Medimmune Gets Its Day In Court And Alters Perceptions Of License Agreement Drafting

A recent U.S. Supreme Court decision may prompt licensees to now challenge patents they are licensing. In MedImmune v. Genentech, the Court held that a licensee is not required to breach or terminate a license agreement as a prerequisite for filing an action to challenge the validity, enforceability or non-infringement of a licensed patent. In short, a patent licensee may maintain the benefit of the license while at the same time challenging the patents covered in the license.

The MedImmune decision, U.S. Supreme Court No. 05-608, will have an impact not only on the law regarding declaratory judgment actions by licensees, but also, on the Federal Circuit’s declaratory judgment jurisprudence in general. The Supreme Court’s 8-1 decision, delivered by Justice Scalia, states that a plaintiff is not required to expose itself to liability in order to bring a lawsuit challenging the validity, enforceability or non-infringement of the licensed patent. In the Court’s opinion, the failure to violate a law does not eliminate the licensee’s right to sue under Article III where the threat-eliminating behavior is essentially coerced. The dilemma posed by that coercion – making the challenger choose between abandoning its license rights or risk being sued – is a "dilemma that it was the very purpose of the Declaratory Judgment Act to ameliorate."

In 1997, Genentech entered into a patent license with MedImmune. The license covered Genentech’s then-pending patent application, which later became a patent, for the production of chimeric antibodies. MedImmune agreed to pay royalties on sales of "Licensed Products." The agreement defined "Licensed Products" as a specified antibody, "the manufacture, use or sale of which … would, if not licensed under th[e] Agreement, infringe one or more claims of either or both of [the covered patents,] which have neither expired nor have been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken."

In 2001, Genentech informed MedImmune that one of MedImmune’s products, Synagis (a drug used to prevent respiratory tract disease in infants and young children), was covered by the patent, and requested that MedImmune pay royalties in accordance with the license. MedImmune stated that no royalties were due because the patent was invalid and unenforceable, and that its product was not infringing. However, MedImmune eventually agreed to pay royalties (under protest and with reservation of all of [its] rights), and later filed a declaratory judgment for invalidity, unenforceability or non-infringement in federal court.

Genentech argued that because MedImmune had entered into a patent license agreement and could not be sued for patent infringement of the licensed patent, MedImmune could not file a declaratory judgment action without first stopping its royalty payments. In other words, MedImmune would have to breach the license agreement. MedImmune argued that it did not want terminate the license because of the risk that it might be found liable for treble damages and attorney fees. Basically, Genentech’s legal argument was that the suit did not involve a "case or controversy" (required by the Constitution and the Declaratory Judgment Act) because there was no real legal dispute between the parties as long as there was a license. The Declaratory Judgment Act’s language requiring that there be an "actual controversy" tracks the language of Article III of the Constitution, which provides that federal courts can hear a "case" or a "controversy."

Lower Court’s Rulings

The District Court dismissed MedImmune’s declaratory judgment claims for lack of subject-matter jurisdiction. The Federal Circuit affirmed. Under its precedent, beginning with Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), a licensee in good standing has no basis to sue for declaratory judgment because the existence of a license agreement eliminated any apprehension of suit by the licensee, thus precluding the possibility of a case or controversy sufficient to satisfy the requirements of Article III or the Declaratory Judgment Act. However, the Federal Circuit’s holding was in contrast to the Supreme Court’s 1969 decision in Lear v. Adkins, which held that a public policy interest in invalidating bad patents was strong enough to warrant a limitation on a licensee’s ability to give up its right to challenge a patent’s validity.

Supreme Court’s Decision

The Supreme Court granted certiorari. The question presented to the Court: Does Article III’s grant of jurisdiction of "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), require that a patent licensee refuse to pay royalties and materially breach the license agreement before the licensee can sue to have a court declare the patent invalid, unenforceable or not infringed?

In support of its decision to reverse the Federal Circuit, the Supreme Court stated that "[t]he only Supreme Court decision in point is, fortuitously, close on its facts to the case before us." In Altvater v. Freeman (319 U.S. 359 (1943)), the Court "held that a licensee’s failure to cease its payment of royalties did not render non-justiciable a dispute over the validity of the patent." This was so because "[t]he royalties ‘were being paid under protest and under the compulsion of an injunction decree,’ and ‘[u]nless the injunction decree were modified, the only other course [of action] was to defy it, and to risk not only actual but treble damages in infringement suits.’" Thus, the Court found that it had previously "concluded that ‘the requirements of [a] case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim.’"

In a footnote, the Court questioned the Federal Circuit’s declaratory judgment jurisprudence. "Even if Altvater could be distinguished as an ‘injunction’ case, it would still contradict the Federal Circuit’s ‘reasonable apprehension of suit’ test (or, in its evolved form, the ‘reasonable apprehension of imminent suit’ test, Teva Pharm. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1333 (2005)). A licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business." The Court also found that the "reasonable-apprehension- of-suit test" conflicted with Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270 (1941), and Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239 (1937), and is "in tension with" Cardinal Chemical Co. v. Morton Int’l, Inc., 508 U.S. 83, 98 (1993).

The Court rejected Genentech’s argument that a party to a license cannot at one and the same time challenge the patent’s validity and continue to reap the license’s benefits. The Court stated that MedImmune was not repudiating or impugning the license while continuing to reap its benefits. Instead, the license, properly interpreted, did not prevent MedImmune from challenging the patents, and did not require the payment of royalties, because the patents did not cover MedImmune’s products and was invalid. In other words, a promise "to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity."

Thus, the Court held that MedImmune was not required to break or terminate its license agreement before seeking a declaratory judgment.

Has the Standard Changed for Bringing Declaratory Judgment Actions of Patent Invalidity?

By reversing the Federal Circuit, the MedImmune decision represents a significant change in the law governing declaratory judgment actions. Could the "reasonable apprehension of suit" test be dead?

Licensees and licensors are likely to try a number of different strategies in future license negotiations, license drafting and litigation until some of the questions raised by MedImmune are resolved. For example: Can a non-threatening letter provide jurisdiction for a declaratory judgment action, i.e., the letter only provides notice of a patent? Can a Generic Drug Manufacturer filing an Abbreviated New Drug Application file a declaratory judgment action if the patent holder does not bring suit within the 45-day period after filing of paragraph IV certification?

The MedImmune decision also calls into doubt the Federal Circuit’s existing law regarding declaratory judgment actions, potentially lowering the hurdle for showing a case or controversy sufficient to meet the Declaratory Judgment Act, thereby expanding opportunities for potential declaratory judgment plaintiffs. Under the MedImmune decision, a licensee needs to do two things: (1) state that payments are being made under protest, and (2) state a belief that the patents are invalid.

The Supreme Court specifically left open the question of whether the district court could have (or should have) dismissed the declaratory judgment action on other grounds. Licensors may argue that the "pay and then sue" strategy is inequitable and that, despite MedImmune, district courts can decline jurisdiction in appropriate cases. Such arguments may be more persuasive where a challenged patent is specifically covered by the license (i.e., the licensee had an opportunity to review the patent and decided to enter into the license agreement). Such arguments may be less persuasive where, as in MedImmune, the license covers pending applications that later issue as challenged patents (i.e., the licensee never had the opportunity to analyze the claims of the licensed patents), and a dispute develops over the validity and/or infringement of the new patents.

What Impact Will MedImmune Have on Existing License Agreements?

The MedImmune decision may have significant ramifications for licensee/licensor relationships, the number of patent suits, and the terms found in license agreements. It is likely that existing licenses will be reevaluated by both licensees and licensors. Licensees may view entering into a license agreement as a win/win situation, such that entering into a license will provide them with the freedom to challenge a patent’s validity at any time without a risk of losing the license. However, licensors may change their licensing practices or even forgo licensing opportunities.

What Language Should Licensors Consider When Drafting a License Agreement in Light of the MedImmune Decision?

Besides having step-down provisions relating to Know-How provided by the licensor, the following suggestions are provided, not as legal advice, but as issues to discuss with patent counsel:

• Adding a provision to terminate the license upon the challenge of the underlying patented technology. Although there is an open question regarding the enforceability of such a provision under Lear v. Adkins, the licensee would no longer be in a position to reap the benefits of the license and the licensor can immediately look for another licensee.

• Considering higher royalty rates, up-front payments or fully paid-up licenses.

• Considering a provision for forum selection favorable for the licensor if a licensee challenges the licensed patents’ validity, enforceability, or infringement. On the other hand, if a challenge of non-infringement is likely, the licensor may want to consider a provision specifying arbitration or mediation.

• Adding a provision providing pre-suit notification, similar to notification by Generic Drug Manufacturers under the paragraph IV of Section 505(j) of the Drug Price Competition and Patent Term Restoration Act of 1984. This provision gives the licensor the opportunity to perhaps renegotiate the agreement or evaluate the strength of the licensee’s claim. The provision may even include a requirement to identify all prior art the licensee believes invalidates any claim of the patent.

• Considering variable royalty rates. For example, if the licensee challenges the patents covered under the license, the licensee would have to pay a higher royalty rate during the pendency of the action. Moreover, should the action result in a determination that the challenged patent is valid, the licensee would have to pay an even higher royalty rate than the one it paid prior to bringing the action.

• Including a provision in the license precluding recovery of previously paid royalties.

• Incorporating a representation that the licensee is not entering into the license under duress.

Besides having provisions essentially negating the above-identified issues for a licensor’s consideration, the following suggestions are provided, not as legal advice to a licensee, but as issues to discuss with patent counsel:

• Including a provision to place royalties in an escrow account during a challenge by the licensee of the underlying patented technology. Upon the courts’ final decision, the winner would receive the money accumulated in the account.

• Including a provision to inform the licensee of any prior art disclosed to the licensor during any third party challenge to the licensed patented technology.

• Maintaining a paper trail of the cease-and-desist letter and responses, including statements of "protest" iterating a good faith belief that the patent(s) are invalid or not infringed. To state such a belief, licensees should retain competent patent counsel to provide an opinion on the invalidity or non-infringement of the patents at issue.

In the wake of the MedImmune decision, both licensees and licensors may want to reevaluate existing license agreements to determine if there is any language precluding initiation of a patent reexamination in the United States Patent and Trademark Office, or challenge to patent validity, enforceability, or non-infringement in the courts. Both licensees and licensors should also consider what provisions should be included in future licenses to better protect themselves.

Because of the significance of this decision, the Life Science Industry Group at Pillsbury Winthrop Shaw Pittman is closely monitoring future activities and will provide additional information as necessary.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.