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On January 9, 2007, the United States Supreme Court ruled that a patent licensee is no longer required to terminate or breach its licence agreement in order to seek a declaratory judgment that the underlying patent is invalid, unenforceable or not infringed.

Facts

In this case, the petitioner, MedImmune, Inc., was the manufacturer of the drug Synagis®, a drug used to prevent respiratory tract disease in infants and young children. In 1997, MedImmune entered into a patent licence agreement with the respondent Genentech, Inc. covering an existing patent and a pending patent application of Genentech. In December 2001, Genentech's patent application covered by the licence matured into the "Cabilly II" patent. Soon thereafter, Genentech advised MedImmune that Synagis® was covered by the Cabilly patent and that it expected MedImmune to pay royalties on its sales of Synagis®. MedImmune was of the view that no royalties were owing as the Cabilly patent was invalid and unenforceable and that, in any event, the patent claims were not infringed by the manufacturing or sale of Synagis®. Nevertheless, MedImmune considered Genentech's letter to be a clear threat to enforce the Cabilly patent, terminate the licence and sue for patent infringement. Being unwilling to expose itself to liability for patent infringement, including possible treble damages and attorneys' fees, MedImmune decided to make the royalty payments under protest, with a reservation of all of its rights. MedImmune's action for declaratory judgment followed shortly thereafter.

The District Court dismissed MedImmune's declaratory judgment claims for lack of subject-matter jurisdiction, finding that a patent licensee in good standing cannot establish a case or controversy as required under Article III of the U.S. Constitution with regard to the validity, enforceability or scope of the patent, as the licence agreement eliminates any reasonable apprehension that the licensee will be sued for infringement. The U.S. Court of Appeals for the Federal Circuit affirmed the District Court's decision.

Findings

The Supreme Court held that the Court of Appeals erred in affirming the dismissal of the action for lack of subject-matter jurisdiction, and that the petitioner was not required to breach or terminate its 1997 licence agreement before seeking a declaratory judgment that the underlying patent was invalid, unenforceable or not infringed. Justice Scalia, who delivered the opinion of the Court, held that the standards for determining whether a particular declaratory judgment action satisfied the case-or-controversy-requirement, i.e., "whether the facts alleged, under all circumstances, show that there is a substantial controversy, between parties having adverse legal interests" were satisfied even though royalties were still being paid by MedImmune. The Court found that while MedImmune's decision to continue paying royalties did eliminate the imminent threat of prosecution, it did not eliminate Article III jurisdiction because the threat-eliminating behaviour was effectively coerced by Genentech. In arriving at its conclusion, the Court drew a comparison with threatened actions by government, where it is recognized that a plaintiff is not required to expose itself to liability before bringing suit to challenge the basis for the threat (e.g., the constitutionality of a law threatened to be enforced). The Court added that the dilemma posed by that coercion (i.e., deciding whether to abandon one's rights or risk prosecution) is one that the very purpose of the Declaratory Judgment Act is meant to ameliorate. As for Genentech's argument that a party to a contract cannot challenge the contract's validity and at the same time continue to reap its benefits, the Court did not find this argument persuasive, as MedImmune was not repudiating the contract, but was asserting that the contract, when properly interpreted, did not prevent it from challenging the patents and did not require the payment of royalties as the patents did not cover its products and were invalid.

Consequences of the Decision

While it will no doubt take many years before the full impact of this decision can be properly measured, this ruling will likely affect the balance of power between patent holders and their licensees. Before this decision, licensees found themselves in a difficult position of either paying royalties on a patent that they considered questionable or breaching the licence agreement and exposing themselves to potentially crippling damages if the patentee were to prevail in an infringement action, including the payment of attorneys' fees and treble damages. Licensees may now be more willing to enter into licensing arrangements, knowing that at any time they can challenge the validity or enforceability of the licensed patents with little downside risk. Patent holders, including Canadian companies involved in licensing U.S. patents, should therefore approach licensing arrangements with increased vigilance, carefully choosing with whom they wish to partner and reviewing their standard licence agreements in order to ensure that appropriate contractual provisions are in place to effectively deter their licensees from challenging the licensed patents.[1]

[1].    Note that in Canada, a licensee is generally estopped from denying the validity of the patent or the title of the licensor as long as the relationship of licensor and licensee exists.  However, the doctrine of estoppel is not absolute; exceptions to this rule include cases where the licensor has covenanted for validity, where the right to dispute validity is reserved, where there has been fraud on the part of the licensor or where the licensee is defending an action for infringement.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault LLP or any member of the firm on the points of law discussed.

© Ogilvy Renault LLP 2007 - All Rights Reserved

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