Medimmune: New Rules for Patent Licenses?

In Gen-Probe, the Federal Circuit also held that a licensee who continued to pay royalties, albeit under protest, did not have a right under the 'Lear' doctrine to contest the validity of the patent. Id. In Lear v. Adkins, 395 U.S. 653 (1969), the Supreme Court had held that federal policy favoring the exposure of invalid patents overruled the state interest in enforcing a term in a patent license estopping the licensee from challenging validity. In Lear, however, the licensee had stopped paying royalties, thus breaching the license. The Federal Circuit, describing the Lear decision as having 'tones that echo from a past era of skepticism over intellectual property law principles,' Studiengesellschaft Kohle M.B.H. v. Shell Oil Co., 112 F.3d 1561, 1567 (Fed. Cir. 1997), generally found that its question, 'whether overriding federal policies would be significantly frustrated' by enforcing the license, Lear, 395 U.S. at 673, could be answered in the negative. For example, it had held an assignor could not challenge the validity of the assigned patents in subsequent infringement litigation, Diamond Scientific Co. v. Ambico, Inc., 848 F.2d 1220 (Fed. Cir. 1988); that settlement agreements and consent decrees could be enforced, Foster v. Hall Manufacturing Co., 947 F.2d 469 (Fed. Cir. 1991); that a contract to share royalties would be upheld, Sun Studs Inc. v. ATA Equip Leasing, Inc., 872 F.2d 978 (Fed. Cir. 1989); that settlement agreements requiring payment of royalties could be enforced even if the patent was later held invalid, Henstreet v. Spiegel, Inc., 851 F.2d 348 (Fed. Cir. 1988); and that a patent licensor could recover royalties under a patent subsequently held invalid up to the date the validity is first challenged, Studiengesellschaft, 112 F.3d at 1568.

Given this background, the Federal Circuit had little doubt that Medimmune, which was still paying royalties under the patent license, was a licensee in good standing, with no reasonable apprehension of an imminent lawsuit, despite its avowal of protest as to the validity and scope of the Cabilly II patent. Medimmune, 427 F.3d at 963. Moreover, as a licensee who had not ceased payment of royalties, the Lear exception to licensee estoppel did not apply to it. Id.

Justice Antonin Scalia, writing for the Supreme Court, pointed out that there was no doubt that had Medimmune stopped paying royalties and repudiated the license, Genentech's demand for royalties on the sales of the Synagis drug would have been sufficient to create an 'actual controversy.' Medimmune, 127 S. Ct. at 771, 772. Genentech argued that not challenging the validity of the patent was a necessary part of being a licensee and that permitting Medimmune to challenge validity would change the terms of the license. 127 S. Ct. at 775, 776.

The Court did not agree ' observing that there was no clear basis in the license for the contention that the licensee could not challenge validity. Id. Justice Scalia observed that a prohibition against challenging validity could not be implied from the license's requirement for payment of royalties on patents 'which have neither expired nor been held invalid.' This, Justice Scalia observed, was not a promise to refrain from seeking a holding of invalidity. Id. Nor did the Court agree that common law principles of licensee estoppel, said to prevent a licensee from retaining benefits from the license while challenging its validity, had any application in this case. While refusing to decide whether Lear's repudiation of licensee estoppel was limited to situations in which the licensee had repudiated the license, the Court held that Medimmune was asserting, not repudiating, the license: It was arguing that the license, properly interpreted, did not prevent a challenge to the patent's validity and did not require royalty payment for the SYNAGIS drug because the patent did not cover that drug and was invalid. Id.

On the case or controversy issue, the Supreme Court noted that where a person faces the consequences of a government action, for example prosecution for violation of a statute, that person is not required to violate the statute in order to challenge its constitutionality. Id at 772. Even though forbearing to violate the law eliminates the threat of prosecution, numerous cases recognize that a declaratory judgment procedure is 'an alternative to pursuit of the arguably illegal activity.' Steffel v. Thompson, 415 U.S. 452, 480 (1974).

Did the same apply in a civil case in which the declaratory judgment plaintiff had chosen to take steps that would prevent exposure? The Court cited circuit court decisions and state court decisions accepting jurisdiction of declaratory judgment actions in cases in which the plaintiff had taken action to avoid imminent injury, but that action was coerced by threatened enforcement action by a private party. Id. at 773. In one case, the Court itself had held that a licensee's failure to discontinue royalty payments did not prevent a dispute over validity of the patent from constituting an actual controversy. In 1943, the Court allowed a licensee to challenge the validity of a patent even though it was still paying royalties and had expressly not breached the license. Altvater v. Freeman, 319 U.S. 359 (1943).

Altvater did not reach the question of whether a patent licensee is estopped from denying the validity of the patent, an issue subsequently reached in Lear v. Adkins, because the lower courts had agreed that the patent license had terminated. Id. at 364. In Altvater, the patent license allowed the licensees to sell certain goods in certain territories, subject to payment of royalties. The licensed patent was surrendered in favor of two re-issue patents. The patentee sued for infringement of the re-issue patent. The licensees contended that the license terminated when the patent was surrendered, that the re-issue patents were invalid, and that they continued to pay royalties only under protest. In addition, the licensees filed for a declaration that the license did not cover the re-issue patents, that the re-issue patents were invalid, and that they were paying royalties only to avoid infringement suits.

Previously, after the license had been executed, the licensees were held to have infringed the patent by selling a device outside the grant of the license and an injunction was entered. The Altvater Court held that there was a 'controversy.' Even though the licensees continued to pay royalties, they disputed the validity of the re-issued patents, which arguably covered other products sold by the licensees. The Court held that royalties were paid 'under protest and under the compulsion of an injunction decree.' Id at 365. The Declaratory Judgment Act existed, the Court explained, to allow the licensees to obtain review of the validity of the re-issue patents without subjecting themselves to the risk of infringement proceedings.

Although in Altvater the licensee was subject to an injunction from earlier infringement proceedings, the Medimmune Court stated that it was not the existence of the injunction that provided the basis for jurisdiction, but the threat of infringement damages. Medimmune, 127 S. Ct. at 774. In Gen-Probe, the Federal Circuit relied on the presence of the injunction in Altvater to distinguish from that case. The Supreme Court held this was a misunderstanding of Altvater, which had not required governmental coercion, but had found sufficient the risk of actual and treble damages for infringement. Id.

Thus, the Court held that Medimmune's payment of royalties on its Synagis drug (the action that shielded it from an infringement claim) was coerced by its fear of exposure to the remedies against patent infringement. This coercion of the royalty payments, then made under protest, was sufficient to preserve the right to challenge the validity of the claim for payment under the declaratory judgment act. Medimmune thus places a civil litigant that disagrees about its obligations to another party on a similar footing to one seeking to challenge a governmental action. If there is a real and concrete dispute as to the legal interests of two parties, that case or controversy is not destroyed by one party taking action to mitigate the consequence that would befall it if it loses the underlying dispute.

Conclusion

In the context of patent licensing, has Medimmune changed the relative bargaining strengths of patentees and licensees? The Supreme Court found an actual controversy arising from the parties' disagreement as to the license, both whether the Synagis drug was within the scope of the Cabilly II patent and whether the patent was valid, and that the actual controversy still existed even though Medimmune continued to pay royalties to avoid legal proceedings and possible injunctions and enhanced damages if it lost. If the licensee can negotiate, shielded from the consequences of infringement including enhanced damages, attorneys' fees, and an injunction, it is clearly in a better bargaining position than if it faced those things. Certainly, Medimmune suggests that a patent licensor should try to avoid linking the obligation to pay royalties to the scope and validity of the patent, to the extent this can be done without patent misuse, thus reducing the opportunity for the licensee to raise an actual controversy as to whether payment of royalties is required under the terms of the license.

John Cone practices with the Dallas IP firm of Hitchcock Evert LLP. He is an adjunct professor at The Dedman School of Law at Southern Methodist University and a frequent speaker and author on IP law topics. He can be reached at [email protected].

The Supreme Court's Medimmune decision relates directly to the federal courts' jurisdictional requirement of case or controversy, but by overruling the Federal Circuit's Gen-Probe decision it may also have changed the balance of power between patentees and licensees.

Medimmune's Synagis' drug accounted for 80% of its sales revenue. Genentech claimed that a patent license to Medimmune under Genentech's Cabilly II patent entitled it to royalties on those sales. Medimmune considered the patent invalid, but did not want to repudiate the license and risk an injunction, treble damages, and attorneys' fees and so paid royalties on sales of the SYNAGIS drug 'under protest.' Was there an 'actual controversy' between Medimmune and Genen- tech to provide jurisdictional basis for a declaratory judgment action or the issues of patent infringement and validity? 'No,' held the Federal Circuit, on the basis of
its earlier Gen-Probe decision, because the license protected Medimmune from the reasonable apprehension of a lawsuit. Medimmune, Inc. v. Genentech, Inc. , 427 F.3d 958, 964, 965 (Fed. Cir. 2005). The Supreme Court, however, reversed, holding that Medimmune did not have to 'bet the farm' by repudiating the license in order to provide the jurisdictional basis for a federal declaratory judgment action. Medimmune, Inc. v. Genentech, Inc. , 127 S. Ct. 764 (2007).

Article III of the Constitution gives federal courts limited jurisdiction allowing them to decide a dispute only if there is a case or controversy. The case or controversy requirement is of particular concern in the case of declaratory judgment actions. To stay within constitutional bounds, federal declaratory judgment actions are limited to cases involving an 'actual controversy.' 28 U.S.C. '2201(a). An actual controversy exists if the dispute is 'definite and concrete, touching the legal relations of the parties having adverse legal interests.' Aetna Life Insurance Co. v. Haworth , 300 U.S. 227, 240 (1937). In the context of patent validity challenges, Federal Circuit law required that the declaratory judgment plaintiff establish in addition a 'reasonable apprehension of imminent suit.' Teva Pharma USA, Inc. v. Pfizer, Inc. , 395 F.3d 1324, 1333 (Fed. Cir. 2005). Applying this test, the Federal Circuit had found no 'actual controversy' when a licensee in good standing filed for a declaration of non-infringement and invalidity of the licensed patent. The license, the Federal Circuit reasoned, protected the licensee against an infringement claim so it could not reasonably fear a lawsuit. Gen-Probe Inc. v. Vysis, Inc. , 359 F.3d 1376, 1381 (Fed. Cir. 2004).

In Gen-Probe, the Federal Circuit also held that a licensee who continued to pay royalties, albeit under protest, did not have a right under the 'Lear' doctrine to contest the validity of the patent. Id . In Lear v. Adkins , 395 U.S. 653 (1969), the Supreme Court had held that federal policy favoring the exposure of invalid patents overruled the state interest in enforcing a term in a patent license estopping the licensee from challenging validity. In Lear, however, the licensee had stopped paying royalties, thus breaching the license. The Federal Circuit, describing the Lear decision as having 'tones that echo from a past era of skepticism over intellectual property law principles,' Studiengesellschaft Kohle M.B.H. v. Shell Oil Co. , 112 F.3d 1561, 1567 (Fed. Cir. 1997), generally found that its question, 'whether overriding federal policies would be significantly frustrated' by enforcing the license, Lear, 395 U.S. at 673, could be answered in the negative. For example, it had held an assignor could not challenge the validity of the assigned patents in subsequent infringement litigation, Diamond Scientific Co. v. Ambico, Inc ., 848 F.2d 1220 (Fed. Cir. 1988); that settlement agreements and consent decrees could be enforced, Foster v. Hall Manufacturing Co. , 947 F.2d 469 (Fed. Cir. 1991); that a contract to share royalties would be upheld, Sun Studs Inc. v. ATA Equip Leasing, Inc. , 872 F.2d 978 (Fed. Cir. 1989); that settlement agreements requiring payment of royalties could be enforced even if the patent was later held invalid, Henstreet v. Spiegel, Inc. , 851 F.2d 348 (Fed. Cir. 1988); and that a patent licensor could recover royalties under a patent subsequently held invalid up to the date the validity is first challenged, Studiengesellschaft, 112 F.3d at 1568.

Given this background, the Federal Circuit had little doubt that Medimmune, which was still paying royalties under the patent license, was a licensee in good standing, with no reasonable apprehension of an imminent lawsuit, despite its avowal of protest as to the validity and scope of the Cabilly II patent. Medimmune, 427 F.3d at 963. Moreover, as a licensee who had not ceased payment of royalties, the Lear exception to licensee estoppel did not apply to it. Id .

Justice Antonin Scalia, writing for the Supreme Court, pointed out that there was no doubt that had Medimmune stopped paying royalties and repudiated the license, Genentech's demand for royalties on the sales of the Synagis drug would have been sufficient to create an 'actual controversy.' Medimmune, 127 S. Ct. at 771, 772. Genentech argued that not challenging the validity of the patent was a necessary part of being a licensee and that permitting Medimmune to challenge validity would change the terms of the license. 127 S. Ct. at 775, 776.

The Court did not agree ' observing that there was no clear basis in the license for the contention that the licensee could not challenge validity. Id . Justice Scalia observed that a prohibition against challenging validity could not be implied from the license's requirement for payment of royalties on patents 'which have neither expired nor been held invalid.' This, Justice Scalia observed, was not a promise to refrain from seeking a holding of invalidity. Id . Nor did the Court agree that common law principles of licensee estoppel, said to prevent a licensee from retaining benefits from the license while challenging its validity, had any application in this case. While refusing to decide whether Lear's repudiation of licensee estoppel was limited to situations in which the licensee had repudiated the license, the Court held that Medimmune was asserting, not repudiating, the license: It was arguing that the license, properly interpreted, did not prevent a challenge to the patent's validity and did not require royalty payment for the SYNAGIS drug because the patent did not cover that drug and was invalid. Id .

On the case or controversy issue, the Supreme Court noted that where a person faces the consequences of a government action, for example prosecution for violation of a statute, that person is not required to violate the statute in order to challenge its constitutionality. Id at 772. Even though forbearing to violate the law eliminates the threat of prosecution, numerous cases recognize that a declaratory judgment procedure is 'an alternative to pursuit of the arguably illegal activity.' Steffel v. Thompson , 415 U.S. 452, 480 (1974).

Did the same apply in a civil case in which the declaratory judgment plaintiff had chosen to take steps that would prevent exposure? The Court cited circuit court decisions and state court decisions accepting jurisdiction of declaratory judgment actions in cases in which the plaintiff had taken action to avoid imminent injury, but that action was coerced by threatened enforcement action by a private party. Id. at 773. In one case, the Court itself had held that a licensee's failure to discontinue royalty payments did not prevent a dispute over validity of the patent from constituting an actual controversy. In 1943, the Court allowed a licensee to challenge the validity of a patent even though it was still paying royalties and had expressly not breached the license. Altvater v. Freeman , 319 U.S. 359 (1943).

Altvater did not reach the question of whether a patent licensee is estopped from denying the validity of the patent, an issue subsequently reached in Lear v. Adkins, because the lower courts had agreed that the patent license had terminated. Id. at 364. In Altvater, the patent license allowed the licensees to sell certain goods in certain territories, subject to payment of royalties. The licensed patent was surrendered in favor of two re-issue patents. The patentee sued for infringement of the re-issue patent. The licensees contended that the license terminated when the patent was surrendered, that the re-issue patents were invalid, and that they continued to pay royalties only under protest. In addition, the licensees filed for a declaration that the license did not cover the re-issue patents, that the re-issue patents were invalid, and that they were paying royalties only to avoid infringement suits.

Previously, after the license had been executed, the licensees were held to have infringed the patent by selling a device outside the grant of the license and an injunction was entered. The Altvater Court held that there was a 'controversy.' Even though the licensees continued to pay royalties, they disputed the validity of the re-issued patents, which arguably covered other products sold by the licensees. The Court held that royalties were paid 'under protest and under the compulsion of an injunction decree.' Id at 365. The Declaratory Judgment Act existed, the Court explained, to allow the licensees to obtain review of the validity of the re-issue patents without subjecting themselves to the risk of infringement proceedings.

Although in Altvater the licensee was subject to an injunction from earlier infringement proceedings, the Medimmune Court stated that it was not the existence of the injunction that provided the basis for jurisdiction, but the threat of infringement damages. Medimmune, 127 S. Ct. at 774. In Gen-Probe, the Federal Circuit relied on the presence of the injunction in Altvater to distinguish from that case. The Supreme Court held this was a misunderstanding of Altvater, which had not required governmental coercion, but had found sufficient the risk of actual and treble damages for infringement. Id .

Thus, the Court held that Medimmune's payment of royalties on its Synagis drug (the action that shielded it from an infringement claim) was coerced by its fear of exposure to the remedies against patent infringement. This coercion of the royalty payments, then made under protest, was sufficient to preserve the right to challenge the validity of the claim for payment under the declaratory judgment act. Medimmune thus places a civil litigant that disagrees about its obligations to another party on a similar footing to one seeking to challenge a governmental action. If there is a real and concrete dispute as to the legal interests of two parties, that case or controversy is not destroyed by one party taking action to mitigate the consequence that would befall it if it loses the underlying dispute.

Conclusion

In the context of patent licensing, has Medimmune changed the relative bargaining strengths of patentees and licensees? The Supreme Court found an actual controversy arising from the parties' disagreement as to the license, both whether the Synagis drug was within the scope of the Cabilly II patent and whether the patent was valid, and that the actual controversy still existed even though Medimmune continued to pay royalties to avoid legal proceedings and possible injunctions and enhanced damages if it lost. If the licensee can negotiate, shielded from the consequences of infringement including enhanced damages, attorneys' fees, and an injunction, it is clearly in a better bargaining position than if it faced those things. Certainly, Medimmune suggests that a patent licensor should try to avoid linking the obligation to pay royalties to the scope and validity of the patent, to the extent this can be done without patent misuse, thus reducing the opportunity for the licensee to raise an actual controversy as to whether payment of royalties is required under the terms of the license.

John Cone practices with the Dallas IP firm of Hitchcock Evert LLP. He is an adjunct professor at The Dedman School of Law at Southern Methodist University and a frequent speaker and author on IP law topics. He can be reached at [email protected].