Background

The Supreme Court assumed the following facts. MedImmune is a biotechnology company that manufactures and sells Synagis®, a monoclonal antibody-based drug used to prevent respiratory tract infections in infants. In 1997, MedImmune took a licence from Genentech on an existing patent and a then pending patent application each covering methods of manufacturing antibodies.

Under the licence agreement, MedImmune was obliged to pay royalties to Genentech on MedImmune’s sales of antibody products which would otherwise infringe one or more claims of the licensed patents which had not been finally held invalid. In 2001, Genentech was issued a patent on its patent application.

Genentech wrote to MedImmune claiming that Synagis® was covered by the new patent and royalties were now due under the licence agreement. MedImmune thought the patent was invalid and unenforceable and was not convinced that Synagis® infringed the patent.

However, because Synagis® accounted for 80 per cent of MedImmune’s sales, and faced with the possibility of an injunction from selling its blockbuster drug, plus treble damages and attorneys’ fees, should Genentech prevail in a patent infringement action, MedImmune chose to continue to pay royalties to Genentech ‘under protest and with reservation of all [its] rights’.

MedImmune then brought an action seeking declaratory judgment that Synagis® did not infringe the patent and that the patent was invalid and unenforceable. In the United States, the availability of declaratory relief depends on whether the plaintiff can show that there is (1) a substantial controversy (2) between parties having adverse legal interests (3) of sufficient immediacy and reality to necessitate a declaratory judgment.

Genentech moved to dismiss the action for lack of jurisdiction for declaratory relief.

The Decision

The Supreme Court found in MedImmune’s favour and reversed the District Court and Federal Circuit decisions, holding that there was no actual case or controversy because a licensee who continues to make royalty payments has no reasonable expectation of being sued. The Supreme Court found that (1) there was a substantial controversy between the parties because Genentech had claimed a right to royalties under the license agreement, (2) the parties had adverse legal interests because MedImmune disputed that right and alleged that the patent was invalid and not infringed, and (3) there was an immediate need for relief because MedImmune was faced with a possible injunction from selling its blockbuster drug.

In its analysis, the court pointed to various decisions supporting the proposition that where there is threatened action by the government, individuals are not required to expose themselves to liability before bringing suit to challenge the basis for the perceived threat, that is, a potential plaintiff does not need to break the law before being able to seek a declaratory judgment as to the law’s constitutionality. In those cases, the plaintiff had eliminated the threat of imminent harm by complying with the relevant law, but the court had held that there was nonetheless jurisdiction for declaratory relief because the threat-eliminating behaviour was effectively coerced through the risk of prosecution. The court then went on to examine whether jurisdiction would similarly be preserved in the rarely litigated situation in which the plaintiff’s threat-eliminating behaviour is coerced by threatened action of a private party rather than the government.

The court cited its decision in Altvater v Freeman (1943), where it held that royalties paid under injunction did not render non-justiciable a dispute over patent validity, on the basis that the royalties were being paid under protest and under compulsion of an injunction.

In that case, the court held that there was a justiciable case or controversy despite payment of royalties because the ‘involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim [for payment]‘. The lower courts in the MedImmune case had distinguished Altvater on the basis that it involved payment of royalties under compulsion of an injunction. However, the Supreme Court disagreed and found that Altvater was not based on the fact that the coercion was governmental, but rather that Altvater spoke of the coercive effect of patent infringement remedies (actual and treble damages in the Altvater case), not government sanctions or prosecution for contempt. The court stated that ‘a licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business.’

Turning to the facts of the MedImmune case, the Supreme Court’s analysis starts from the premise that had MedImmune refused to pay royalties to Genentech, the dispute would clearly have been fit for judicial resolution. The question here was whether MedImmune’s ongoing payment of royalties, which had the effect of eliminating any imminent threat of Genentech obtaining injunctive relief to halt sales of Synagis®, caused the dispute to fall outside the bounds of a ‘case or controversy’. The court found that MedImmune’s continued payment of royalties in order to pre-empt an infringement action and possible injunction from selling its blockbuster drug, plus potential treble damages and attorneys’ fees, did not render the contractual dispute between the parties non-justiciable. The court held that, under the circumstances, MedImmune’s threateliminating behaviour could be viewed as coerced, because a plaintiff need not ‘destroy a large building, bet the farm, or (as here) risk treble damages and the loss of 80 per cent of its business, before seeking a declaration of its actively contested legal rights’. The Supreme Court found MedImmune’s potential business loss unacceptable and every bit as coercive as a criminal sanction.

The nature of MedImmune’s victory is procedural. The Supreme Court remanded the case back to the District Court for findings bearing on the usefulness of the declaratory judgment remedy and merit-based, equitable, prudential and policy arguments in favour of a discretionary dismissal. The Supreme Court also expressly left it to the trial court to consider merit-based arguments regarding validity, enforceability, and non-infringement of the licensed patent. In addition, the trial court may also need to address the issue of licensee estoppel since the licence agreement is silent on whether MedImmune can challenge the validity or enforceability of the licensed patents.

Implications

While there is significant uncertainty about the scope and impact of the decision, it has certainly generated a great deal of public debate. One element which has not generally been acknowledged in that discourse, however, is that whatever the legal impact of the MedImmune decision on licensor/licensee interactions, its business impact will be substantially limited to technologies which are licensed on a non-exclusive basis; rarely will the terms of an exclusive licence be such that the licensee would be motivated to forego patent protection in exchange for royalty relief.

Because licensees will no longer be faced with the choice of either terminating the licence in order to challenge the patent or operating under the licence without the ability to challenge the patent, the MedImmune decision may result in a shift in strategy and bargaining power between licensors and licensees and will add new considerations which will need to be addressed by attorneys negotiating and drafting patent licence agreements. The decision is widely heralded as a coup for licensees. Certainly, nonexclusive licensees now have a greater incentive to challenge patents so long as attorneys’ fees are not substantially greater than the royalty payment. However, the ability of a licensee to take advantage of a MedImmune plaintiff status may depend on the particular facts and the level of business coercion at the time at which it wishes to bring a declaratory judgment action. The Supreme Court relied heavily on the level of coercion and the business impact to MedImmune, repeatedly emphasising that Synagis® represented 80 per cent of MedImmune’s sales, and that treble damages and an injunction would be fatal to MedImmune’s business.

From the licensor’s perspective, there are potential workarounds to minimise the risks of a MedImmune-type problem. In order to avoid challenges concerning whether royalties are payable on a given product, a licensor may consider describing the licensed product generically rather than by reference to whether it infringes any claims of the licensed patent and/or whether those claims are valid. It would also be helpful if the licensor is able to negotiate an acknowledgement from the licensee that the licensed patents are valid and would be infringed by named products but for the licence grant. In addition, many patent licences in the United States already include a covenant from the licensee not to challenge the validity of the licensed patent.

Although the licence agreement between Genentech and MedImmune did not include any such covenant, Genentech asserted that a licence agreement was like a settlement agreement, akin to an insurance policy rendering MedImmune immune from suit so long as royalties continue to be paid. The Supreme Court rejected this argument and stated that a promise to pay royalties or contractual language requiring payment on patents that have not been held invalid does not amount to a promise not to challenge validity. The court, however, implied that parties could potentially contract out of such challenges by noting that ‘it is not clear where the prohibition against challenging the validity of the patents is to be found. It can hardly be implied from the mere promise to pay royalties on patents…’. Another variation could be a provision allowing the licensor to terminate the licence upon challenge and seek enhanced damages for infringement. It is an open question at this point whether such ‘no challenge’ covenants and ‘termination trigger’ clauses violate the doctrines of licensee estoppel and patent misuse.

A licensor could also build in contractual ‘disincentives’ to otherwise deter licensees who will not agree to having their ability to challenge the licensed patent’s validity restricted. For example, the licensor could require a right to recover its litigation costs (including attorney’s fees) in any challenge to the validity or scope of the licensed patent, or it could require an escalation in the royalty rate if the licensee challenges the patent’s validity. Other potential workarounds for the licensor include modified financial structures such as seeking higher, non-refundable up-front payments with lower royalties and back-end payments.

In addition to its implications for licensor/licensee relationships, many in the industry are also concerned that the Supreme Court has lowered the threshold for declaratory judgment actions generally and has called into question prior Federal Circuit requirements that a plaintiff have a ‘reasonable apprehension’ of suit to seek a declaratory judgment that a patent is invalid, unenforceable, or not infringed. This has major implications for patent litigation between branded and generic drug companies in the United States. Several lower courts have since interpreted footnote 11 of the MedImmune decision as eliminating the ‘reasonable apprehension’ of suit test. In one recent Federal Circuit case, Teva v Novartis (2007), the court held that an actual case or controversy exists to establish jurisdiction when a generic drug company brings a declaratory judgment action on non-asserted patents. This holding may be limited to the particular facts where the pioneer company initiates an infringement action against the generic company on only some of the patents relating to its branded drug, and it is still unclear whether a generic drug company has declaratory judgment jurisdiction where the pioneer company has not brought suit at all. The Federal Circuit, in SanDisk Corp. v STMicroelectronics, Inc. (2007), also recently applied the MedImmune v Genentech standard to find declaratory judgment jurisdiction based on extensive cross-licensing negotiations between the parties. Overturning its prior ‘reasonable apprehension of imminent suit’ test, the court held that a case or controversy exists ‘where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without licence’.

If the Supreme Court is indeed advocating a more lenient standard which would lower the threshold requirements for bringing a declaratory judgment action, the decision will be particularly important not only for patent licensing, but also for potential litigants wishing to obtain an adjudication on their obligations without exposing themselves to the risk of a lawsuit to enforce those obligations. It remains to be seen how the lower courts use their discretion in deciding whether to take on such declaratory judgment actions.