Supreme Court to Decide Standing Issue

On Feb. 21, 2006, the Supreme Court granted certiorari to review MedImmune, Inc. v. Genentech, 427 F.3d 958 (Fed. Cir. 2005). The question presented is: '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 a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable, or not infringed?' Whether the Court affirms or reverses the Federal Circuit, which answered in the affirmative, undoubtedly will affect the balance of power between patentees and their licensees and, perhaps, the willingness of licensors to grant licenses.

Background

The Declaratory Judgment Act (the 'Act') provides: 'In a case of actual controversy within its jurisdiction … any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.' 28 U.S.C. '2201(a). The limitation of the Act to 'case[s] of actual controversy' arises from Article III of the U.S. Constitution. Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 239 (1937).

MedImmune is not the first time that the Supreme Court has considered the issue of standing in a patent infringement-related declaratory action. In Altvater v. Freeman, 319 U.S. 359 (1943), Freeman, the patent holder, entered into a license agreement with Altvater. Id. at 359. Shortly thereafter, Freeman filed suit against Altvater for specific performance of the agreement alleging violation of its covenants and infringement. Id. The district court held that Altvater could not challenge the validity of the patent due to the now-overruled doctrine of licensee estoppel (see discussion below) and that Altvater's product infringed the patent. Id. at 361. Accordingly, Altvater was ordered to pay royalties under the license. Id. at 361. Freeman filed a separate action against another party, Premier Machine Co., on the same patent. Id. In the case against Premier, the court held that only three of the asserted claims were valid. Id. Freeman subsequently surrendered the original patent, obtained two reissue patents, and brought a second action against Altvater. Id. at 362. In this action, Freeman asked for specific performance of the license agreement, for an injunction, and for an accounting. Id. at 360. Altvater filed a counterclaim contending that the license did not cover the reissue patents, and that such patents were invalid. Id. at 361.

The district court found that: 1) Altvater's devices did not infringe the reissue patents; 2) the decision in the Premier case that only three of the 26 claims of the original patent were valid constituted an eviction under the license agreement; 3) the license agreement terminated with the surrender of the original patent; 4) Altvater did not make the reissue patents a basis for a new license agreement; 5) while Altvater paid certain royalties, it did so under protest and pursuant to an injunction entered in the first suit; and 6) the reissue patents were invalid. Id. at 362. On review, the appellate court held that when the lower court found that no license existed and that there was no infringement, the other issues became moot and there was no longer a justiciable controversy. Id. Thus, the appellate court modified the lower court's decree by striking: 1) the provision that held that Freeman was evicted from his monopoly as a result of the decision in the Premier suit; 2) the provision that the reissue patents were invalid; and 3) the provision which resolved the issues on the counterclaim in favor of Altvater. Id. at 363.

The Supreme Court in Altvater stated: 'It is said that so long as petitioners are paying royalties they are in no position to raise the issue of invalidity ' the theory being that as licensees they are estopped to deny the validity of the patents and that, so long as they continue to pay royalties, there is only an academic, not a real controversy, between the parties.' Id. at 364. The Court then noted that 'the fact that royalties were being paid did not make this a 'difference or dispute of a hypothetical or abstract nature.” Id. The Court stated that because the royalties were being paid under the compulsion of an injunction decree, the only course was to defy it and risk not only actual, but also treble damage in an infringement suit. Id. at 365. According to the Court, '[i]t was the function of the Declaratory Judgment Act to afford relief against such peril and insecurity.' Id. As such, the Court held that the issues raised by the counterclaim were not moot and remanded to the Court of Appeals so that it could review the counterclaim issues. Id.

In Lear, Inc. v. Atkins, 395 U.S. 653 (1969), the Court was faced with an issue involving the policy considerations in MedImmune. The court below had held that, pursuant to the doctrine of licensee estoppel, the licensee was required to pay royalties to the licensor in a suit for unpaid royalties and was foreclosed from arguing that the patent was invalid. 395 U.S. at 670. After weighing the equities, the Court repudiated the doctrine and held that a licensee is not foreclosed from an invalidity defense. Id. The Court stated:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public do-main. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued. Id. at 670-671 (emphasis added).

Over the years, the Federal Circuit has attempted to limit the reach of Lear. See, e.g., Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1381 (Fed. Cir. 2004), cert. dismissed, 543 U.S. 941 (2004) ('in several instances, this court has declined to apply the Lear doctrine'); Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220 (Fed. Cir. 1988) (holding that Lear did not repudiate the doctrine of assignor estoppel, wherein an assignor is estopped from challenging the patent's validity).

In Gen-Probe, the Federal Circuit limited Lear by creating the same rule that will be reviewed in MedImmune, ie, that a licensee that continues to pay royalties does not have standing to bring a declaratory judgment action. In fashioning this rule, the court noted that such a licensee could not have a 'reasonable apprehension' that it would face a lawsuit, because the license insulated it from an infringement suit. 359 F.3d at 1381. The court distinguished Altvater on the grounds that Altvater paid royalties under the compulsion of an injunction decree. Id. 1382. The court reasoned: 'Allowing this suit to proceed would effectively defeat those contractual covenants and discourage patentees from granting licenses. In other words, in this situation, the licensor would bear all the risk, while the licensee would benefit from the license's effective cap on damages or royalties in the event its challenge to the patent's scope or validity fails.' (Interestingly, before repudiating licensee estoppel, the Lear Court noted that similar policy considerations supported licensee estoppel. See 395 U.S. at 656 ('The theory underlying [licensee estoppel] is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void')).

MedImmune

In the MedImmune case, MedImmune licensed a Genentech patent related to manufacturing human antibodies. 427 F.3d at 961. Subsequently, MedImmune brought a declaratory judgment action alleging that the patent was invalid or unenforceable. Id. at 962. Relying on Gen-Probe and a later decision following Gen-Probe, MedImmune v. Centocor, Inc., 409 F.3d 1376 (Fed. Cir. 2005), the Federal Circuit held that because MedImmune continued to pay royalties under the license agreement, the district court properly dismissed the suit as non-justiciable. 427 F.3d at 962-965.

In its Petition for a Writ of Certiorari, MedImmune presented four reasons that the Court should review the case: 1) the Federal Circuit's decision was contrary to several Supreme Court cases, including Altvater; 2) the decision was contrary to declaratory judgment holdings in other circuits; 3) the decision frustrates Lear; and 4) the decision inhibits new medical drugs and treatment. Regarding the last reason, MedImmune contended that the decision would further encourage licensors to bundle overly broad invalid patents with valid patents.

Commentary

Although the Federal Circuit supported its holding in Gen-Probe with certain policy considerations, as did MedImmune in its Petition, it is not clear whether these policy considerations should have any role in the case. Indeed, the policy considerations that are typically involved in Article III cases ” political concerns, separation of powers, and states' rights (See Moore's Federal Practice, '101.01, 101-13) ” have no relation to the policies cited by the Federal Circuit or MedImmune. Perhaps tellingly, MedImmune's Petition concedes as much. Petitioner's Brief at 19 ('Article III does not exist to promote particular substantive policies, but rather sets the parameters of the federal judicial power'). Nonetheless, in Altvater, the Court justified its holding by stating: 'Unless the injunction decree were modified, the only other course was to defy it, and to risk not only actual but treble damages in infringement suits. It was the function of the Declaratory Judgments Act to afford relief against such peril and insecurity.' 319 U.S. at 365 (internal citations omitted).

To the extent that substantive policy considerations should play a role, it seems that the Lear rationale that 'licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery' may have particular resonance in a case like MedImmune, because MedImmune's product is a monoclonal antibody for treating a disease. Indeed, it may be particularly unlikely that another company would have the incentive to challenge a patent like the Genentech patent, because: 1) biotechnology products are often subject to numerous patent licenses, and another company, even if successful in challenging the patent, might infringe other patents, which might be assigned or exclusively licensed to a licensee like MedImmune; and 2) there are significant barriers to entry in introducing most biotechnology therapeutics, because, unlike the case concerning generic versions of traditional chemical pharmaceuticals, which can be marketed after an abbreviated FDA approval process, the current regulatory scheme does not allow a company seeking to market certain biotechnology therapeutics, including antibodies, to shortcut the FDA approval process by relying on an earlier company's laboratory and clinical tests.

Finally, the Federal Circuit has remarked that Lear 'echo[es] from a past era of skepticism over intellectual property principles.' Studiengesellschaft Kohle m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1567 (Fed. Cir. 1997). Thus, it may be of note that the Supreme Court recently overruled two patent-related cases from the Lear era. See Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. __ (2006) (overruling U.S. v. Loew's Inc., 371 U.S. 38 (1962) and Intern'l Salt Co. v. U.S., 332 U.S. 392, (1947) and holding that a patent no longer creates a presumption of mar-ket power in an antitrust case alleging an improper tying arrangement).

Oral argument is expected in the October 2006 Term.

Shane Cortesi is an associate in the New York office of Kenyon & Kenyon LLP. He can be reached at 212-908-6222.

On Feb. 21, 2006, the Supreme Court granted certiorari to review MedImmune, Inc. v. Genentech , 427 F.3d 958 (Fed. Cir. 2005). The question presented is: '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 a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable, or not infringed?' Whether the Court affirms or reverses the Federal Circuit, which answered in the affirmative, undoubtedly will affect the balance of power between patentees and their licensees and, perhaps, the willingness of licensors to grant licenses.

Background

The Declaratory Judgment Act (the 'Act') provides: 'In a case of actual controversy within its jurisdiction … any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.' 28 U.S.C. '2201(a). The limitation of the Act to 'case[s] of actual controversy' arises from Article III of the U.S. Constitution. Aetna Life Ins. Co. v. Haworth , 300 U.S. 227, 239 (1937).

MedImmune is not the first time that the Supreme Court has considered the issue of standing in a patent infringement-related declaratory action. In Altvater v. Freeman , 319 U.S. 359 (1943), Freeman, the patent holder, entered into a license agreement with Altvater. Id. at 359. Shortly thereafter, Freeman filed suit against Altvater for specific performance of the agreement alleging violation of its covenants and infringement. Id. The district court held that Altvater could not challenge the validity of the patent due to the now-overruled doctrine of licensee estoppel (see discussion below) and that Altvater's product infringed the patent. Id. at 361. Accordingly, Altvater was ordered to pay royalties under the license. Id. at 361. Freeman filed a separate action against another party, Premier Machine Co., on the same patent. Id. In the case against Premier, the court held that only three of the asserted claims were valid. Id. Freeman subsequently surrendered the original patent, obtained two reissue patents, and brought a second action against Altvater. Id. at 362. In this action, Freeman asked for specific performance of the license agreement, for an injunction, and for an accounting. Id. at 360. Altvater filed a counterclaim contending that the license did not cover the reissue patents, and that such patents were invalid. Id. at 361.

The district court found that: 1) Altvater's devices did not infringe the reissue patents; 2) the decision in the Premier case that only three of the 26 claims of the original patent were valid constituted an eviction under the license agreement; 3) the license agreement terminated with the surrender of the original patent; 4) Altvater did not make the reissue patents a basis for a new license agreement; 5) while Altvater paid certain royalties, it did so under protest and pursuant to an injunction entered in the first suit; and 6) the reissue patents were invalid. Id. at 362. On review, the appellate court held that when the lower court found that no license existed and that there was no infringement, the other issues became moot and there was no longer a justiciable controversy. Id. Thus, the appellate court modified the lower court's decree by striking: 1) the provision that held that Freeman was evicted from his monopoly as a result of the decision in the Premier suit; 2) the provision that the reissue patents were invalid; and 3) the provision which resolved the issues on the counterclaim in favor of Altvater. Id. at 363.

The Supreme Court in Altvater stated: 'It is said that so long as petitioners are paying royalties they are in no position to raise the issue of invalidity ' the theory being that as licensees they are estopped to deny the validity of the patents and that, so long as they continue to pay royalties, there is only an academic, not a real controversy, between the parties.' Id. at 364. The Court then noted that 'the fact that royalties were being paid did not make this a 'difference or dispute of a hypothetical or abstract nature.” Id. The Court stated that because the royalties were being paid under the compulsion of an injunction decree, the only course was to defy it and risk not only actual, but also treble damage in an infringement suit. Id. at 365. According to the Court, '[i]t was the function of the Declaratory Judgment Act to afford relief against such peril and insecurity.' Id. As such, the Court held that the issues raised by the counterclaim were not moot and remanded to the Court of Appeals so that it could review the counterclaim issues. Id.

In Lear, Inc. v. Atkins , 395 U.S. 653 (1969), the Court was faced with an issue involving the policy considerations in MedImmune . The court below had held that, pursuant to the doctrine of licensee estoppel, the licensee was required to pay royalties to the licensor in a suit for unpaid royalties and was foreclosed from arguing that the patent was invalid. 395 U.S. at 670. After weighing the equities, the Court repudiated the doctrine and held that a licensee is not foreclosed from an invalidity defense. Id. The Court stated:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public do-main. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued. Id. at 670-671 (emphasis added).

Over the years, the Federal Circuit has attempted to limit the reach of Lear. See, e.g., Gen-Probe Inc. v. Vysis, Inc. , 359 F.3d 1376, 1381 (Fed. Cir. 2004), cert. dismissed , 543 U.S. 941 (2004) ('in several instances, this court has declined to apply the Lear doctrine'); Diamond Scientific Co. v. Ambico, Inc. , 848 F.2d 1220 (Fed. Cir. 1988) (holding that Lear did not repudiate the doctrine of assignor estoppel, wherein an assignor is estopped from challenging the patent's validity).

In Gen-Probe, the Federal Circuit limited Lear by creating the same rule that will be reviewed in MedImmune, ie, that a licensee that continues to pay royalties does not have standing to bring a declaratory judgment action. In fashioning this rule, the court noted that such a licensee could not have a 'reasonable apprehension' that it would face a lawsuit, because the license insulated it from an infringement suit. 359 F.3d at 1381. The court distinguished Altvater on the grounds that Altvater paid royalties under the compulsion of an injunction decree. Id. 1382. The court reasoned: 'Allowing this suit to proceed would effectively defeat those contractual covenants and discourage patentees from granting licenses. In other words, in this situation, the licensor would bear all the risk, while the licensee would benefit from the license's effective cap on damages or royalties in the event its challenge to the patent's scope or validity fails.' (Interestingly, before repudiating licensee estoppel, the Lear Court noted that similar policy considerations supported licensee estoppel. See 395 U.S. at 656 ('The theory underlying [licensee estoppel] is that a licensee should not be permitted to enjoy the benefit afforded by the agreement while simultaneously urging that the patent which forms the basis of the agreement is void')).

MedImmune

In the MedImmune case, MedImmune licensed a Genentech patent related to manufacturing human antibodies. 427 F.3d at 961. Subsequently, MedImmune brought a declaratory judgment action alleging that the patent was invalid or unenforceable. Id. at 962. Relying on Gen-Probe and a later decision following Gen-Probe , MedImmune v. Centocor, Inc. , 409 F.3d 1376 (Fed. Cir. 2005), the Federal Circuit held that because MedImmune continued to pay royalties under the license agreement, the district court properly dismissed the suit as non-justiciable. 427 F.3d at 962-965.

In its Petition for a Writ of Certiorari, MedImmune presented four reasons that the Court should review the case: 1) the Federal Circuit's decision was contrary to several Supreme Court cases, including Altvater; 2) the decision was contrary to declaratory judgment holdings in other circuits; 3) the decision frustrates Lear; and 4) the decision inhibits new medical drugs and treatment. Regarding the last reason, MedImmune contended that the decision would further encourage licensors to bundle overly broad invalid patents with valid patents.

Commentary

Although the Federal Circuit supported its holding in Gen-Probe with certain policy considerations, as did MedImmune in its Petition, it is not clear whether these policy considerations should have any role in the case. Indeed, the policy considerations that are typically involved in Article III cases ” political concerns, separation of powers, and states' rights (See Moore's Federal Practice, '101.01, 101-13) ” have no relation to the policies cited by the Federal Circuit or MedImmune. Perhaps tellingly, MedImmune's Petition concedes as much. Petitioner's Brief at 19 ('Article III does not exist to promote particular substantive policies, but rather sets the parameters of the federal judicial power'). Nonetheless, in Altvater, the Court justified its holding by stating: 'Unless the injunction decree were modified, the only other course was to defy it, and to risk not only actual but treble damages in infringement suits. It was the function of the Declaratory Judgments Act to afford relief against such peril and insecurity.' 319 U.S. at 365 (internal citations omitted).

To the extent that substantive policy considerations should play a role, it seems that the Lear rationale that 'licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery' may have particular resonance in a case like MedImmune, because MedImmune's product is a monoclonal antibody for treating a disease. Indeed, it may be particularly unlikely that another company would have the incentive to challenge a patent like the Genentech patent, because: 1) biotechnology products are often subject to numerous patent licenses, and another company, even if successful in challenging the patent, might infringe other patents, which might be assigned or exclusively licensed to a licensee like MedImmune; and 2) there are significant barriers to entry in introducing most biotechnology therapeutics, because, unlike the case concerning generic versions of traditional chemical pharmaceuticals, which can be marketed after an abbreviated FDA approval process, the current regulatory scheme does not allow a company seeking to market certain biotechnology therapeutics, including antibodies, to shortcut the FDA approval process by relying on an earlier company's laboratory and clinical tests.

Finally, the Federal Circuit has remarked that Lear 'echo[es] from a past era of skepticism over intellectual property principles.' Studiengesellschaft Kohle m.b.H. v. Shell Oil Co. , 112 F.3d 1561, 1567 (Fed. Cir. 1997). Thus, it may be of note that the Supreme Court recently overruled two patent-related cases from the Lear era. See Illinois Tool Works Inc. v. Independent Ink, Inc. , 547 U.S. __ (2006) (overruling U.S. v. Loew's Inc., 371 U.S. 38 (1962) and Intern'l Salt Co. v. U.S. , 332 U.S. 392, (1947) and holding that a patent no longer creates a presumption of mar-ket power in an antitrust case alleging an improper tying arrangement).

Oral argument is expected in the October 2006 Term.

Shane Cortesi is an associate in the New York office of Kenyon & Kenyon LLP. He can be reached at 212-908-6222.