Authored by L. Scott Burwell
In October, the Supreme Court will hear oral argument in MedImmune, Inc. v. Genentech, Inc., a case that concerns whether a licensee may challenge the validity of a licensed patent without first breaching the license agreement. The case arose when MedImmune filed a declaratory judgment action challenging the validity of a patent licensed from Genentech, while continuing to pay royalties under the license agreement. The district court dismissed MedImmune's suit, holding that because the license agreement had not been breached, MedImmune did not have the reasonable apprehension of suit required under the Declaratory Judgment Act. When the Court of Appeals for the Federal Circuit affirmed the dismissal, MedImmune sought review by the Supreme Court.
The case highlights the tension between two compelling arguments. In its 1969 decision in Lear v. Adkins, the Supreme Court rejected the notion that a licensee was precluded from asserting that a licensed patent was invalid. Lear noted the important public interest in eliminating invalid patents and observed that licensees often may be the only individuals with enough incentive to challenge a potentially invalid patent. On the other hand, it seems fundamentally unfair for an accused infringer to wrest compromise license terms from a patent owner, who accepts the compromise to avoid expensive litigation, and then force the patent owner to litigate the issue with no hope of securing anything more than the compromise consideration under the license agreement.
The Supreme Court's resolution of the MedImmune case may dramatically affect the relationship between patent owners and licensees. If the Court overturns MedImmune and holds that a licensee may challenge the validity of a patent without first breaching the license agreement, licensees may decide to challenge patents more frequently. Such a challenge would be a fairly risk-free endeavor for the licensee, for if the patent is held invalid, the licensee will be able to practice the technology free of any royalty obligation. If the challenge fails, however, the licensee will merely have to continue paying the agreed royalties while the license agreement remains in effect. Because patent owners would bear all the risk under these circumstances, they might become more reluctant to license their technology. Or, fearing an increase in the frequency of patent challenges, patent owners might seek higher royalties as compensation for the greater risk they face. Patent owners might also seek to include conditions in their license agreements that impede the ability of licensees to challenge the licensed patent.
If the Supreme Court upholds MedImmune, licensees will be faced with the difficult decision of whether to breach a license agreement to allow a patent challenge to proceed. Breach usually permits the patent owner to terminate the license agreement and could expose the licensee to a charge of willful infringement and its accompanying exposure to treble damages. That threat may dissuade licensees from challenging the validity of questionable patents. To further discourage challenges, patent owners might seek to bundle patents of dubious validity with stronger ones in a single license. Such a tactic would render a licensee unable to challenge a weak patent without risking termination of the entire license. Accordingly, forcing a licensee to breach the license agreement before attacking a patent's validity could result in unjustified patent protection for inventions that should be in the public domain.
The Supreme Court will have to determine if the policies espoused in Lear are still important and, if so, whether they are absolute. Its decision will undoubtedly affect when and how patent owners and licensees enter into license agreements with each other. A decision in MedImmune is expected later this year or in early 2007.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.