must be required to comply with its contract to continue to pay royalties until its challenge to the validity of the patent was finally vindicated in the courts. Id. The Supreme Court held that the licensee was not required to continue to make payments to the licensor while it was challenging the validity of the patent because "such a requirement would be inconsistent with the aims of federal patent policy." Id. In this situation, the federal interest in placing inventions protected by invalid patents in the public domain outweighs the requirements of state contract law. Id. at 670-71. The Supreme Court stated:
Enforcing this contractual provision would give the licensor an additional economic incentive to devise every conceivable dilatory tactic in an effort to postpone the day of final judicial reckoning. We can perceive no reason to encourage dilatory court tactics in this way. Moreover, the cost of prosecuting slow-moving trial proceedings and defending an inevitable appeal might well deter many licensees from attempting to prove patent invalidity in the courts. . . . If a licensee has reason to believe that he will replace a patented idea with a new one in the near future, he will have little incentive to initiate lengthy court proceedings, unless he is freed from liability at least from the time he refuses to pay the contractual royalties.
Id. at 673-74.
Refining this concept in practice, the Federal Circuit held in C.R. Bard, Inc. v. Schwartz, 716 F.2d 874 (Fed. Cir. 1983), that a licensee need not terminate a license before filing a declaratory judgment action.
Based on Lear and C.R. Bard, many lawyers believed that a licensee could continue to pay royalties and need not breach the license agreement in order to file a suit challenging the validity of a licensed patent. Some older cases had so held. For example, in Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184 (2d Cir. 1977), the Second Circuit held that although the licensee had not ceased payment of royalties under the license agreement, there was still a controversy sufficient to create federal court jurisdiction. (The Federal Circuit cited Warner-Jenkinson for this proposition in C.R. Bard, although the Court did not explicitly adopt it. See 716 F.2d at 880.) The advantage of this "pay and sue" strategy was that, because there had been no breach, the patentee could not terminate the license and sue the licensee for infringement. The worst-case scenario for the declaratory relief plaintiff was that the patentee retained the royalties paid and the terms of the license remained in effect.
In 2004, a panel of the Federal Circuit rejected this reading of the cases in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004). In 2005, two different panels rejected arguments that the Gen-Probe decision was inconsistent with Lear, C.R. Bard and other Federal Circuit precedents. On February 21, 2006, the Supreme Court agreed to review one of these 2005 decisions. MedImmune, Inc. v. Genentech, Inc., U.S. Supreme Court No. 05-608 (Feb. 21, 2006).
In Gen-Probe, the Federal Circuit held that a licensee in good standing who disputed the scope or validity of a licensed patent could not file a declaratory judgment action regarding the licensed patent without running afoul of the constitutional "case or controversy" requirement.
In Gen-Probe, the patentee, Vysis, had granted Gen-Probe a nonexclusive license that required Gen-Probe to pay ongoing royalties for products that practiced the licensed patents. 359 F.3d at 1377-78. Gen-Probe nevertheless filed a declaratory judgment action, asserting that one of the licensed patents was not infringed by Gen-Probe’s products and that the patent was invalid. However, Gen-Probe continued to pay royalties under the license, albeit under "protest." Id. at 1379. Gen-Probe also indicated that it intended to pay royalties throughout the litigation. Id. The district court conducted a trial and the jury ruled in favor of Gen-Probe.
On an appeal, the Federal Circuit held that there was no case or controversy sufficient for the district court to have exercised jurisdiction. The Court noted that the Declaratory Judgment Act, 28 U.S.C. § 2201(a), only supports jurisdiction in the event of an actual controversy. Id. Whether there is an actual case or controversy is determined by evaluating the totality of the circumstances. The Court held that the license was a covenant not to sue that "insulated Gen-Probe from an infringement suit instituted by Vysis." Id. at 1381. Thus, the Court determined that the license, "unless materially breached, obliterated any reasonable apprehension" of an infringement lawsuit. Id.
The Court distinguished the Lear case, stating that Lear did "not grant every licensee in every circumstance the right to challenge the validity of the licensed patent." Id. The Court also distinguished the C.R. Bard case, explaining that the licensee in that case had stopped paying royalties and was therefore in "material breach," meaning that the agreement could be terminated by the patentee. Id. at 1380. The material breach allowed the patentee to file a patent infringement suit against the licensee at any time. Id.
The Court also indicated that its holding was supported by public policy:Id. at 1382. The Federal Circuit therefore held that there was no actual controversy to support the declaratory judgment action, and vacated the jury verdict and remanded the case to the district court. The Court subsequently denied a petition for rehearing and rehearing en banc.
Based on Gen-Probe, two patent infringement cases involving biotechnology company MedImmune, Inc., were dismissed by two separate district courts for lack of an actual case or controversy. MedImmune appealed both cases and the subsequent Federal Circuit decisions helped clarify the scope of the Gen-Probe decision.
In the first of these cases, MedImmune, Inc. v. Centocor, Inc., 409 F.3d 1376 (Fed. Cir. 2005), the patentees (Columbia and Stanford Universities) obtained a patent in 1984 and asserted that MedImmune was infringing that patent. MedImmune licensed the patent, but later filed a declaratory judgment action asserting that the patent was invalid and unenforceable. MedImmune claimed that after the formation of the license agreement, it discovered information indicating that the patent was invalid and unenforceable. MedImmune continued to make royalty payments during the litigation. The district court dismissed the suit based on Gen-Probe. On appeal, the Federal Circuit affirmed: "Quite simply, once the license agreement was in place and MedImmune was in compliance with the terms of the agreement, MedImmune could not be under a reasonable apprehension that it would face an infringement suit." Id. at 1379 (citing Gen-Probe).
The Court quickly dismissed all of MedImmune’s arguments regarding the inapplicability of Gen-Probe. The Federal Circuit distinguished Cardinal Chemical Co. v. Morton International, 508 U.S. 83 (1993), because that decision set forth a rule for appellate courts and "did not concern the jurisdiction of the federal district courts." Id. at 1380. The Federal Circuit also (again) rejected the argument that Gen-Probe was inconsistent with Lear. The Court noted that although Lear held that a licensee is not estopped from challenging a licensed patent, the Lear case said nothing about when the courts have jurisdiction over such disputes. Id. at 1380. The Court also rejected MedImmune’s arguments that Gen-Probe was inconsistent with several earlier Federal Circuit decisions. Id. at 1380-81. Further, the Court declined MedImmune’s request that the panel recommend that the case be heard en banc.
As in the Centocor case, the district court in MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005), dismissed MedImmune’s declaratory judgment action under Gen-Probe. MedImmune had continued to pay royalties during the litigation. On appeal, the Federal Circuit affirmed the dismissal for lack of jurisdiction. Id. at 965. The Federal Circuit rejected MedImmune’s argument that it met the requirements of the Declaratory Judgment Act, even if there was no reasonable apprehension of a lawsuit, because if it stopped paying the royalties, it could be sued. Id. at 963. The Court held that MedImmune "assiduously avoided" breach so the result should be the same as in Gen-Probe. The Court further noted that this result was consistent with its prior rulings. Id. at 963-64.
MedImmune also argued that the same public policy concerns that had caused the courts to eliminate licensee estoppel in intellectual property cases weighed in favor of allowing its lawsuit, but the Court held that Gen-Probe addressed the availability of declaratory judgment relief, not estoppel. The purpose of the Declaratory Judgment Act is to accommodate the concerns of both sides of a dispute and to allow a licensee to preserve its license (and its royalty rate) even if its attack on the patent failed would distort the equalizing principles that underlie the Declaratory Judgment Act. Id. at 963-64.
Additionally, the Court rejected MedImmune’s argument that the timing of the license agreement was significant. MedImmune had argued that Gen-Probe was distinguishable because in that case the license agreement was entered into after the patent issued, whereas MedImmune negotiated its license before the patent issued. The Court also dismissed MedImmune’s argument that other circuits have held in intellectual property disputes that a license need not be breached to acquire declaratory judgment standing. The Court held that those cases involved other factors that created an actual controversy. Id. at 964.
The Court noted its holding in the Centocor case and affirmed the pragmatic utility of the "totality of the circumstances" test. It also noted that although the licensee and licensor always have "adverse legal interests," that relationship does not create a definite case or controversy and the courts have no discretion to accept cases where such a controversy is absent. Id. at 964-65.
MedImmune’s petition for certiorari. MedImmune’s petition for certiorari made three arguments in favor of review by the Supreme Court. First, MedImmune argued that the Federal Circuit’s interpretation of the Declaratory Judgment Act was inconsistent with the interpretation given to that act by other circuits. Specifically, MedImmune argued that requiring breach of a license is inconsistent with the way other courts have applied the Declaratory Judgment Act to other contracts, where there generally has been no requirement of breach as prerequisite for finding of a justiciable dispute, so long as there is a real disagreement about the interpretation or scope of the contract.
Second, MedImmune argued that the Federal Circuit’s decision was inconsistent with Lear and undermines the policies expressed by the Supreme Court in Lear. According to MedImmune, "Gen-Probe and the present decision leave Lear virtually a dead letter in the Federal Circuit." MedImmune argued that the Federal Circuit’s decision was part of a string of Federal Circuit decisions that attempted to undermine Lear. MedImmune cited the Federal Circuit’s 1997 decision in Studiengesellschaft Kohle, m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1567 (Fed. Cir. 1997), where it characterized the Supreme Court’s Lear decision as sounding "tones that echo a past era of skepticism over intellectual property principles."
Finally, MedImmune argued that the impact of the decision will be to inhibit the introduction of new medical drugs and treatments
The Supreme Court’s grant of certiorari. On February 21, 2006, the Supreme Court granted a petition for certiorari in this matter on the following issue: "Whether Article III’s grant of jurisdiction over "all Cases … arising under … the Laws of the United States," implemented in the "actual controversy" requirement of the Declaratory Judgment Act, 28 U.S.C. § 2201(a), requires a patent licensee to refuse to pay royalties and commit a material breach of a license agreement before suing to declare a patent invalid, unenforceable, or not infringed."
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In Centocor and Genentech, the Federal Circuit confirmed the broad scope of its ruling in Gen-Probe. In order to satisfy the requirements of the Declaratory Judgment Act, the Federal Circuit believes, a licensee must have a reasonable apprehension of a patent infringement suit by the licensor. The Court has clearly and repeatedly held that a licensee in good standing has no such apprehension. The Court has also consistently and unequivocally rejected every argument that Gen-Probe is either harsh or unfair to licensees, and has rejected arguments that it is contrary to its own precedents and those of the Supreme Court and other circuits.
The Supreme Court’s interest in this case is difficult to predict. On the one hand, the Supreme Court may decide that the policy considerations that led it to its decision in Lear are still valid and that the public interest in innovation and competition not being inhibited by invalid patents requires that such patents not be insulated from attack. Such a view may lead the Court to reaffirm and arguably expand Lear, and to reject the Federal Circuit’s Gen-Probe line of cases. On the other hand, the Supreme Court may conclude that the Federal Circuit is correct, and the Lear doctrine has outlived its utility, or should in any event not be expanded. The Supreme Court may decide it is time to resurrect licensee estoppel, a decision that would dramatically change the patent licensing landscape. At a minimum, the Court may conclude that the Gen-Probe rule strikes the correct balance of the risks and incentives of both licensees and licensors when they decide to license a patent and is an appropriate restriction on a broader reading of Lear’s holding.
We expect that the Supreme Court will hear arguments in the case in the Fall of 2006, with a decision to follow in late 2006 or early 2007.
Note:
MedImmune also alleged that the patent in suit was the result of an anticompetitive settlement of an interference contesting priority between Genentech and Celltech R&D, Ltd., a British biotechnology company. The district court granted Genentech and Celltech’s motions for summary judgment on MedImmune’s antitrust and unfair competition claims, and the Federal Circuit affirmed that ruling. Morrison & Foerster represented Celltech in both the district court and in the Federal Circuit.
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