Medimmune v. Genentech and Its Aftermath

A rare U.S. Supreme Court decision in January 2007 may change the way parties negotiate patent license agreements in the future. The Medimmune, Inc. v. Genentech, Inc. decision has reversed the mainstream position that a patent licensee must discontinue paying royalties to challenge its obligation to pay royalties in a court of law. At face value, the decision might appear to be of little impact to parties of a patent license agreement. However, it could have a dramatic effect on how they approach the negotiation of a license agreement. In addition, the Medimmune decision has already been applied to patent infringement cases outside of the scope of licensing arrangements.

Medimmune Background

Genentech licensed certain patent applications (and any patents issued thereunder) to Medimmune. When a 'Genentech Patent' was issued under one of the applications, Genentech notified Medimmune that it expected royalties on sales of Medimmune's Synagis product.

Medimmune disagreed that the Genentech Patent covered Synagis. However, with Synagis amounting to approximately 80% of its total sales, Medimmune did not want to risk losing the right to sell the product. Losing Synagis sales would seemingly have been catastrophic to the business of Medimmune.

Consequentially, Medimmune was faced with a dilemma. If it discontinued payment of royalties, Genentech's natural reaction would have been to terminate the license agreement and file suit against Medimmune for damages, including damages for failure to pay royalties if Synagis sales continued after the license termination. While those damages would have been bad enough, the court would also have had the authority to award treble damages for failure to pay royalties (i.e., three times the amount of unpaid royalties). An alternative for Medimmune would have been to simply continue paying royalties that it sincerely believed it did not owe in order to avoid litigation.

Instead, Medimmune chose to pay royalties 'under protest,' and brought an action in federal court for a declaratory judgment under the Declaratory Judgment Act. It sought a declaration from the court that the Genentech patent was invalid and unenforceable, and that, even if the Genentech patent were deemed to be valid and enforceable, Medimmune's sales of Synagis did not infringe upon any claims set forth in the Genentech patent.

Medimmune Decision

Based on its interpretation of prior case law, the U.S. District Court and U.S. Court of Appeals dismissed Medimmune's request for declaratory judgment. Based on those courts' interpretations of prior law, Medimmune was unable to seek a declaratory judgment on a patent's validity, enforceability, or scope while it continued to pay royalties and was otherwise in compliance with the license agreement.

Under this rationale, in order for a patent licensee to challenge in court an obligation to pay royalties to the licensor, the licensee would be forced to discontinue paying royalties. Until then, there is no actual case or controversy that the court is allowed to decide under Article III of the U.S. Constitution, which grants the courts the authority to rule only on actual cases or controversies, not theoretical controversies.

The Supreme Court's decision looked to existing law that recognized that if a party was prohibited from certain activity because of a criminal statute, the party should not be forced to violate it in order to challenge its constitutionality. Parties are entitled to seek a declaratory judgment, so long as there is a genuine threat of statute enforcement against a proposed action. The government's 'coercion' of the party into not acting in the manner to which it has the right created an actual case or controversy.

The Supreme Court in Medimmune extended this rationale to private 'coercion.' In other words, when Genentech made it clear that it intended to enforce its perceived right to royalties on sales of Synagis, Medimmune was 'coerced' into paying royalties for fear of monetary damages and the loss of sales. The Court concluded that this coercion, based on an alleged contract dispute, arose to an actual case and controversy that was subject to the Court's authority.

Medimmune Decision Already Applied to Other Cases

The Supreme Court's decision has already been applied by the Court of Appeals in two separate cases decided in March of this year: SanDisk Corporation v. STMicroelectronics and Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceutical Corporation. However, the context of these decisions is quite different ' most notably, because no license agreements existed in either case. In each decision, although more fully articulated in Teva, the Court of Appeals relied on a footnote in the Medimmune decision that stated that the 'reasonable apprehension of imminent suit' test applied by federal courts for a declaratory judgment in a general patent infringement controversy was inconsistent with prior Supreme Court decisions and, consequently, the Medimmune decision itself. Therefore, it replaced the 'reasonable apprehension of imminent suit' test with an 'all the circumstances' test to determine if an actual case or controversy exists in the patent infringement context.

SanDisk Corporation v. STMicroelectronics

In SanDisk, ST and SanDisk held certain 'business' meetings in which ST showed why it believed that certain SanDisk products infringed its patents. It had no intention to sue SanDisk, but offered the analysis to prompt patent license negotiations. In applying the teachings of Medimmune, the Court of Appeals concluded that the mere allegation that SanDisk was infringing ST's patents was enough to create an actual case or controversy that allowed SanDisk to seek a declaratory judgment that no infringement existed ' even though it is undisputed that ST stated it had no intention to sue SanDisk. The Court of Appeals held, consistent with Medimmune, that 'where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of legal rights.'

Teva Pharmaceuticals USA, Inv. v.Novartis Pharmaceutical Corporation

In Teva, Teva filed an abbreviated new drug application to market a generic version of a Novartis proprietary pharmaceutical product. The Novartis product was listed in the 'Orange Book' as being protected under five separate patents, one composition patent and four method-of-use patents. In accordance with the procedures set forth in the Hatch-Waxman Act, Novartis sued Teva for infringement, but only with respect to the composition patent. That lawsuit is pending. Because Novartis did not sue for infringement of the method of use patents, Teva filed for a declaratory judgment that its generic version of the Novartis product did not infringe those patents. The district court, applying the then-existing 'reasonable apprehension of imminent suit' test, held that there was no actual case or controversy because Novartis did not even threaten to sue for infringement of those patents. The Court of Appeals applied the Medimmune teachings in holding that the circumstances taken together created an actual controversy, even though Novartis did not overtly threaten to sue.

The Aftermath

The question now is how the Medimmune decision and its already established progeny will change how parties negotiate license agreements and treat infringement issues in the future.

Licensing Issues

In the licensing context, the licensor is likely going to seek more of the consideration in an upfront payment. In this way, future royalty payments are not at risk if the licensee later challenges the enforceability or validity of a patent.

In addition, the licensor may pursue 'a covenant not to sue' from the licensee, which states it will not challenge the validity or enforceability of the licensed patent. However, this covenant could be problematic for the licensee, who will surely be reluctant to forego its right to assert that its product does not infringe the licensed patent.

General Infringement Issues

Based on how the new 'circumstances' test has already been applied in determining whether an actual case or controversy exists, it appears that the hurdle for getting a declaratory judgment has been lowered, at least in the context of the Hatch-Waxman Act, and in discussing potential infringement claims. The SanDisk decision seems to indicate that an actual case or controversy exists anytime a party mentions or otherwise implies the 'I' word, and it is hard to imagine when an actual controversy does not exist in the context of a Hatch-Waxman scenario after the Teva decision.

Time will tell how the Medimmune decision will ultimately change how parties negotiate license agreements. However, one thing is for sure ' both the licensor and licensee should keep this decision in mind as they negotiate these transactions.

Dan L. O'Korn is a partner at Hunton & Williams LLP with a practice that focuses on pharmaceutical and biotech transactions and general FDA-related regulatory matters.

A rare U.S. Supreme Court decision in January 2007 may change the way parties negotiate patent license agreements in the future. The Medimmune, Inc. v. Genentech, Inc. decision has reversed the mainstream position that a patent licensee must discontinue paying royalties to challenge its obligation to pay royalties in a court of law. At face value, the decision might appear to be of little impact to parties of a patent license agreement. However, it could have a dramatic effect on how they approach the negotiation of a license agreement. In addition, the Medimmune decision has already been applied to patent infringement cases outside of the scope of licensing arrangements.

Medimmune Background

Genentech licensed certain patent applications (and any patents issued thereunder) to Medimmune. When a 'Genentech Patent' was issued under one of the applications, Genentech notified Medimmune that it expected royalties on sales of Medimmune's Synagis product.

Medimmune disagreed that the Genentech Patent covered Synagis. However, with Synagis amounting to approximately 80% of its total sales, Medimmune did not want to risk losing the right to sell the product. Losing Synagis sales would seemingly have been catastrophic to the business of Medimmune.

Consequentially, Medimmune was faced with a dilemma. If it discontinued payment of royalties, Genentech's natural reaction would have been to terminate the license agreement and file suit against Medimmune for damages, including damages for failure to pay royalties if Synagis sales continued after the license termination. While those damages would have been bad enough, the court would also have had the authority to award treble damages for failure to pay royalties (i.e., three times the amount of unpaid royalties). An alternative for Medimmune would have been to simply continue paying royalties that it sincerely believed it did not owe in order to avoid litigation.

Instead, Medimmune chose to pay royalties 'under protest,' and brought an action in federal court for a declaratory judgment under the Declaratory Judgment Act. It sought a declaration from the court that the Genentech patent was invalid and unenforceable, and that, even if the Genentech patent were deemed to be valid and enforceable, Medimmune's sales of Synagis did not infringe upon any claims set forth in the Genentech patent.

Medimmune Decision

Based on its interpretation of prior case law, the U.S. District Court and U.S. Court of Appeals dismissed Medimmune's request for declaratory judgment. Based on those courts' interpretations of prior law, Medimmune was unable to seek a declaratory judgment on a patent's validity, enforceability, or scope while it continued to pay royalties and was otherwise in compliance with the license agreement.

Under this rationale, in order for a patent licensee to challenge in court an obligation to pay royalties to the licensor, the licensee would be forced to discontinue paying royalties. Until then, there is no actual case or controversy that the court is allowed to decide under Article III of the U.S. Constitution, which grants the courts the authority to rule only on actual cases or controversies, not theoretical controversies.

The Supreme Court's decision looked to existing law that recognized that if a party was prohibited from certain activity because of a criminal statute, the party should not be forced to violate it in order to challenge its constitutionality. Parties are entitled to seek a declaratory judgment, so long as there is a genuine threat of statute enforcement against a proposed action. The government's 'coercion' of the party into not acting in the manner to which it has the right created an actual case or controversy.

The Supreme Court in Medimmune extended this rationale to private 'coercion.' In other words, when Genentech made it clear that it intended to enforce its perceived right to royalties on sales of Synagis, Medimmune was 'coerced' into paying royalties for fear of monetary damages and the loss of sales. The Court concluded that this coercion, based on an alleged contract dispute, arose to an actual case and controversy that was subject to the Court's authority.

Medimmune Decision Already Applied to Other Cases

The Supreme Court's decision has already been applied by the Court of Appeals in two separate cases decided in March of this year: SanDisk Corporation v. STMicroelectronics and Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceutical Corporation. However, the context of these decisions is quite different ' most notably, because no license agreements existed in either case. In each decision, although more fully articulated in Teva, the Court of Appeals relied on a footnote in the Medimmune decision that stated that the 'reasonable apprehension of imminent suit' test applied by federal courts for a declaratory judgment in a general patent infringement controversy was inconsistent with prior Supreme Court decisions and, consequently, the Medimmune decision itself. Therefore, it replaced the 'reasonable apprehension of imminent suit' test with an 'all the circumstances' test to determine if an actual case or controversy exists in the patent infringement context.

SanDisk Corporation v. STMicroelectronics

In SanDisk, ST and SanDisk held certain 'business' meetings in which ST showed why it believed that certain SanDisk products infringed its patents. It had no intention to sue SanDisk, but offered the analysis to prompt patent license negotiations. In applying the teachings of Medimmune, the Court of Appeals concluded that the mere allegation that SanDisk was infringing ST's patents was enough to create an actual case or controversy that allowed SanDisk to seek a declaratory judgment that no infringement existed ' even though it is undisputed that ST stated it had no intention to sue SanDisk. The Court of Appeals held, consistent with Medimmune, that 'where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise and the party need not risk a suit for infringement by engaging in the identified activity before seeking a declaration of legal rights.'

Teva Pharmaceuticals USA, Inv. v.Novartis Pharmaceutical Corporation

In Teva, Teva filed an abbreviated new drug application to market a generic version of a Novartis proprietary pharmaceutical product. The Novartis product was listed in the 'Orange Book' as being protected under five separate patents, one composition patent and four method-of-use patents. In accordance with the procedures set forth in the Hatch-Waxman Act, Novartis sued Teva for infringement, but only with respect to the composition patent. That lawsuit is pending. Because Novartis did not sue for infringement of the method of use patents, Teva filed for a declaratory judgment that its generic version of the Novartis product did not infringe those patents. The district court, applying the then-existing 'reasonable apprehension of imminent suit' test, held that there was no actual case or controversy because Novartis did not even threaten to sue for infringement of those patents. The Court of Appeals applied the Medimmune teachings in holding that the circumstances taken together created an actual controversy, even though Novartis did not overtly threaten to sue.

The Aftermath

The question now is how the Medimmune decision and its already established progeny will change how parties negotiate license agreements and treat infringement issues in the future.

Licensing Issues

In the licensing context, the licensor is likely going to seek more of the consideration in an upfront payment. In this way, future royalty payments are not at risk if the licensee later challenges the enforceability or validity of a patent.

In addition, the licensor may pursue 'a covenant not to sue' from the licensee, which states it will not challenge the validity or enforceability of the licensed patent. However, this covenant could be problematic for the licensee, who will surely be reluctant to forego its right to assert that its product does not infringe the licensed patent.

General Infringement Issues

Based on how the new 'circumstances' test has already been applied in determining whether an actual case or controversy exists, it appears that the hurdle for getting a declaratory judgment has been lowered, at least in the context of the Hatch-Waxman Act, and in discussing potential infringement claims. The SanDisk decision seems to indicate that an actual case or controversy exists anytime a party mentions or otherwise implies the 'I' word, and it is hard to imagine when an actual controversy does not exist in the context of a Hatch-Waxman scenario after the Teva decision.

Time will tell how the Medimmune decision will ultimately change how parties negotiate license agreements. However, one thing is for sure ' both the licensor and licensee should keep this decision in mind as they negotiate these transactions.

Dan L. O'Korn is a partner at Hunton & Williams LLP with a practice that focuses on pharmaceutical and biotech transactions and general FDA-related regulatory matters.