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Patent Law Alert - Patent Licensing - The Supreme Court Tilts the Landscape in Favor of Licensees, Again

03.09.2007

The Supreme Court of the United States decided Medimmune, Inc. v. Genentech, Inc., et al., 549 U.S. ____ (2007), and in doing so, touched the very essence of patent licensing and negotiation. Medimmune enables a patent licensee, while continuing to pay royalties, to ask for and obtain a judicial determination as to whether the licensed patent is invalid, unenforceable or not infringed. This way, a licensee can challenge the patent while remaining under the protection of the license, thus avoiding claims for breach of contract and for patent infringement.

The Medimmune Decision  

Medimmune, Inc. manufactured pharmaceuticals said to be covered by a patent application addressed in a license agreement from Genentech, Inc. Once the application matured into a patent, Genentech sent a letter to Medimmune stating its belief that a product made by Medimmune was covered by the now issued patent. The letter also expressed Genentech’s expectation that royalties would be paid under the parties’ license agreement. Medimmune, however, believed the patent to be invalid and not infringed, and the letter to be a threat to enforce the patent if royalties were not paid. Nonetheless, Medimmune made the payments “under protest and with reservation of all of [its] rights,” and later went to court asking for a determination that its beliefs were correct.  

The very fact that Medimmune continued to comply with its license obligations to Genentech, and at the same time sought to challenge the validity of the patent, gave rise to the question whether Medimmune’s actions constituted a case or controversy which conferred jurisdiction on the court.   

In contrast to rulings from lower federal courts in this case, the Supreme Court said that Medimmune’s actions did provide jurisdiction. In exploring the question whether the Declaratory Judgment Act requires a patent licensee to terminate or be in breach of its license before it can make the above request, the Court looked to the purpose behind the Act and then decided that such licensee actions were not necessary. The Court noted that the Act is aimed at providing for resolution of situations, as in Medimmune, in which a party is forced to choose between complying or not complying with a legal obligation, the obedience to which is coerced by its opponent.   

In bringing its suit challenging the validity of Genentech’s patent, Medimmune relied on the contract between the parties. It argued, and the Court agreed, that neither the contractual provisions nor its continued payment of royalties prevented it from challenging the licensed patent. In fact, the Court noted that “[p]romising to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity.”   

Prior Caselaw   Prior to the Court’s decision, repudiating the license was a sure-fire way to wind up in court. Unlike Medimmune, repudiation of the license agreement existed in Lear, Inc. v. Adkins, 395 U.S. 653 (1969). There, Lear had refused payment of contractually obligated royalty payments and communicated that refusal to Adkins, the licensor of the patent. The Supreme Court, in weighing the requirements of contract law alongside the public policy underlying patent law ruled that a patent licensee could not be prevented from challenging the validity of the licensed patent, and that royalty payments need not be made during such challenge.   

Whether Medimmune is expansive of, or separate from, the decision in Lear is unclear. What is clear is that neither of the decisions was based on affirmative language in the contract.  

Patent Licensing and The Medimmune Lesson  

Patent license coverage is important because it ordinarily safeguards the licensee against a finding of patent infringement and the grant of an injunction which would shut down any benefit obtainable from exploiting of the patented invention.   

A dominant question raised throughout court decisions has been whether contract law or patent policy should determine the outcome when a licensee challenges the patent. On the one hand, it is important to enforce contractual obligations. On the other hand, it is important that patents be valid; otherwise, the public should reap the unencumbered benefit of the knowledge disclosed by the patent.  

Challenging a patent is expensive for both parties. Alternatively, not challenging a patent that is ultimately invalid can be even more expensive for the licensee who pays royalties year after year for the term of the patent. For both the licensor and the licensee, there is much at stake.  

Medimmune  provides the clear lesson that the language of the license is vital to the later determination of the rights of the contracting parties.  

Some Considerations In Licensing A Patent  

The following are some practical considerations to be weighed in negotiating a patent license:  

For the Licensor

  • Challenge Prohibition Unenforceable. Recognize that a clause stating that the licensee cannot challenge the patent should not be written into the license because it is unenforceable.
  • License Revocation. Consider including a clause stating that if the licensee challenges the patent, the license is revoked.
  • Increased Royalties. Consider requiring the payment of increased royalties from the outset as means for paying for litigation that could be brought by the licensee. 
  • Costs and Attorneys Fees. Consider including a clause requiring the payment of costs and attorneys fees associated with an unsuccessful challenge to the patent.

For the Licensee  

  • Validity Investigation. Conduct a patent validity study before entering into the license.
  • Licensor Disclosure. Consider including a clause requiring the immediate disclosure to the licensee by the licensor of any material(s) relevant to the validity of the licensed patent(s), and, in the event of non-disclosure, the payment of liquidated damages equal to the royalty amount owed on the agreement after the time such awareness is shown to have existed. Doing so will prevent unjustified payment of royalties owing to a patent that is known to be invalid, and may even prompt the licensor to investigate the validity of the patent before finalizing the license agreement.
  • Alternative Dispute Resolution. Consider including a clause providing for the use of alternate dispute resolution -- mediation and arbitration -- as ways of resolving a potential conflict without costly litigation.
  • Costs and Attorneys Fees. Consider including a clause requiring the payment of costs and attorneys fees associated with a successful challenge to the patent.
  • Return of Royalties. Consider including a clause requiring the return of post-challenge royalties, i.e., royalties paid from the time a court challenge to the patent is brought until final judgment, should that challenge be successful.

Patent litigation is sometimes unavoidable, but these suggestions may reduce the potential angst and cost associated with such litigation. A license is a product of a negotiation. Hopefully, it is led on either side by skillful, knowledgeable representatives of each of the parties who are willing to listen to each other.

The Next Case   Another patent case undoubtedly of interest to those with any stake in patents is KSR International Co. v. Teleflex, Inc., et al., S. Ct. No. 04-1350, which is pending as this is being written. There, the Court is being asked to clarify the standard for finding that an invention is “obvious,” and thus unpatentable. The outcome of that case may impact all patents and the challenges to them. The Supreme Court appears to have taken a keen interest in the field of patent law. Knowledgeable counsel is needed to take advantage of the opportunities presented by this stream of new legal developments regarding patents and licenses.   

For further information, please contact Mark Montague.

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