Justice Scalia, reversing the U.S. Court of Appeals for the Federal Circuit, delivered the opinion of the Supreme Court, holding that under the Declaratory Judgment (DJ) Act (the Act), a licensee in good standing need only plead a license dispute in order to challenge the underlying patent. MedImmune, Inc., v. Genentech, Inc., et al; Case No. 05-608; (U.S. Sup Ct., Jan. 9, 2007) (Scalia, Justice; Thomas, Justice, dissenting).
In 1997, Genentech granted a patent license to MedImmune for a patent covering the production of chimeric antibodies and a then-pending patent application (now the Cabilly II patent) covering the coexpression of immunoglobulin chains in recombinant host cells. Soon after MedImmune began to manufacture Synagis, a drug used for infants and young children to protect against respiratory tract diseases, the Cabilly II patent issued. Genentech informed MedImmune of its belief that Synagis was covered by the patent and expected royalty payments to commence. MedImmune believed Genentech’s letter provided notice that Genentech would enforce the Cabilly II patent, terminate the license agreement and sue for patent infringement if it did not pay the demanded royalties. Although MedImmune believed it had invalidity and non-infringement defenses, it began paying the demanded royalties "under protest and with reservation of all of [its] rights." MedImmune feared the possibility of actual damages, treble damages, attorney’s fees and an injunction against its product, from which it realized 80 percent of its revenues.
Genentech moved to dismiss MedImmune’s DJ complaint for lack of subject-matter jurisdiction. Its motion was granted by the district court and affirmed by the Federal Circuit. Both courts based their decisions on the Federal Circuit decision in Gen-Probe Inc. v. Vysis. Inc., holding that a patent licensee in good standing cannot establish the requisite case or controversy under Article III to invoke the Act because the license agreement removes any reasonable apprehension of a suit for infringement.
The Supreme Court reversed, finding that MedImmune’s DJ complaint pled a contract dispute, i.e., that it had no obligation to pay royalties on an invalid patent and that was sufficient to confer subject-matter jurisdiction under the Act. The Supreme Court noted that disputes that satisfy the case or controversy requirement be "‘definite and concrete, touching the legal relations of parties having adverse legal interests’ and that it be ‘real and substantial’ and ‘admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.’" The Supreme Court articulated the case or controversy test as follows: "[b]asically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy,between parties having adverse legal interests, of sufficientimmediacy and reality to warrant the issuance of a declaratory judgment." The issue then was whether MedImmune, having made royalty payments "under protest and with reservation of all of [its] rights," pre-empted the existence a case or controversy.
The Court analogized the dispute to one "where threatened action by government is concerned," noting that "we do not require a plaintiff to expose himself to liability before bringing suit to challenge the basis for the threat — for example, the constitutionality of a law threatened to be enforced." Turning to its own precedent, Altvater v. Freeman, Justice Scalia characterized the decision as holding that "a licensee’s failure to stop its royalty payments did not render a dispute over the validity of the patent non-justiceable." In Altvater, the licensee paid, "under protest," royalties required by an injunction the patentee had obtained in an earlier case and filed a declaratory judgment that the patents were invalid. The Altvater Court reasoned that payment of royalties did not make the "dispute of a hypothetical or abstract character" since the royalties "were being paid under protest and under the compulsion of an injunction decree." The Court reasoned that the result in Altvater was based simply on the consequences of stopping payment, not the existence of an injunction. Analogizing Altvater to the case at hand, the Court viewed the possibility of actual and treble damages as coercive where it threatened the solvency of MedImmune’s business.
The Court concluded that "the requirements of [a] case or controversy are met where payment of a claim is demanded as of right and wherepayment 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." In sum, the Court held that "petitioner was not required, insofar as Article III is concerned, to break or terminate its 1997 license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed. The Court of Appeals erred in affirming the dismissal of this action for lack of subject-matter jurisdiction."
Justice Thomas, in a rare disagreement with Justice Scalia, dissented. Justice Thomas reasoned that in order to meet the case on controversy requirements, a patentee must breach its license before challenging the patent validity. Justice Thomas also found error in the Court’s equating governmental coercion to private contractual obligations, stating that "[b]y holding that contractual obligations are sufficiently coercive to allow a party to bring a declaratory judgment action, the majority has given every patent licensee a cause of action and a free pass around Article III’s requirements for challenging the validity of licensed patents."
Practice Note: As patent disputes resolved by licenses are no longer as final as before, when licensing a patent, the patent owner should now address whether any attack by the licensee on the underlying patent would result in automatic termination of the license grant, thus at least pressuring the issue of infringement in the event of a patent validity challenge by a (former) licensee.
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