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No Case or Controversy Between Ptentee and Licensee in Good Standing

March 05, 2004

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Last Month at the Federal Circuit - April 2004

Judges: Rader (author), Archer, and Gajarsa

In Gen-Probe Inc. v. Vysis, Inc., No. 02-1617 (Fed. Cir. Mar. 5, 2004), the Federal Circuit held that no case or controversy exists between patentee and licensee where the licensee sued for DJ of invalidity or unenforceability but continued paying royalties and exercised its right to extend the license to third parties.

Vysis, Inc. and its corporate predecessor (collectively “Vysis”) own U.S. Patent No. 5,750,338 (“the ’338 patent”), which claims methods and kits for use in nucleic acid diagnostic assays, such as HIV and hepatitis C blood assays. At the time this patent issued, Vysis and Gen-Probe Inc. (“Gen- Probe”) were involved in litigation over other patents. Vysis informed Gen-Probe of this patent and, in light of Gen-Probe’s plans to develop bloodscreening technology, it decided to take a nonexclusive license to this and other related patents it might otherwise infringe as part of the settlement of unrelated patent litigation. This license also included an option for Gen-Probe to extend the license to its third-party collaborators in the assay market.

After taking this license, Gen-Probe wrote a letter to Vysis stating that it intended to maintain its royalty payments under the license and to exercise its option to extend the license to Chiron Corporation (“Chiron”) and Bayer Corporation (“Bayer”), but that it believed that its tests did not infringe any claims of the licensed patents and that the ’338 patent is invalid. The letter also stated that Gen-Probe was concurrently filing suit against Vysis seeking relief from the ’338 patent but that to maintain the status quo, it would continue its royalty payments and exercise its option with regard to Chiron and Bayer. Vysis filed a motion to dismiss for lack of subject matter jurisdiction. But the district court denied this motion, noting that Gen- Probe was notified of its possible infringement of the ’338 patent and that there was a history of litigation between the parties. The Court then upheld a jury determination of noninfringement, obviousness, and nonenablement of the ’338 patent.

On appeal to the Federal Circuit, Gen-Probe argued that the Declaratory Judgment Act authorizes a suit where the parties dispute the rights and obligations under the license and where a licensee pays royalties only under protest. Vysis argued that Gen-Probe, as a patent licensee in good standing, does not have the ability to adjudicate the validity and scope of a licensed patent.

In analyzing the jurisdictional issue, the Federal Circuit reviewed its decisions in C.R. Bard, Inc. v. Schwartz, 716 F.2d 874 (Fed. Cir. 1983) (“Bard”), and Lear, Inc. v. Adkins, 395 U.S. 653 (1969) (“Lear”). In Bard, the totality of the circumstances indicated that a controversy existed ecause the licensee ceased payment of the royalties due under the agreement—which constitutes a material breach of the agreement—and this nonpayment allowed Schwartz to terminate the agreement and file a lawsuit for infringement. In fact,Schwartz did file suit in state court for recovery of royalties due, which indicated his willingness to enforce his patent rights. Here, the Court found Bard distinguishable because Gen-Probe continued to pay its royalties throughout the DJ suit and expressly indicated it would do so in the letter it sent to Vysis the day before it filed that suit. It also exercised its option to extend the license for Chiron and Bayer. Thus, Gen-Probe did not materially breach its license agreement and Vysis could not and did not file suit for breach.

In addition to Bard, Gen-Probe and the district court relied on the Lear doctrine to determine that an actual controversy existed. Lear provides that a license does not per se bar the licensee from challenging the validity of a licensed patent. But the Federal Circuit concluded that Gen-Probe’s payment of royalties under “protest” is not sufficient to create a case or controversy—other cases analyzing the Lear doctrine imply that a licensee must at least stop paying royalties (a material breach) before suing to challenge the validity or scope of licensed patents. Furthermore, the district court erred in relying on activities that occurred prior to the execution of the patent license, because the license included a covenant by Vysis not to sue. Thus, the license, unless materially breached, removed any reasonable apprehension by Gen-Probe of suit.

In concluding that there was no actual controversy between Gen-Probe and Vysis, the Court noted the negative impact of allowing suits like this to be adjudicated. Allowing attacks on patent validity and enforceability in situations like this would effectively defeat the value of contractual covenants common in patent-license agreements and would discourage patentees from granting such licenses. Here, Vysis bears the risk of having its patents found unenforceable while providing a covenant to Gen-Probe and third parties that it would not sue for infringement. But Gen-Probe, Chiron, and Bayer would benefit from the damages cap effectively imposed on Vysis by the election to continue paying royalties in the event that a patent challenge is ultimately unsuccessful.