The U.S. Supreme Court handed down its much-anticipated decision last week in MedImmune v. Genentech, 2007 WL 43797 (U.S. Jan. 9, 2007). In an 8 to 1 decision, the Court held that a patent licensee is not required to terminate its license agreement before filing an action declaring a patent invalid, unenforceable, or not infringed. This ruling enables patent licensees to challenge the validity of patents more easily and necessitates that patent holders negotiate new waiver provisions as part of their licensing agreements.
In this case, Genentech granted a patent license to MedImmune in a patent covering the production of chimeric antibodies (Cabilly I) and a then-pending patent application (Cabilly II) covering certain immunoglobulin chains in host cells. Through this license, MedImmune manufactured Synagis, which is a drug designed to prevent certain respiratory diseases in infants and children. After the Cabilly II patent issued, Genentech notified MedImmune that Synagis was covered by the Cabilly II patent and that MedImmune owed additional royalties. Believing that the Cabilly II patent was invalid, MedImmune brought an action for declaratory judgment to declare the patent invalid and unenforceable. However, MedIummune paid the demanded royalties "under protest and with reservation of all of [its] rights" because MedImmune derived more than 80 percent of its revenues from Synagis and feared the possibility of an injunction against the drug.
Genentech moved to dismiss MedImmune's complaint for lack of subject matter jurisdiction. The motion was granted by the district court and affirmed by the Federal Circuit. Both courts based their decision on the Federal Circuit's prior decision in Gen-Probe Inc. v. Vysis. Inc.. The Gen-Probe court followed historical precedent and held that a licensee in good standing could not establish the requisite case or controversy under Article III because the license agreement "obliterates any reasonable apprehension" of being sued for patent infringement.
In reversing the lower courts, the Supreme Court held that "the requirements of a case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim." The Court stated that a patent lawsuit may proceed when the "factual and legal dimensions of the dispute are well defined and, but for petitioner's continuing to make royalty payments, nothing about the dispute would render it unfit for judicial resolution." In arriving at its decision, the Court noted that "[p]romising 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." Nonetheless, the Court noted that its MedImmune decision only addressed an instance where the licensee had not waived its rights.
This decision represents a substantial change in the law governing patent licenses. For licensees, the decision provides the option of challenging patent validity without breaching any licensing agreement. Similarly, patent holders, in negotiating licensing agreements, must consider the licensee's ability to mount such challenges and seek appropriate protections, such as waivers and termination provisions relating to any challenges by the licensee.
To discuss the MedImmune decision's impact on your business or other intellectual property matters, please contact a member of Powell Goldstein's Technology and Intellectual Property group.
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