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Supreme Court: Licensees Can Sue for Invalidity

Posted in Patent Law

By Audrey Millemann

        The Supreme Court has expanded the rights of licensees to challenge the validity of the patents being licensed and the terms of their licenses. In MedImmune, Inc. v. Genentech, Inc., 127 S.Ct. 764 (January 9, 2007), the Court addressed the question of whether a licensee of a patent was required to terminate or breach the license in order to obtain a declaratory of judgment of invalidity, unenforceability, or noninfringement. 

MedImmune licensed a patent from Genentech which covered one of MedImmune’s antibody products. The license provided that MedImmune would also be entitled to receive a license under a second patent that was yet to be issued. When the second patent issued, Genentech sent MedImmune a letter demanding that MedImmune pay royalties under the second patent as well. MedImmune treated Genentech’s letter as a threat that if MedImmune failed to pay royalties under the second patent, Genentech would sue for patent infringement and seek treble damages, attorneys’ fees, and an injunction. Because of these risks, MedImmune filed a declaratory judgment action in the district court, seeking a judgment of invalidity or unenforceability of the second patent, but continued to pay royalties to Genentech throughout the litigation.

          The district court dismissed the case on the grounds that there was no justifiable controversy because there was no threatened suit of infringement by Genentech. The Court of Appeals for the Federal Circuit affirmed. The Supreme Court reversed. 

          The Declaratory Judgment Act provides the federal courts with jurisdiction to resolve cases of actual controversy. The Court explained that declaratory judgment cases satisfy Article III’s requirement for “a case or controversy” if “there is a substantial controversy, between parties having adverse legal interests, of sufficient immecliacy and reality to warrant and issuance of a declaratory judgment.” Id. at 771. The Court explained that if MedImmune had repudiated the license and ceased making royalty payments to Genentech, Article III would clearly have been met. Because MedImmune continued to pay royalties, however, there was no possible threat of a suit by Genentech. Thus, the issue was whether MedImmune’s conduct rendered the dispute not a justiciable controversy within Article III. 

          The Court analogized MedImmune’s situation to cases in which a plaintiff challenges the constitutionality of a particular law. For example, in cases involving a challenge to the anti-alien land law or a challenge to a law prohibiting the distribution of handbills at shopping centers, the Court had not required the plaintiff to engage in the violative action in order to file a declaratory judgment action and meet Article III. In both cases, the plaintiffs had elimintated the threat of prosecution by not violating the laws that they claimed were unconstitutional. The Court stated that “that did not preclude subject-matter jurisdiction because the threat-eliminating behavior was effectively coerced.[Citations omitted.] The dilemma posed by that coercion – – putting the challenger to the choice between abandoning his rights or risking prosecution – – is ‘a dilemma that it was the very purpose of the Declaratory Judgment Act to ameliorate.’” Id. at 772-3, quoting Abbott Laboratories v. Gardner, 387 U.S. 136 (1967).

          The Court acknowledged that there was a difference between the government action cases and this case, in which the threat was from a private party (Genentech) rather than the Government. The Court cited several cases in which the threat of private action was sufficient to satisfy Article III, including its prior decision in Altvater v. Freeman, 319 U.S. 359 (1943). In that case, the Court had held that a patent licensee who continued to pay royalties (under protest due to the existence of an injunction) could challenge the patent’s validity in a declaratory judgment action. The case was a justiciable controversy because the licensee was coerced to continue to pay royalties due to the risk of actual and treble damages for infringement. The Court held that Altvater was not distinguishable on the grounds that it involved an injunction. 

          Genentech argued that MedImmune had settled the dispute it had over the patent when it entered into the license. Genentech contended that the licensee had essentially agreed not to sue for invalidity in exchange for the patentee agreeing not to sue for infringement, as long as the licensee paid royalties. According to Genentech, if the licensee was allowed to challenge the patent while remaining immune from suit for infringement, that would alter the bargain. 

          The Court disagreed, first finding that Genentech’s argument had no merit to the extent that MedImmune was claiming that its product did not infringe Genentech’s patent, because the issue of validity is irrelevant to the determination of infringement. Second, the Court said that MedImmune’s license did not contain a prohibition against challenging validity and no such provision could be implied from MedImmune’s agreement to pay royalties for valid patents.

          The Court held that MedImmune was entitled to challenge the validity of Genentech’s patent through a declaratory judgment action and that it did not have to first terminate or breach its license.  Id.

          This case clearly gives patent licensees more freedom to challenge a patent then before. The Court did not address, however, whether a patent owner can draft a license that would eliminate those rights. Accordingly, both sides to a license need to be aware that such language, or the absence of such language, may significantly affect their rights.