U.S. Supreme Court Makes It Easier for Patent Licensee to Have Its Cake and Eat It Too

In the recently decided case of Med-Immune vs. Genentech, the U.S. Supreme Court ruled that a patent licensee may continue to obtain the benefits of being a patent licensee while initiating litigation to challenge validity of a licensed patent. This decision will make it easier for a licensee to challenge a patent while continuing to obtain the benefit of the license. Under prior law, before a licensee could initiate such litigation, it had to breach the license agreement by not paying royalties or terminate the license agreement. This exposed the licensee to the risk of the licensor initiating litigation for breach of the agreement or, in the event the licensee terminated the license before challenging validity, the licensor initiating litigation for patent infringement.

In 1969, the U.S. Supreme Court ruled that clauses in license agreements which precluded a licensee from challenging validity were not enforceable as being contrary to public policy. The licensee who wished to challenge validity was required to repudiate the agreement by breaching the agreement or by terminating the same. The public policy of favoring challenges to invalid patents could not, however, be furthered by the licensee without assuming substantial risks.

The issue before the court in the MedImmune case was whether a licensee could avoid the risk of litigation for either breach of contract or patent infringement by continuing to pay royalties under the agreement and simultaneously challenging validity by a declaratory judgment action. This would provide the licensee with the double benefit of both being a licensee and challenging validity.

Under the U.S. constitution, one who is involved in a case or controversy with a third party need not wait to be sued, but rather can initiate litigation in the federal courts seeking to have a declaration consistent with that party’s view of the case. The Declaratory Judgment Act requires that there be an actual controversy before such court action can be initiated.

In the Med-Immune case, MedImmune was licensed by Genentech to manufacture and sell a pharmaceutical useable in treating certain respiratory diseases in young children. The license agreement stated that MedImmune had an obligation to pay royalties until such time as the patents were held invalid. Genentech’s position was that because the pharmaceutical was covered by one of the patents, MedImmune owed royalties under the agreement. MedImmune believed that no royalties were due, that the patent was invalid and unenforceable, and that there was no infringement. Under prior law, MedImmune’s options would have been to either continue to pay royalties under the agreement and refrain from challenging the validity of the patent or to breach or terminate the license agreement and initiate action to have the patent declared invalid and/or not infringed. The latter approach exposed the licensee to a risk of a court finding that it was a willful infringer and imposing treble damages and, within the court’s discretion, compelling the licensee to pay the licensing attorneys’ fees.

In the MedImmune case, the Supreme Court ruled that one seeking to obtain a declaratory judgment that a patent was either invalid or unenforceable or that it was not infringed may initiate such litigation while continuing to perform its obligations under the license agreement by paying royalties.

Genentech had no basis for initiating legal action as MedImmune was performing its obligations under the license agreement. Genentech could only await initiation of litigation by MedImmune and defend itself in the litigation. While Genentech argued that the licensee’s continuing to pay royalties eliminated the “actual controversy,” the Supreme Court in an 8 to 1 decision found that the argument lacked merit.

The Supreme Court has, therefore, clarified and expanded the right of a licensee to challenge patents which it believes to be invalid, unenforceable, or not infringed. Inherent in this ruling is a reaffirmation of the court’s view that it is in the public interest to permit full and free competition in the use of ideas which are in reality a part of the public domain. This decision obviously makes it easier for a licensee to challenge validity or obtain a declaration that its conduct does not infringe a patent, while not exposing itself to the risks existing under prior law.

In summary, it is important for both potential licensors and licensees to have an accurate understanding of the contractual rights and obligations provided for in the private license agreement, as well as the law which will govern the same.

For more information, contact A.B. Silverman at Eckert Seamans Cherin & Mellott, LLC, 600 Grant Street, 44th Floor, Pittsburgh, Pennsylvania 15219 (412) 566-2077; fax (412) 566-6099; e-mail abs@escm.com.