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By Charles S. Barquist and Jason A. Crotty
Special to Law.com
01-29-2007

On Jan. 9, 2007, the Supreme Court decided MedImmune, Inc. v. Genentech, Inc., U.S. Supreme Court No. 05-608, holding that a patent licensee need not breach its license agreement in order to file a declaratory judgment action regarding non-infringement, invalidity or unenforceability. This decision overturned a rule established by the Federal Circuit decision in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), that the existence of a license agreement categorically 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. The MedImmune decision 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 generally. Moreover, the case will have ramifications for both licensors and licensees in all fields of technology.

At the time the Federal Circuit decided Gen-Probe, another declaratory judgment case was pending involving MedImmune Inc. and Genentech Inc. MedImmune had licensed certain intellectual property rights from Genentech, but sued Genentech for a declaration that one of the licensed patents was not infringed by MedImmune's activities and/or was invalid. MedImmune continued to pay royalties during the litigation. When Gen-Probe was decided, the district court dismissed MedImmune's suit for lack of an actual case or controversy. The Federal Circuit affirmed, rejecting MedImmune's argument that it met the requirements of the Declaratory Judgment Act because if it stopped paying the royalties, it could be sued. MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005). MedImmune appealed to the Supreme Court.

The Supreme Court began its analysis "with the recognition that, where threatened action by government is concerned, we do not require a plaintiff to expose himself to liability before bringing suit to challenge the basis for the threat -- for example, the constitutionality of a law threatened to be enforced. The plaintiff's own action (or inaction) in failing to violate the law eliminates the imminent threat of prosecution, but nonetheless does not eliminate Article III jurisdiction." The Court acknowledged that decisions are "more rare" when a plaintiff's "self-avoidance of imminent injury is coerced by threatened enforcement action of a private party rather than the government." The Court noted that "[t]he only Supreme Court decision is, fortuitously, close on its facts to the case." Altvater v. Freeman, 319 U.S. 359 (1943), "held that a licensee's failure to cease its payment of royalties did not render nonjusticiable 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.'"

Accordingly, 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.'"

The Court was not persuaded by the fact that MedImmune's obligation to pay was a product of its voluntary decision to sign a license with Genentech. It contended that Altvater could not be distinguished on the ground that it involved the compulsion of an injunction, because the Altvater Court "acknowledged that the licensees had the option of stopping payments in defiance of the injunction, but explained that the consequence of doing so would be to risk 'actual [and] treble damages in infringement suits' by the patentees." The Court "significantly did not mention the threat of prosecution for contempt, or any other sort of governmental sanction."

In a footnote, the Court broadly called the Federal Circuit's declaratory judgment jurisprudence into question: 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 continued, stating that the "reasonable-apprehension-of-suit test" also conflicts with its decisions in 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 the parties had effectively settled the dispute by entering into the license agreement, and that MedImmune should not be able to unravel the settlement unilaterally by filing suit. "Promising 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."

The Court also held that Genentech could not rely upon "the common-law rule that a party to a contract cannot at one and the same time challenge its validity and continue to reap its benefits." The Court explained that "[p]etitioner is not repudiating or impugning the contract while continuing to reap its benefits. Rather, it is asserting that the contract, properly interpreted, does not prevent it from challenging the patents, and does not require the payment of royalties because the patents do not cover its products and are invalid."

Genentech had also urged the Supreme Court to affirm dismissal on discretionary or prudential grounds, such as what it characterized as MedImmune's "duplicitous 'license and then sue' strategy."

However, the Court declined to reach beyond the threshold issue of jurisdiction, and stated that "it would be imprudent for us to decide whether the District Court should, or must, decline to issue the requested declaratory relief. We leave the equitable, prudential, and policy arguments in favor of such a discretionary dismissal for the lower courts' consideration on remand."

The MedImmune decision will likely have significant ramifications for licensee/licensor relationships, the number of patent suits and the terms found in license agreements. MedImmune may cause licensors to demand higher royalties because the incentive to compromise is reduced if the licensor knows that the license is not a final resolution, but rather that the licensee can simply turn around and file a declaratory judgment action challenging the validity of the patent or whether it is used, or infringed, at all.

On the other hand, licensees may be more willing to enter into patent licenses, since doing so will not limit their ability to challenge a licensed patent. Licensees may view licenses as a kind of insurance policy, giving them downside protection by limiting the scope of their liability if they unsuccessfully challenge a licensed patent.

Additionally, under Gen-Probe, if a license involved several patents, a licensee could not challenge only one of the licensed patents without risking the entire license. Thus, in this regard, MedImmune has restored the pre-Gen-Probe relationship between licensors and licensees.

The decision may also increase the number of declaratory judgment actions challenging the validity of patents, particularly in areas such as biotechnology where patents may be particularly vulnerable to written description and enablement challenges under 35 U.S.C. §112. Indeed, the patent at issue in MedImmune is a biotechnology patent.

The Supreme Court specifically left open the question of whether the district court could have (or should have) dismissed the declaratory judgment action on prudential 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 the challenged patent (i.e., the licensee never had the opportunity to analyze the licensed patent), and a dispute develops over the validity and/or infringement of that new patent.

The MedImmune decision may also have broad consequences for the Federal Circuit's case law regarding declaratory judgment jurisdiction outside the licensing context. The MedImmune decision effectively undermines the Federal Circuit's "reasonable apprehension of suit" test for declaratory judgment jurisdiction by stating that it conflicts (or is in tension) with four Supreme Court decisions.

Thus, many of the Federal Circuit's existing statements regarding declaratory judgment may now be open to question. For example, the Federal Circuit has concluded that its test for determining declaratory judgment jurisdiction is not met "when a patentee does nothing more than exercise its lawful commercial prerogatives and, in so doing, puts a competitor in the position of having to choose between abandoning a particular business venture or bringing matters to a head by engaging in arguably infringing activity." Cygnus Therapeutics Sys. v. ALZA Corp., 92 F.3d 1153, 1160 (Fed. Cir. 1996).

Similarly, the Federal Circuit has stated that "[t]he offer of a patent license does not create an actual controversy ... . When there are proposed or ongoing license negotiations, a litigation controversy normally does not arise until the negotiations have broken down." Phillips Plastics Corp. v. Kato Hatsujou Kabushiki Kaisha, 57 F.3d 1051, 1053 (Fed. Cir. 1995). Additionally, under existing Federal Circuit law it may be possible for patentees to provide actual notice under 35 U.S.C. § 287(a) but not trigger a controversy sufficient to create declaratory judgment jurisdiction. See SRI Int'l, Inc. v. Advanced Tech. Labs., Inc., 127 F.3d 1462 (Fed. Cir. 1997) (holding that actual notice may be achieved without creating an actual controversy). These holdings may now be questionable.

By reversing the Federal Circuit, the MedImmune decision represents a significant change in the law governing declaratory judgment actions. Licensees and licensors are likely to try a number of different strategies in future license negotiations and in litigation until some of the questions raised by MedImmune are resolved.

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.

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's 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 both in the district court and in the Federal Circuit.