A summary of the Supreme Court decision, Medlmmune Inc. v. Genentech.

US Court Decision (2) Medlmmune Inc. v. Genentech, Inc. 127 S.Ct. 764 (2007)

Background:

Facts: In 1997, MedImmune entered into a license agreement with Genentech for technology claimed in a Genentech patent and a then-pending Genentech patent application. When Genentech’s patent application matured into a patent, Genentech sent MedImmune a letter asserting that MedImmune’s Synagis drug was covered by the patent and that Genentech expects MedImmune to pay royalties from March 2002. MedImmune considered the letter a clear threat to enforce the patent, terminate the license agreement, and sue for patent infringement if MedImmune did not make royalty payments as demanded. MedImmune believed the patent was invalid and unenforceable, and that the patent did not cover MedImmune’s Synagis product. However, if MedImmune ceased paying royalties (i.e. broke the license agreement), there was a risk that Genentech would sue MedImmune for infringement and obtain an injunction and treble damages against MedImmune if the patents were found to be valid and infringed. Since MedImmune’s Synagis product accounts for more than 80% of its sales revenue, an injunction would be fatal to its business. For this reason, MedImmune instead continued to pay royalties “under protest,” and filed a declaratory judgment action (DJ action) against Genentech, requesting a declaration that the patent was invalid or unenforceable, and that MedImmune did not infringe the patent.

District court: The district court, following CAFC precedent, held that for a party to prove subject matter jurisdiction to bring a DJ action, the party must demonstrate that there is a “reasonable apprehension” that the party will face an infringement suit. The district court found that because MedImmune continued to pay royalties under its license agreement with Genentech, there could be no “reasonable apprehension of an infringement suit” by Genentech. Accordingly, the district court dismissed MedImmune’s DJ action for lack of subject matter jurisdiction.

CAFC: MedImmune appealed to the CAFC. The CAFC affirmed the judgment of the district court.

U.S. Supreme Court: MedImmune petitioned the U.S. Supreme Court to review the case. The Supreme Court granted MedImmune’s petition.

U.S. Supreme Court Holding.ÅF

The U.S. Supreme Court reversed the judgment of the Federal Circuit. The Supreme Court held that MedImmune was not required to break its license agreement before seeking a declaratory judgment that the patent is invalid, unenforceable, or not infringed. The Court remanded the case to the district court.

DJ action inquiry. The U.S. Supreme Court summarized the inquiry of whether a DJ action satisfies U.S. Constitution, Article III requirements as follows:
“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.
” Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U. S. 270, 273 (1941).

U.S. Supreme Court Analysis: Issue. Does MedImmune’s (“Petitioner’s”) own act of continuing to pay royalties (i.e. not breaking the license agreement), and thus eliminating the threat of a patent infringement suit by Genentech (“Respondent”), cause the dispute to no longer be a case or controversy within the meaning of Article III of the U.S. Constitution?

Analogy to threatened government action. The U.S. Supreme Court drew an analogy between cases where threatened government action is concerned and cases where threatened private action is concerned. Supreme Court jurisprudence allows a plaintiff to challenge the constitutionality of a law threatened to be enforced by the government without having to first violate the law. In other words, a plaintiff’s self-avoidance of violating a criminal law should not deny the plaintiff jurisdiction to challenge the law. Similarly, the Court said, in “situations in which the plaintiff’s self-avoidance of imminent injury is coerced by threatened enforcement action of a private party rather than the government,” lower federal and state courts have found jurisdiction.

The Court also relied on its own precedent. Payment of royalties under “coercive” circumstances does not eliminate jurisdiction. The U.S. Supreme Court also relied on Altvater v. Freeman, 319 U. S. 359 (1943). In that case, several patentees sued their licensees, and the licensees filed a counterclaim for declaratory judgment that the patents were invalid. The licensees continued paying, “under protest”, royalties required by an injunction the patentees had obtained in an earlier case. The patentees in Altvater argued that so long as the licensees continued to pay royalties, there is no real controversy, and thus no jurisdiction for the licensees to challenge patent validity. The 1943 Court rejected that argument, holding that a licensee’s continued payment of royalties did not render a challenge to the validity of the patent non-justiciable. In the present case, the Court said the central lesson of Altvater is that “payment of royalties under ‘coercive’ circumstances does not eliminate jurisdiction. ” In the present case, the coercive circumstances are a threat of treble damages and loss of 80 percent of MedImmune’s business. The Court pointed out that although Altvater differs from this case in that Altvater involved the compulsion of an injunction, in both cases the consequence is similar. Altvater acknowledged that the licensees had the option of stopping payments in defiance of the injunction, but that the consequence of doing so would be to risk “actual [and] treble damages in infringement suits” by the patentees, a consequence also threatened in this case.

Rejection of Genentech’s contract arguments. Genentech argued that the dispute between the parties was settled in their 1997 license agreement, under which MedImmune “promised to pay royalties on patents which have neither expired nor been held invalid by a court.” The U.S. Supreme Court noted, however, that the license agreement did not appear to prohibit challenges to the validity of the underlying patents. The Court held that “promising to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity.”

Comments:

1. The U.S. Supreme Court in MedImmune held that a licensee is not required to break a license agreement before seeking a declaratory judgment that the licensed patent is invalid, unenforceable or not infringed. A licensee may continue to pay royalties, while also challenging the validity of the licensed patent, provided that there is threatened enforcement action, e.g. a threat of an injunction and treble damages, if the licensee does not pay royalties.

2. What constitutes “threatened enforcement action”? In the MedImmune case, Genentech sent a letter asserting its patent covered MedImmune’s product and that it expected payment of royalties. In addition, MedImmune alleged, and Genentech did not contradict, a threat by Genentech to enjoin sales if MedImmune did not pay royalties. It is based on these facts, apparently, that the U.S. Supreme Court determined there was “threatened enforcement action.” However, what if Genentech did not send the letter; or did not assert its patent covered MedImmune’s product; or did not demand royalties; or did not threaten to enjoin sales? These questions remain unanswered and will undoubtedly be the subject of much debate among licensors and licensees in the lower courts.

3. The U.S. Supreme Court restated the holding of its landmark decision Lear v. Adkins, i.e. that a repudiating licensee is not required to pay royalties while challenging the validity of a licensed patent. Under the Lear doctrine, a licensee can stop making royalty payments at the time it takes action to invalidate the patent.

4. However, if a licensee continues paying royalties while challenging the validity of a licensed patent, and the patent is eventually held invalid, can the licensee recover the paid royalties? The U.S. Supreme Court declined to address this question in the MedImmune case.

5. If a license agreement includes a clause that prohibits a licensee from challenging the validity of the licensed patent, is such a clause enforceable? The U.S. Supreme Court did not specifically address this question, although the language of the Court’s opinion suggests that such a clause may perhaps be enforceable.

6. The U.S. Supreme Court stated that the Federal Circuit’s “reasonable apprehension of suit” test is in conflict with or in tension with several earlier U.S. Supreme Court cases. The Court’s decision thus effectively overrules contradictory Federal Circuit holdings in MedImmune, Inc. v. Genentech, Inc., 427 F.3d 958 (Fed. Cir. 2005); Teva Pharm. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324 (Fed. Cir. 2005); and Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004).

7. [Added April 4, 2007.] On March 26, 2007, the Federal Circuit issued its first post-MedImmune decision SanDisk Corp. v. STMicroelectronics, Inc. (Fed. Cir. 2007). In SanDisk, the CAFC set forth its new legal test on what the requirements are for triggering Declaratory Judgment jurisdiction in the license negotiation context:
“where a patentee asserts rights under a patent based on certain activity of another party, and where that party contends that it has the right to engage in the accused activity without license, an Article III case or controversy will arise…”

On March 30, 2007, the CAFC issued Teva Pharm. USA, Inc. v. Novartis Pharm., Inc. (Fed. Cir. 2007), which addressed Declaratory Judgment jurisdiction in the context of ANDA (Abbreviated New Drug Application) filings. In Teva, the CAFC applied the Supreme Court’s “under all the circumstances” test and acknowledged that its “reasonable apprehension of imminent suit” test has been overruled by the U.S. Supreme Court’s MedImmune decision.