Oral argument: October 4, 2006
PATENT, DECLARATORY JUDGMENT, LICENSEE ESTOPPEL, JUSTICIABLE, BREACH OF LICENSE AGREEMENT
A declaratory judgment suit is one in which the plaintiff’s requested relief from the court is a statement of the parties’ rights. In a declaratory judgment action, an “actual controversy” must exist between the parties in order for a court to declare the rights and legal relations of the interested parties. MedImmune v. Genentech asks the Supreme Court to consider what defines an “actual controversy” as applied to suits challenging the validity of patents. Specifically, the Court will decide whether it is necessary for a patent licensee to breach the terms of a patent in order to bring suit against the patent owner. The Court’s decision in this case has the potential to shift the balance of power between patent holders and licensees.
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?
Should patent licensees be required to violate the terms of a patent licensing agreement, and therefore risk a willful patent infringement suit by the patent owner, in order to challenge the validity of the patent in a court of law?
MedImmune licensed a patent owned by Genentech called Cabilly I (United States Patent No. 4,816,567), which involved technology relating to the use of cell cultures to manufacture human antibodies. By the terms of that agreement, MedImmune also received a similar license under a patent called Cabilly II (United States Patent No. 6,331,415), also owned by Genentech. After issuance of Cabilly II, Genentech advised MedImmune that a MedImmune product, called Synagis(R), was covered by Cabilly II and subject to royalties in accordance with the license terms. MedImmune objected, and filed a declaratory judgment action in the United States District Court for the Central District of California. MedImmune requested a declaration that the Cabilly II patent is invalid or unenforceable, based on various grounds flowing from a 1990 settlement of a patent interference between Genentech and Celltech R&D, Ltd (“Celltech”).
In 1990, in accordance with 35 U.S.C. § 135, the United States Patent and Trademark Office (PTO) declared an interference between Genentech’s Cabilly II patent and a patent owned by Celltech called the Boss patent (United States Patent No. 4,816,397). The PTO interference proceedings consumed seven and a half years. The Board of Patent Appeals and Interferences decided priority in favor of Boss. Cabilly v. Boss, 55 USPQ2d 1238 (Bd. Pat. App. & Int. 1988). Genentech then filed a civil action in the United States District Court for the Northern District of California, in accordance with 35 U.S.C. § 146. By suggestion of the court, Genentech and Celltech retained a mediation service, and they reached a settlement whereby Genentech and Celltech agreed that the Cabilly II was entitled to priority as against the Boss patent. The court entered judgment on the parties' resolution of the issue of priority, and directed the PTO to vacate its prior decision, revoke the Boss patent, and issue a patent on the Cabilly II application. Genentech, Inc. v. Celltech Therapeutics, Ltd., 2001 U.S. Dist. LEXIS 3489, No. C98-3926 MMC (WDB) (N.D. Cal. March 16, 2001). Due to complications, the Cabilly II patent was not issued until December 18, 2001, eleven years after the inception of the interference.
Despite MedImmune’s claims, the Central District of California, applying Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004), dismissed the suit as non-justiciable (not a case that the court was able to hear). The court explained that since MedImmune continues to comply fully with the license terms, leaving no possibility of infringement suit or license cancellation by Genentech, there is no "case of actual controversy" as required by the Declaratory Judgment Act. The Federal Circuit Court of Appeals affirmed.
“You can’t have it both ways” is a frequent admonition of parents to indecisive children. However, the Supreme Court is now set to decide whether patent licensees can indeed have it both ways for themselves by deciding whether a licensee can sue to invalidate a patent they are licensing without first breaching their license agreement (thereby risking a lawsuit and a potentially costly finding of willful infringement).
The present case turns on the Supreme Court’s interpretation of the words “case of actual controversy ” the language of a requirement imposed by the Declaratory Judgment Act and Article III of the Constitution. In making its interpretation, the Court will resolve the current differences among the federal appellate courts. Both the Second Circuit and Seventh Circuit, for example, do not require that licensees breach their license agreements in order to contest the validity of their agreements. See Petition for Certiorari. However, the Federal Circuit Court of Appeals has held that a licensee must breach its licensing agreement to create a “case of actual controversy” regarding the validity of the patent at issue. MedImmune and future companies like MedImmune would be benefited if the Court adopted the Second Circuit and Seventh Circuit standards, while Genentech and future companies like Genentech would prefer the adoption of the Federal Circuit Court of Appeals standard.
The resolution of MedImmune v. Genentech has profound business implications for licensees and licensors of patents. If a patent licensee must stop making royalty payments to the patent owner or otherwise breach their contract before they can challenge the validity of the patent, then licensees are forced to take the huge business risk of having the patent being declared valid and voluntarily infringing. MedImmune emphasizes the difficulties that the Federal Circuit Court of Appeals opinion creates, particularly, for small businesses. See Petition for Certiorari. When MedImmune went to market with its product, Synagis, it elected to pay Genentech a licensing fee on a family of patents, some of which were not yet granted, because it lacked the financial resources to challenge or examine the patents’ validity or applicability to MedImmune’s product. Today, MedImmune asserts that the Cabilly II patent, which it continues to license from Genentech is invalid and wishes to receive assurances that this is the case without taking on the financial risks of a suit for breach of contract, willful patent infringement, and possible treble damages that may result if a judge or jury decides that Genentech’s patent is still valid. See id. Treble damages, special punitive damages charged to parties who willfully infringe a patent, may amount to a cost of up to three times the amount of actual damages determined. See 35 U.S.C. § 284. MedImmune may in effect be punished today in treble damages for lacking the resources to examine the necessity of a license on Genentech’s patents during the company’s infancy.
According to Genentech, however, if the Federal Circuit Court of Appeals’ decision is reversed, a patent owner may be taken by surprise when its previously complacent business partner files a lawsuit with the potential to invalidate its patent and denies it the ability to strike back by asserting the improper use of its patented technology. See Brief in Opposition to Certiorari. Genentech cites Lear v. Adkins, where the Supreme Court required that a licensee breach its licensing agreement to create a “case of actual controversy” under the requirements of Article III of the Constitution. Once a licensing agreement has been breached, then both the licensee and licensor have substantial interests at stake in the ensuing litigation. The licensee has breached its contract with the patent holder and may be found liable for the unpaid royalties and additional punitive damages for willful patent infringement. The licensor must defend the validity of its patent or else risk relinquishing its monopoly and allowing any other party the freedom to freely exploit the invention it spent its own research and development resources to develop.
In addition, if a licensee can sue for a declaratory judgment of invalidity on a patent they are licensing without actually breaching the licensing agreement to create infringement, then the patent owner becomes handicapped. See Brief in Opposition to Certiorari. Unless a licensee breaches the license agreement, there is no patent infringement, and a patent owner has no cause of action against a royalty-paying patent licensee because there is no infringement by the licensee. Id. If the patent owner cannot counterclaim for infringement against the licensee, then he loses an important avenue of defense.
Many patent owners have written amicus briefs in support of Genentech’s assertion of no jurisdiction in this case. See Amicus Brief by Columbia University and Stanford University. Notably, research universities and other non-commercial enterprises would be substantially harmed if licensees, whom these parties rely on to make their useful, patented inventions available to the public, could sue for declarations of patent invalidity without breaching licensing agreements. See id. Such behavior by licensees could discourage many non-commercial research entities from licensing their inventions because they cannot afford the potential liability. Such a move by universities and other researchers could remove many important technological inventions from public availability. Id.
MedImmune v. Genentech will be the first of several patent cases heard by the Supreme Court this term. After a span of nearly 40 years when the Court reviewed very few patent cases, the Court appears to have an interest in revisiting certain fundamentals of patent law and overseeing the work of the Federal Circuit Court of Appeals, which hears all appeals from US District Courts arising under federal patent law. See 28 U.S.C. § 1338 (2006).
MedImmune v. Genentech requires the Supreme Court to reexamine the “case of actual controversy” requirement imposed by the Declaratory Judgment Act. A declaratory judgments suit is one in which the plaintiff’s requested relief from the court is a statement of the parties’ rights. For example, in the present case, MedImmune has requested that the court pronounce Genentech’s Cabilly II patent invalid, but desires no additional relief in the form of either damages or injunctions.
The Declaratory Judgment Act imposes a requirement that “[i]n a case of actual controversy within its jurisdiction, [. . .] any court of the United States, [. . .] may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” 28 U.S.C. § 2201 (2006). The “case of actual controversy” requirement articulated by the statute derives its origin from Article III of the US Constitution and essentially requires that a court only issue a declaratory judgment when there is an actual problem between the parties that a court is needed to resolve. See US Constitution, Article III. The Declaratory Judgment Act prohibits US courts from issuing declaratory relief in response to hypothetical situations.
To determine whether a declaratory judgment may be properly requested by MedImmune, the Court must decide whether a patent licensee who has not breached his license agreement but wishes to challenge the validity of the licensed patent has done enough to create a “case of actual controversy” according to the intentions of the Constitution and Declaratory Judgment Act. Petitioner MedImmune argues that royalty payments need not cease for a “case of actual controversy” over patent validity to exist, while Respondent Genentech asserts that there is no “case of actual controversy” until the licensee breaches his agreement and risks damages for infringement.
Petitioner MedImmune argues for the adoption of a totality of the circumstances test for determining whether there is a “case of actual controversy.” See Petitioner’s Reply Brief. It argues that the Supreme Court’s understanding of this language should place emphasis on the presence of a real and immediate “controversy.” See Petition for Certiorari. There need not be a breach of contract for there to be a real and immediate “controversy,” as another real and immediate issue may suffice. The presence of a controversy, according to MedImmune’s arguments, has been improperly redefined by the Federal Circuit Court of Appeals as requiring a patent licensee to materially breach its license agreement before an “actual controversy” exists. See Petition for Certiorari. In support of this proposition, MedImmune cites Altvater v. Freeman, in which the Court held that a licensee should not be forced by the judiciary to choose between paying license payments and risking treble damages. See Altvater v. Freeman, 319 U.S. 359, 365 (1943).
Respondent Genentech argues that the Federal Circuit Court of Appeals’ decision should be upheld. The Federal Circuit Court of Appeals held that US courts have no jurisdiction over patent invalidity declaratory judgment suits absent a breach of contract and that the lacked of a “case of actual controversy.” See Brief in Opposition to Certiorari. In Gen-Probe, Inc. v. Vysis, the Federal Circuit Court of Appeals found that controversies over patent enforcement, validity, and infringement do not exist while a licensing agreement remains in effect. Genentech and its co-respondents further cite the unfair inability of a patent owner to predict a lawsuit when it is filed by a non-breaching licensee. In some Circuit Courts of Appeals, notably the Second Circuit and Seventh Circuit, a “reasonable apprehension of suit” by the defendant is a requirement for the availability of declaratory judgments. See Warner-Jenkinson Co. v. Allied Chem. Corp., 567 F.2d 184, 187 (2d Cir. 1977); Precision Shooting Equip. Co. v. Allen, 646 F.2d 313 (7th Cir.), cert. denied, 454 U.S. 964 (1981).
Genentech suggests that the standard used by the Second Circuit is really a deviation from the circuit’s usual practice. See Brief in Opposition to Certiorari at 16. For example, in Atlantic Richfield Co. v. Alcan Aluminum Holdings Ltd., a declaratory judgment action was deemed improper when a plaintiff requested assurance from the court that breaching a contract was a viable option when it was more economically efficient for the party to breach than to abide by the contract terms. See Atlantic Richfield Co. v. Alcan Aluminum Holdings Ltd., 12 F.Supp.2d 460 (S.D.N.Y. 1998). The Second Circuit refused to issue the requested declaratory judgment in Atlantic Richfield because the plaintiff’s suit could not be reasonably apprehended by the defendant prior to its filing. See id. Genentech claims that despite the standard articulated by Warner-Jenkinson and Precision Shooting, the present situation is nearly identical to that of Atlantic Richfield—MedImmune is seeking assurance from the court that they no longer need to pay royalties on Genentech’s patent without taking the economic risk of breaching their licensing agreement. See Brief in Opposition to Certiorari at 17.
Licensee estoppel states that making royalty payments on a patent in accordance with a licensing agreement is evidence that the licensee considers the patent to be valid. Courts do not allow a party to take actions that indicate the party simultaneously holds two opposing positions. Under licensee estoppel, a royalty-paying licensee is implying his belief in the validity of the licensed patent every time he makes a royalty payment and, therefore, cannot simultaneously request that a court declare the patent invalid.
Licensee estoppel was rejected by the Supreme Court in 1969 in Lear v. Adkins, which determined that a patent licensee should not have to bear the risk of a willful patent infringement lawsuit as an inherent consequence of challenging the validity of a licensed patent. See Lear v. Adkins, 395 U.S. 653 (1969). However, licensee estoppel was more recently reinstated in Gen-Probe, where the Federal Circuit Court of Appeals held that a licensee “must, at a minimum, stop paying royalties (and thereby materially breach the agreement) before bringing suit to challenge the validity or scope of the licensed patent” See Gen-Probe, 359 F.3d at 1381. The Gen-Probe holding was cited as controlling precedent by the Federal Circuit Court of Appeals in its opinion in MedImmune v. Genentech, the related case MedImmune v. Centocor, and Teva Pharmaceuticals v. Pfizer, Inc. See MedImmune, Inc. v. Genentech, 427 F.3d 958 (Fed.Cir. 2005); MedImmune, Inc. v. Centocor, Inc., 409 F.3d 1376 (Fed.Cir. 2005); Teva Pharmaceuticals USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, rehearing en banc denied 405 F.3d 990 (Fed.Cir. 2005), cert. denied 125 S.Ct. 1413 (2005).
Petitioner MedImmune requests that the Supreme Court overturn the recently re-imposed doctrine of licensee estoppel. MedImmune argues that the Federal Circuit Court of Appeals, which did not receive authorization from the Supreme Court to overturn Lear, should be required to return to the previously mandated standard. MedImmune asserts that many small, innovative companies will be forced to accept the unbearable risk of a patent infringement suit if they are required to materially breach license agreements before challenging patent validity. Additionally, MedImmune highlights that licensees, frequently small companies, are often the parties best situated to identify invalid or overbroad patents and need not be impeded by the risk of patent infringement unnecessarily. See Petitioner’s Request for Certiorari at 8-9.
Respondent Genentech does not emphasize the issue of licensee estoppel, but rather concentrates on the lack of a justiciable controversy under the requirements of the Declaratory Judgment Act. Genentech argues that eliminating licensee estoppel unfairly favors licensees because it gives them the ability to sue to get out of their licensing agreement without risking further action. See Brief in Opposition to Certiorari at 7. Licensors, on the other hand, are limited in their ability to sue for breach of a licensing agreement or patent infringement until such actions actually occur. See Brief in Opposition to Certiorari at 17.
Based on the Court’s conclusion in MedImmune v. Genentech, the business of patent ownership and licensing is sure to be significantly affected. The decision will cause either the patent licensee or patent owner to bear increased liability. This will likely affect the bargaining leverage between the parties, which may influence factors such as the price of patent licenses and the transaction costs involved in licensing agreements. For example, patent licensees may expend more resources, before entering such agreements, to determine the validity of the patent.