Editor’s Note: A. José Cortina is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.

RESEARCH TRIANGLE PARK, N.C. – On Jan. 9, the U.S. Supreme Court handed down its decision in “Medimmune, Inc. v. Genentech, Inc.,” which immediately resulted in much media buzz about how the decision would impact patent licensing.

The holding, which permits a licensee to challenge its licensor’s patent while paying royalties to continue use of the patent under a valid license agreement, was portrayed in the popular press as an important and fundamental change in the patent landscape. In reality, however, the case follows, and in part expands upon, an earlier decision of the Supreme Court in the case of “Lear, Inc. v. Adkins.”

In the Lear case, Lear as the licensee entered into an agreement concerning certain innovations, both unpatented and patented, relating to gyroscopes (“gyros”). The license agreement in question provided, in part, that if the Patent Office refused to issue a patent or if such a patent so issued were to be subsequently held invalid, then Lear would have the right to terminate the specific license or to terminate the entire agreement.

Prior to the issuance of the patent in question, Lear undertook a Patent Office search and determined that there was a patent which anticipated the invention for which the patent was being sought. As a result Lear stated it would no longer pay royalties on gyros produced in one of its plants.

In its holding, the 1969 Supreme Court stated that overriding federal policies would be significantly frustrated if licensees could be required to continue to pay royalties while challenging a patent’s validity in the courts. Thus, Lear was allowed to avoid payment of all royalties accruing after issuance of the patent if Lear could prove that the patent was invalid. Even though the contract included a provision which would require payment of royalties until the patent was shown to be invalid, the Court ruled that enforcing such a contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain.

Common Good vs. Technical Requirements

More specifically, the Supreme Court explained that the federal law of patents requiring all ideas in general circulation be dedicated to the common good unless protected by a valid patent, overrides the technical requirements of contract doctrine, which must yield to the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.

Since that time, a number of cases decided by the Court of Appeals for the Federal Circuit have resulted in obstacles being created with respect to declaratory relief in patent cases. More specifically, the Court of Appeals for the Federal Circuit for many years has held that a company licensing a patent has to risk infringing the patent in order to challenge it in court. In other words you could not have your cake and eat it too by both paying for the patent license and then hedging your bets by challenging it at the same time.

In the Medimmune v. Genentech case, Medimmune, while paying royalties under a license agreement, sought to bring a suit for declaratory judgment to invalidate the patent. Genentech’s argument in opposing Medimmune’s ability to challenge the patent was that since Medimmune continued to pay royalties, it had no legal ability (known as “standing”) to bring such a suit because as a result of the license and royalty payments Medimmune was not under the threat of being sued for patent infringement.

Such an argument, the Court reasoned, appeared to be contrary to the Supreme Court’s decision in Lear v. Adkins, which held that a public policy interest in invalidating a patent is strong enough to warrant limitations on a requirement that the licensee give up rights to challenge a patent’s validity.

More specifically, the question presented to the Supreme Court in Medimmune v. Genentech was whether the U.S. Constitution’s Article III, 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), requires a patent licensee to refuse to pay royalties and commit material breech of a license agreement before suing to declare the patent invalid, unenforceable, or not infringed.

When Are Royalties Due?

In contract provisions similar to those in the Lear case, the license in the Medimmune case required payment of royalties until a patent had been held invalid by a competent body. In discussing the case, the Court in Medimmune indicated there was no dispute that the standard to satisfy the case or controversy requirements would have been met if Medimmune had taken the final step of refusing to make royalty payments. The Court stated that the facts on the legal dimensions of the dispute were well defined, and, except for the licensee continuing to make royalty payments, nothing about the dispute would render it unfit for judicial resolution.

On the other side of the issue, the Court recognized that Medimmune’s own act of continuing payments eliminated the imminent threat of harm. Thus, the question before the Court was whether such continuation of payment of royalties caused the dispute to no longer be a case or controversy within the meaning of Article III.

The licensor argued that when a licensee enters into a license agreement, it essentially purchases an insurance policy immunizing it from suits for infringement so long as it continues to pay royalties and does not challenge the covered patent. Accordingly, the licensor argued that permitting a licensee to challenge the validity of the patent without terminating or breaking the agreement alters the deal, allowing the licensee to continue enjoying its immunity while bringing a suit, the elimination of which was part of the quid-pro-quo of the deal.

Point, Counterpoint

In contrast, the licensee argued that the fact royalties were being paid did not make the dispute one of a hypothetical or abstract character. Rather, it argued that the royalties were being paid under protest and under compulsion. The Court further focused on the fact that the Declaratory Judgment Act provides the Court may declare the rights and other legal relations of any interested party, and not that it must do so. The Act, the Supreme Court stated, confers on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants. However, based on prior Federal Circuit decisions and the rule established through such decisions, the Court reasoned that the District Court considered itself bound to dismiss the case.

In issuing its ruling, the Supreme Court stated that it would be imprudent for it to decide whether the District Court should grant or must decline to issue the requested declaratory relief, and that arguments in favor of such discretionary dismissal is properly considered by the lower court on remand. As such, the holding of the Court is that the licensee was not required, insofar as Article III is concerned, to break or terminate its license agreement before seeking a declaratory judgment in Federal Court that the patent is invalid.

(Part Two: A discussion of the impact the holding in this case may have on patent licensing).

A. José Cortina is a registered patent attorney with the law firm of Daniels, Daniels & Verdonik, P.A. He focuses his practice on the intellectual property needs of small to large technology companies, including providing patent, trademark, copyright, counseling, licensing, conflict resolution and transactional services. He is experienced in a broad range of technologies, including electronics, communications, computer hardware and software, biomedical, materials, and selected chemical and chemical engineering technologies.