On January 9, 2007, the United States Supreme Court issued its decision in MedImmune, Inc. v. Genentech Inc., 549 U.S. ___; 81 USPQ2d 1225 (2007), which reversed a line of decisions by the Federal Circuit most recently set forth in Gen-Probe Inc. v. Vysis Inc., 359 F.3d 1376; 70 USPQ2d 1087 (Fed. Cir. 2004). Under Gen-Probe, unless the licensee breached the license as was done in Lear, Inc. v. Adkins, 395 U.S. 653; 162 USPQ 1 (1969), the licensee was not in sufficient imminent threat of suit to satisfy the case or controversy requirement of Article III of the Constitution. Therefore, under Gen-Probe, the licensee could not file a request for declaratory judgment under the Declaratory Judgment Act, 28 U.S.C. § 2201(a), to contest the validity or enforceability of the licensed patent. In reversing this line of decisions, the Court held that a sufficient case or controversy exists to allow a licensee in good standing to file a declaratory judgment to determine whether, under the license, continued royalty payments are required if payments are not required if the licensed patent is invalid, unenforceable, or not infringed.
MedImmune, Inc. (“MedImmune”), the petitioner, manufactures the drug Synagis. Synagis is used to prevent respiratory tract disease in infants and children. Synagis currently represents more than 80% of MedImmune’s total sales revenue. In 1997, MedImmune entered into a license agreement with Genentech, Inc. (“Genentech”) and City ofHope, the respondents. The license agreement covered an existing patent, U.S. Patent No. 4,816,567 (“Cabilly I”), as well as a patent application then pending before the U.S. Patent and Trademark Office. Among other provisions, the license agreement required MedImmune to pay royalties under the Cabilly I patent (as well as the patent application, should it mature into a patent) until the patent(s) expired or were held invalid by a court.
The United States Patent and Trademark Office issued a patent for the licensed application, U.S. Patent No. 6,331,415 (“Cabilly II”), in December 2001. Upon receiving the Cabilly II patent, Genentech sent MedImmune a letter stating its belief that the Cabilly II patent covered Synagis. Since Cabilly I was not alleged to cover Synagis, no license royalties were owed prior to issuance of Cabilly II. MedImmune, however, alleged it did not believe the Cabilly II patent was either valid or enforceable. Nevertheless, MedImmune made a strategic decision to pay the royalties under the 1997 license agreement rather than risk an injunction, payment of the attorney’s fees and/or treble damages should MedImmune lose a subsequent infringement action. MedImmune paid the royalties “under protest” and “with reservation of all of [its] rights”, but otherwise complied fully with the requirements of the 1997 license agreement.
Subsequently, and while continuing to pay royalties under the license agreement, MedImmune filed a declaratory judgment in the District Court for the Central District of
California. The basis of the declaratory judgment was that no royalties were owed under the license because the license only required payment for an enforceable and valid patent, and the Cabilly II patent was invalid and unenforceable. As such, MedImmune filed suit to determine whether the Cabilly II patent was valid such that continued royalty payments should be made under the terms of the license agreement.
The District Court dismissed the suit for lack of subject matter jurisdiction. Citing the Federal Circuit’s decision in Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), the District Court held that the Declaratory Judgment Act, 28 U.S.C. § 2201(a) only allows parties to file for declaratory judgments consistent with the limits of Article III of the Constitution, which requires an actual case or controversy. As interpreted by the District Court, the per se rule under Gen-Probe is that licensees in good standing cannot establish an actual controversy regarding patent validity or enforceability as there is no imminent threat of litigation. As MedImmune was paying the required royalties, there was no imminent threat. Therefore, the District Court, following Gen-Probe, held that MedImmune had not established an actual controversy and dismissed the suit for lack of subject matter jurisdiction.
The Federal Circuit affirmed the District Court’s dismissal of the case based upon its prior Gen-Probe decision.
QUESTION PRESENTED TO SUPREME COURT
Following the Federal Circuit’s decision, MedImmune filed a writ of certiorari on the following question:
Does Article III’s grant of jurisdiction of “all Cases . . . arising under . . . the Laws of the United States,” implemented in the “actual controversy” requirement of the Declaratory Judgment Act, 28 U.S.C. § 2201(a), require a patent licensee to refuse to pay royalties and commit material breach of the license agreement before suing to declare the patent invalid, unenforceable or not infringed?
The Supreme Court granted certiorari to determine whether the actual controversy requirement of the Declaratory Judgment Act and the case or controversy requirement of Article III of the Constitution required a licensee to breach the contract before suing to declare the patent invalid, unenforceable, or not infringed.
HOLDING OF THE SUPREME COURT
In an 8-to-1 decision, the Supreme Court found that neither the Declaratory Judgment Act nor Article III of the Constitution is restricted to situations where there is an imminent threat of suit. In the context of a patent license, the threat of serious business injury should the royalty payment be stopped (i.e., an injunction, attorneys fees, potential treble damages) presented a sufficient controversy that the licensee should not be required to breach the license merely to bring an existing validity or noninfringement dispute into court. As such, the Supreme Court overruled the Federal Circuit’s prior holdings, as set forth more recently in Gen-Probe, and allowed the District Court to exercise its discretion as to whether MedImmune can continue its suit against Genentech and to reach a decision on the merits of the case.
In reaching this conclusion, the Supreme Court extended a prior line of cases allowing parties to file declaratory judgments against the government without first exposing themselves to criminal liability. The deciding factor in those cases was the degree of risk the plaintiffs would have borne had they been required to engage in a possibly illegal act before going to court. See Terrace v. Thompson, 263 U.S. 197 (1923)(lease with alien), and Steffel v. Thompson, 415 U.S. 452 (1974)(distribution of handbills). The Supreme Court found similar factors at play in the patent context, where a loss at trial could result in attorney’s fees, treble damages, and an injunction. The combination of these factors could easily drive a losing defendant out of business such that the resulting serious business injury was sufficiently coercive to satisfy the case or controversy requirement of Article III.
Moreover, the Court drew heavily on its prior decision in Altvater v. Freeman, 319 U.S. 359, 364; 57 USPQ 285 (1943), for the proposition that a justiciable controversy exists even where payments are being made. As stated in Altvater, “[t]he fact that royalties were being paid did not make this a ‘difference or dispute of a hypothetical or abstract character.'” 319 U.S. at 364, quoting Aetna Life Ins. Co. v. Haworth, 300U.S. 227, 240 (1937). As such, Justice Scalia, writing for the Court, found that existing precedent did not force licensees to “bet the farm” as the only way to create a case or controversy sufficient to support filing a declaratory judgment suit.
The Court turned aside Genentech’s counter-arguments that a license was merely an insurance policy and that granting subject matter jurisdiction was contrary to the common law rule that “a party to a contract cannot at one and the same time challenge its validity and continue to reap its benefits.” MedImmune at 1233. The Court held that the license was not an “insurance policy” protecting Genentech from an invalidity suit because the license did not explicitly forbid such suits. Nor was MedImmune barred from suit by the common law rule since MedImmune’s argument was not that the contract was invalid, but was instead that the contract, if interpreted properly, did not require payment of royalties if the patent was invalid. As such, MedImmune’s challenge was in the context of a valid contract, and the justifiable controversy was over the enforcement of a contractual requirement requiring payment only where the patent is infringed, valid, and enforceable.
In its decision, the Court noted that the existence of a case or controversy does not require that the District Court exercise jurisdiction. Specifically, the Court noted that the Declaratory Judgment Act provides that a court “may declare the rights….” Moreover, the Court also noted that common law defenses and other contract law principles relied upon by Genentech do not preclude jurisdiction, but instead relate to any decision on the merits that the District Court may make to resolve the case. As such, the Court explicitly limited the effect of its ruling to allowing the District Court to exercise its discretion (which was not allowed under the Federal Circuit’s Gen-Probe decision), and left for the District Court to determine on remand the “equitable, prudential and policy arguments for such a discretionary dismissal” and “any merits-based arguments for denial of declaratory relief.”
SIGNIFICANCE TO PATENT OWNERS
As also noted in greater detail below in the Feature Commentary entitled Licensing Strategies After MedImmune: The Potential Impacts of the Supreme Court Allowing Licensees in Good Standing to file Declaratory Judgments Against Licensors, the Supreme Court’s decision appears to overturn what had been an assumed rule based upon Federal Circuit precedent that the licensee in good standing had not recourse to contest the validity or scope of the licensed patent while under the license. However, the Supreme Court’s finding will likely cause licensors to devise alternate mechanisms to avoid costly litigation with licensees. Moreover, cases such as MedImmune have caused speculation as to whether the Supreme Court is becoming increasingly hostile to patents as a whole, or whether the Supreme Court is merely recognizing the importance intellectual property plays in the modern economy.