Supreme Court Provides (Some) Ammo For Licensees For Future Patent Challenges

Medimmune Inc. v. Genentech, Inc. (No. 05-608) - January 9, 2007

MedImmune makes and markets Synagis™, a drug that helps prevent a particular respiratory tract infection caused by virus. Prior to the time in which MedImmune first put the drug on the market, it agreed to license a group of patents from Genentech, Inc., in return for paying royalties on products covered by one of the patents.

Eventually, a dispute arose over payment of royalties, but, fearing that a possible lawsuit would expose MedImmune to significant damages and an injunction, MedImmune began paying royalties, but did so "under protest." While being a licensee in good standing, MedImmune decided it wanted to challenge the validity of the specific patent and brought a declaratory action in district court. The lawsuit was dismissed by the District Court, and that was upheld by the Federal Circuit Court, finding that no "actual controversy" existed under 28 U.S.C. §2201(a) of the Declaratory Judgment Act.

The Federal Circuit's decision to uphold the dismissal was largely based on the controlling Federal Circuit precedent in GenProbe Inc. v. Vysis, which held that a licensee in good standing cannot establish an Art. III case or controversy, since the license agreement "obliterate[s] any reasonable apprehension" that the licensee will be sued for infringement.

The Supreme Court repudiated GenProbe, noting that "[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 [her] business." The court also found the GenProbe rationale in conflict with prior SCOTUS holdings, which included the case of Cardinal Chemical v. Mortin Int'l, where it was ruled that appellate affirmance of a judgment of noninfringement, which effectively eliminated any apprehension of suit, did not moot a declaratory judgment counterclaim of patent invalidity.

The Court carefully tailored its narrow ruling around the Lear doctrine by abstaining from any merits holdings as to whether a licensee should be permitted to challenge the validity of a patent where it continues to pay royalties. Instead, the Court left the "equitable prudential and policy arguments in favor of such a discretionary dismissal for the lower courts' consideration on remand."

While the MedImmune case is big, it appears that a hole was created in the dicta which could allow patentees to nevertheless protect themselves from being in the same position as Genentech. In responding to Genentech's argument (supported by Thomas in his dissent) that a party to a contract cannot at one and the same time challenge its validity and continue to reap its benefits, Justice Scalia noted:

Petitioner 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. Of course even if respondents were correct that the licensing agreement or the common-law rule precludes this suit, the consequence would be that respondents win this case on the merits - not that the very genuine contract dispute disappears, so that Article III jurisdiction is somehow defeated (emphasis added).

It appears from this statement that the problem with the case was the language chosen for the license agreement - had the agreement included a "no-challenge" clause that triggered repudiation, MedImmune would be placed squarely within Lear. Accordingly, Genentech would not necessarily be insulated from defending validity; however, it wouldn't be locked into a potentially disadvantageous license agreement either.

In light of this holding, expect that future licenses will, as a matter of course, contain "no-challenge" clauses (a.k.a "MedImmune clauses") to protect patentees from being savaged by licensees. However, it is unclear how the thousands of existing agreements, which do not contain such clauses, will be affected by the ruling.

Also, it appears that the Supreme Court is continuing the trend of reversing the Federal Circuit - the last affirmance of a CAFC decision was back in 2001 (J.E.M. Ag. Supply v. Pioneer Hi-Bred Int'l). The MedImmune ruling will certainly create additional anxiety leading up the KSR v. Teleflex decision.