Challenge to Patent Validity by a Licensee
The United States Supreme Court has issued a decision which some commentators believe may increase the risk that patent licensees will challenge the validity of patents under which they are licensed.
In 1969 in the case of Lear v. Adkins, the United States Supreme Court held that there is no general rule preventing a licensee under a patent license form challenging the validity of the licensed patent. The question of challenges to patent validity by licensees has now come before the Supreme Court again in Medimmune Inc v. Genentech Inc. The issue before the court was the circumstances in which such a challenge can be made.
Article III of the United States Constitution provides that the federal courts of the United States have the power to adjudicate “cases and controversies”. To avoid courts having to decide on hypothetical situations, the Declaratory Judgments Act provides that where there is “actual controversy” the federal courts “may declare the rights and other legal relations of any interested party”.
In Medimmune Inc v. Genentech Inc., following settlement of an interference, the parties had entered into a license agreement in 1997 relating to the production of chimeric antibodies. Rights were licensed under one issued patent and a pending application. After termination of the interference the application was subject to further prosecution in the USPTO before being granted. The basis of the dispute that led to the case before the Supreme Court was whether that patent was valid, enforceable and covered products produced by the licensee.
The specific issue before the Supreme Court was whether the licensee could obtain a declaration from a federal court on validity, enforceability and or infringement even though it was continuing to pay license fees under the agreement and so was neither in breach of the agreement nor had terminated the agreement.
The Federal Circuit Court of Appeals, following its own earlier precedent in Gen-Probe Inc. v. Vysis Inc., and its view that once the patent owner had contracted away its right to sue by grant of a license it was inequitable that the liensor should be open to continuing attack whenever the licensee chose to do so, had held that since there had been no breach or termination of the agreement, there was no “actual controversy” and so no such declaration could be given.
On January 9, 2007 in an 8-1 decision (Justice Thomas dissenting), the Supreme Court reversed the decision of the Court of Appeals and held:
“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.”
To have held otherwise would, according to the Court have required that the licensee would have to run the risk of triple damages for willful infringement in order to be able to obtain a ruling on its dispute. Prior Supreme Court case law held that actions for declaratory judgments were permissible in disputes that were “definite and concrete, touching the legal relations of parties having adverse legal interests” and more particularly its 1943 decision in Altvater v. Freeman had held that a licensee under a patent license agreement was entitled to a declaratory judgment on the validity of a licensed patent while making royalty payments as a result of an injunction. The Supreme Court found that the Court of Appeals distinction was erroneous and that this was essentially a case where the payments were made “under protest” as was the situation in the case before it. The Supreme Court did not believe the issue of an injunction was a relevant factor in Altvater. The real issue was that there was effective coercion of one party by another in a situation where the validity of the underlying right was in dispute. This was similar to the present situation.
Interestingly, the Supreme Court specifically declined to rule on whether its decision in Lear v. Adkins could be read to cover a situation in which a non-repudiating licensee could at the same time challenge the validity of a contract and derive benefit under it.
On its facts, the Supreme Court’s decision does not seem particularly exceptional. There was a contract dispute about whether certain acts fell within the scope of valid claims of a patent that had been granted after the contract had been made. There are, however, fears that, notwithstanding the Court’s refusal to re-evaluate the scope of its decision in Lear v. Adkins, the Supreme Court’s latest decision may open the doors to more extensive challenges to patent validity and enforceability than has hitherto been the case.