Supreme Court: patent licensee need not cease royalty payments to challenge patent’s vaildityJanuary 9, 2007

Today the Supreme Court decided MedImmune v. Genentech, a case about the power of federal courts to decide issues related to patent infringement and validity when one party to the dispute is currently licensing the patent from the other party. In an 8-1 decision, the Court held that a licensee need not stop paying royalties, thereby breaching the license agreement, in order for courts to have jurisdiction to consider a request for a declaratory judgment of invalidity or noninfringement.

More details of the case after the jump.

Under Article III, section 2 of the United States Constitution, in order for a federal court to have jurisdiction over a case, there must be, among other things, a "case or controversy." In most cases, this requirement is not at issue, however frequently in intellectual property cases an alleged infringer will ask a court to declare that, for example, a patent is invalid, unenforceable, or not infringed. Under the federal Declaratory Judgment Act, a party does not need to wait to be sued in order to have a court make such a decision: the alleged infringer must be under a "reasonable apprehension of suit." What happens when the alleged infringer has entered into a license agreement with the IP owner, though? Is that licensee still under a reasonable apprehension of suit sufficient to give a federal court jurisdiction?

In this case, MedImmune manufactures the drug Synagis, which is used to prevent respiratory tract disease in infants and young children. In 1997, MedImmune entered into a patent license agreement with Genentech relating to a then-pending patent application that potentially covered MedImmune's Synagis product.

When the patent issued in 2001, MedImmune did not believe that the claims as issued covered its product and also believed the patent to be invalid and unenforceable. However, Genentech notified MedImmune that it expected royalty payments under the license to begin in March, 2002. Taking this as a threat to enforce the patent, MedImmune, instead of risking an injunction against a product that comprised 80% of its sales, paid the royalties "under protest and with reservation of all of [its] rights."

MedImmune then sued for a declaration that the patent is invalid, unenforceable, and not infringed. Both the district court and the Federal Circuit held that MedImmune was not under a reasonable apprehension of suit because it was paying royalties. In order to be under threat of suit, these courts held that MedImmune must cease the royalty payments, exposing it to a breach of contract and/or patent infringement action.

The Supreme Court disagreed. The Court, quoting a 1941 Supreme Court case, summarized the requirement for declaratory judgment jurisdiction:

"Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment."

It is undisputed that if MedImmune had ceased paying royalties, this requirement would be satisfied. The question is whether by continuing to pay royalties, and thus ending any imminent threat of harm, the dispute is no longer a "case or controversy" under Article III.

The Court, analogizing cases where government prosecution was possible if a declaratory judgment is not issued, stated that "the declaratory judgment procedure is an alternative to the pursuit of the arguably illegal activity." Using similar logic, the Court held that MedImmune was not required under the Constitution to breach the contract in order to seek a declaratory judgment.

In summary, the Court stated: "We hold that petitioner was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed." The Court did leave open the possibility that the lower court may, in its discretion, refuse to consider the request for declaratory judgment for other equitable or prudential reasons.

This decision could increase the number of declaratory judgment actions filed, as patent licensees will no longer have to intentionally breach a license agreement in order to challenge the licensed patent. It will also likely mitigate the amount of damages in patent cases involving a licensee of the asserted patent, as if the licensee continues to pay royalties, the patent holder may be hard pressed to show additional damages beyond the license payments.