Supreme Court Signals Balance Shift in Licensing Patents

The Supreme Court on Tuesday handed down a decision that affects the value of licenses for patents.

In particular, the decision was a repudiation of an established doctrine set forth by the Court of Appeals for the Federal Circuit, which held that a patent licensee in good standing cannot generally challenge the patents under the agreement; instead, an actual dispute or at least apprehension of a lawsuit must first arise before the licensed patents can be challenged for invalidity.

Justice Scalia in an 8-1 Opinion (Thomas dissenting) reversed the Federal Circuit.

Paid Under Protest

Back in 1997,Genentech licensed various intellectual properties toMedImmune under a patent license agreement, including a patent application that later issued as a patent. Genentech then sought royalties for that patent, deemed to cover MedImmune’s billion dollar childhood respiratory drug Synagis.

MedImmune disagreed, considering the patent invalid. Nonetheless, MedImmune paid the requisite royalties and otherwise did not breach the agreement, although it indicated that payments under that patent were being made under protest.

MedImmune then sought to adjudicate patent invalidity by invocation of the Declaratory Judgment Act, which allows parties to sue anticipatorily — that is, not wait to be sued and then defend, but sue first. Parties litigating in this fashion must demonstrate some immediate and substantial harm or reasonable apprehension of a lawsuit; otherwise, they must wait to be sued and defend.

In this case, the Federal Circuit had considered the circumstances, i.e., the licensee remaining under the agreement and paying royalties, as not sufficient to warrant declaratory relief, and thereby dismissed the case for lack of jurisdiction. Justice Scalia, writing for the majority, disagreed, and expanded on Supreme Court jurisprudence in this area.

Patent Tensions Growing

Although the case has been returned to the lower court, the effect of the decision, even though deemed a narrow one, will reverberate as numerous licensed patents are now potentially open to a new attack from even good licensees.

However, just as with the Supreme Court’s Tassini decision years ago, concerning whether newspaper and other writers’ copyrights also included electronic database usage, the issue here may be mooted in short order as companies rewrite their agreements to handle licensee patent challenges.

The Opinion does have language indicating that the Court’s decision does not prevent “equitable, prudential and policy arguments in favor of” discretionary dismissal of such challenges. Thus, MedImmune’s challenge may nonetheless be dismissed upon further review of the circumstances.

To help remedy the situation, license agreements can contain provisions indicating that any challenges by licensees to the validity of covered patents could constitute a repudiation of the agreement, perhaps then leaving the licensee open to a patent infringement suit.

Similar to challenges under a will or family trust, parties under the document could find themselves cut out of the protections afforded by the agreement. With the growing tensions about patents in society, however, such provisions could result in antitrust or public policy challenges and the establishment of further Supreme Court precedent later.

Substantial Economic Threat

Most major patent holders and law organizations backed the view of Genentech, the patentee in the underlying dispute. In their view, by allowing licensees that wish to take full advantage of the benefits of the license — e.g., immunity from a patent infringement lawsuit — to challenge the patents in the agreement, patentees lose the quid pro quo in the arrangement. The thought here is that patentees relinquish their right to sue, and licensees gain peace of mind through an agreement.

Conversely, Justice Scalia, seeing the dispute as more of a contract reinterpretation, considered the coercive factors at play as controlling the outcome. In particular, he viewed the facts here more in line with Supreme Court precedent permitting parties — even private parties voluntarily choosing to avoid violations of an ordinance or agreement — to challenge the terms of that agreement.

In the patent context, the view is that the threat of treble damages and injunctions is immediate and substantial enough to warrant invocation of Declaratory Judgment Act jurisdiction. In other words, the economic threat is real.

Even licensees dutifully paying their royalties can challenge the patents, provided they disagree about the validity of the patents. Indeed, the allocation of risk in licensing agreements has shifted a bit with Tuesday’s decision, and settled expectations must be reevaluated.

More Lawsuits?

Additional concerns have been noted. Patent owners may be less likely to settle — that is, license their technologies — and instead may be more inclined to get a final judgment of patent validity in court, thereby decreasing consensual licensing and increasing litigation.

Also, some have noted the potential for so-called friendly lawsuits between a licensor and licensee, where subject patents are “validated” by a judgment, thereby strengthening the patent against subsequent invalidity assertions by others.

In short, patentees can no longer inoculate themselves from patent challenges from their licensees, even good licensees who pay their royalty payments. Licensees under an agreement with patents they view as invalid now may have a justiciable claim to challenge those patents.