Medical Device Link.

REGULATIONS & STANDARDS

Timothy B. McBride, JD, is an attorney at Senniger Powers (St. Louis), an intellectual property law firm specializing in the acquisition, management, and enforcement of intellectual assets. He can be reached via e-mail at tmcbride@senniger.com.

Intellectual property rights provide companies and educational institutions with powerful revenue-earning tools. In particular, companies conducting pioneering research can protect and take advantage of their intellectual property by obtaining patents that prevent unauthorized parties from exploiting their patented technologies.¹

However, companies that are not necessarily technological pioneers can still use the rights provided in the patent laws by licensing technologies from patent owners. Patent licenses are contracts between a patent holder (licensor) and a company that wants to commercialize the patented subject matter (licensee). Such licenses allow the licensee to use the patented technology within the scope of the patent.

Patent licenses offer numerous advantages. For example, entities unable to market their patented technologies (e.g., universities) can gain financial rewards by licensing their technologies to companies that can commercialize them.

Patent licenses also provide benefits to the public. A patent holder can exclude others from performing activities with the patented technology that fall within the scope of the patent, regardless of whether it has been commercialized. But without the ability to license such technology, it would remain unavailable to the public for the duration of the patent term.1 Patent licenses play a significant role in utilizing and sharing patented technol-ogies, maintaining commerce, and providing the public with the benefits associated with licensed technologies.

The Supreme Court’s decision in Laboratory Corporation of America Holdings v. Metabolite Laboratories Inc. fueled significant discussion in the IVD industry, and the recent decision in KSR International Co. v. Teleflex Inc. promises to do the same.^2-3 However, the Court’s decision in MedImmune Inc. v. Genentech Inc. may have the greatest practical impact due to the importance of patent licenses to the diagnostics industry.^2-4 Understanding how this decision may affect not only the enforcement of current patent licenses but also the preparation and enforcement of future licenses is vital.

Prior Rulings Affecting Patent Licenses

Before the Supreme Court’s MedImmune decision, several other key decisions dealt with patent licenses and a licensee’s ability to invalidate a licensed patent. In Lear v. Adkins, the Court established that a licensee cannot be prevented, or estopped, from challenging a patent’s validity.⁵ The Court also held that once a licensee breaches a license agreement and discontinues royalty payments, it cannot be forced to pay royalties during a challenge. Lear unequivocally established a licensee’s right to challenge a licensed patent’s validity and to forgo royalty payments during the challenge period.

Thirty-five years later in Gen-Probe Inc. v. Vysis Inc., the Federal Circuit court held that a licensee cannot bring a declaratory judgment action seeking to invalidate a licensed patent unless it materially breaches or terminates the license agreement.⁶ In this case, after entering into a patent license, the licensee subsequently challenged the patent’s validity but continued to pay royalties, although under protest. Because the licensee paid royalties during the challenge, the court held that the license was never breached and the patent’s validity could not be challenged since no justiciable case or controversy existed.

Combining these two decisions, while a licensee is not prevented from filing suit to challenge a licensed patent’s validity, it has to materially breach or terminate the license agreement in order to create the necessary justiciable case or controversy. As such, a licensee has to put itself in peril of an infringement suit before it can challenge a licensed patent. This was the general rule until the Supreme Court’s MedImmune decision.

The MedImmune Opinion

In 1997, MedImmune Inc. (Gaithersburg, MD) entered into a patent license agreement with Genentech Inc. (South San Francisco, CA). The license agreement covered Genentech’s existing patent relating to chimeric antibodies and a pending patent application relating to the coexpression of immunoglobulin chains in recombinant host cells. According to the agreement, MedImmune agreed to pay royalties on the sales of licensed products, and Genentech granted MedImmune the right to make, use, and sell the licensed products.

In 2001, the coexpression patent application, or the Cabilly II patent, was issued.⁷ Soon after, Genentech sent MedImmune a letter stating that its Synagis product was covered by the Cabilly II patent, and that it should pay royalties for that product. MedImmune did not believe that royalties were due because the Cabilly II patent was invalid and unenforceable, and Synagis did not infringe the patent claims. MedImmune also believed the letter “to be a clear threat to enforce the Cabilly II patent, terminate the 1997 license agreement, and sue for patent infringement if it did not make royalty payments as demanded.”⁴ But if Genentech were to win such a suit, MedImmune would have to pay treble damages and attorneys’ fees, and would be enjoined from selling Synagis, “a product that accounted for more than 80% of its revenue from sales since 1999.”4 With such risks in mind, MedImmune decided to pay the royalties, but “under protest and with reservation of all rights.”⁴

In order to clarify the matter, MedImmune filed a declaratory judgment action seeking to find the Cabilly II patent claims invalid and unenforceable, and to rule that Synagis did not infringe the patent’s claims. Nonetheless, the District Court granted Genentech’s motion to dismiss the case for lack of a case or controversy, citing Gen-Probe Inc. v. Vysis Inc. The Federal Circuit court affirmed the dismissal, also relying on the Gen-Probe decision.

However, on appeal, the Supreme Court held that a case or controversy did exist and that MedImmune could sue for declaratory judgment under the Declaratory Judgment Act.⁸ This act allows companies threatened with an infringement suit to preemptively sue for invalidity, unenforceability, and noninfringement of a patent, provided there is an “actual controversy.”⁸ Because an actual controversy is required for a court to have jurisdiction under the act, the Court had to determine whether such an actual controversy existed, even though MedImmune did not breach the license agreement and paid royalties.

Citing a number of cases involving government action, the Supreme Court noted that “where threatened action by government is concerned, we do not require a plaintiff to expose itself to liability before bringing suit to challenge the basis for the threat…The plaintiff’s own action (or inaction) in failing to violate the law eliminates the imminent threat of prosecution, but nonetheless does not eliminate Article III [Declaratory Judgment Act] jurisdiction.”⁴ Similarly, the Court asserted that a licensee should not be required to expose itself to liability (i.e., treble damages and attorneys’ fees for patent infringement, possible injunction) in order to create the necessary controversy to challenge a licensed patent. This decision effectively overturned the Federal Circuit’s decision in Gen-Probe.

The Supreme Court also found that licensee estoppel or specific provisions in a license agreement prohibiting a challenge by a nonrepudiating licensee have a no bearing on whether an actual controversy existed for filing an action under the Declaratory Judgment Act. Instead, the Court noted that if licensee estoppel or particular provisions of the license agreement “preclude this suit, the consequence would be that [Genentech would] win this case on the merits . . . [and not] that Article III [Declaratory Judgment Act] jurisdiction is somehow defeated.”⁴ Even though the Court ruled that a nonrepudiating licensee can demonstrate an actual controversy, the licensee’s suit can still be dismissed for reasons such as licensee estoppel or specific provisions in the license agreement prohibiting such challenges.

Effects of MedImmune

The MedImmune decision could affect existing and future patent license agreements. IVD manufacturers should prepare future patent agreements by keeping this decision in mind, and review existing agreements with the thought of possibly renegotiating them.

Existing Agreements. MedImmune offers current licensees opportunities to renegotiate existing patent license agreements, especially those that are overly favorable to licensors. Specifically, since a licensed patent’s validity or enforceability can be challenged without having to breach the license agreement, a licensee can renegotiate an agreement to obtain more-favorable terms. Such terms could be decreased royalty rates in exchange for giving up the right to challenge the patent.

The ability to challenge a licensed patent may also provide a licensee an opportunity to litigate an unfavorable license agreement without subjecting itself to the liability of treble damages and attorneys’ fees. While previously a licensee would have to breach or terminate the agreement and suffer the consequences, a licensee may now challenge a patent without having to breach, which reduces the risk of potential liability to litigation costs. To a licensee paying significant royalties, this would provide a strong financial incentive to challenge a licensed patent, since the only downside, besides litigation costs, would be continuing to pay royalties during litigation.

Likewise, current licensors should consider the possible effects of MedImmune. Such effects include increased risk of litigation and costs associated with litigation. This is especially troubling for small companies and universities that may not have the capital to litigate a challenge to one of its licensed patents. Such entities should be wary of being strong-armed into renegotiating existing license agreements.

Future License Agreements. From the MedImmune decision, licensees have gained significant benefits in negotiating and executing future license agreements. Perhaps the single greatest benefit is that a licensee can enter into a license agreement knowing that it still can challenge the licensed patent without having to breach the agreement. This permits a licensee to avoid the many risks associated with losing a patent infringement suit brought by the licensor and to postpone deciding whether to file a declaratory judgment action by simply entering into a patent license agreement. A licensee may insulate itself from liability to treble damages and attorneys’ fees by entering into a license agreement, and then determine, from the safe harbor provided by the license, whether to challenge a licensed patent’s validity, enforceability, and infringement.

MedImmune may also allow a licensee to negotiate more-favorable license terms. Specifically, in exchange for surrendering the right to challenge the licensed patent, a licensee can negotiate more-favorable royalty rates, payment terms, and other clauses. However, the enforceability of a provision forbearing a licensee’s right to sue in the absence of a breach is questionable, particularly for public policy reasons. Nevertheless, a licensee may include such a provision in an agreement.

While licensees obtained many advantages, MedImmune left licensors with substantial challenges. Because a licensee can challenge a licensed patent without breaching the license agreement, a licensor must now consider provisions that might not have previously appeared in license agreements.

For example, such provisions would allow a licensor to collect increased royalties, collect a substantial portion of the royalties earlier during the license period, or prohibit or dissuade a licensee from filing suit in the absence of breaching or terminating the agreement. Examples of such provisions include simply requiring higher royalty payments.

A licensor should also consider placing provisions in an agreement that require a large up-front, lump sum payment or accelerated payments. Alternatively, license provisions could require graduated payments that result in higher royalty rates during the first quarter or third of the license agreement period, and lower royalty rates during the remainder of the period. Since a challenge to a licensed patent does not allow a licensee to recover royalties already paid and adds to a licensee’s costs from the litigation, such provisions would create an economic disincentive for a licensee to challenge the patent.

In addition, a licensor could place provisions in an agreement that provide for decreased royalty rates if a licensee surrenders its right to challenge a patent in the absence of breaching the license agreement (although such provisions raise public policy concerns). In a similar provision, a licensor has the right to increase the royalty rate if a licensee unsuccessfully challenges a licensed patent.

Likewise, licensors can seek to control possible challenges to a licensed patent by including provisions in an agreement that provide them the right to terminate a license if the licensee challenges the licensed patent (again, the enforceability of such provisions is questionable).

A licensor can also attempt to limit such challenges by using arbitration provisions. Such provisions would require validity, enforceability, or infringement disputes
to be arbitrated, instead of being litigated.

Conclusion

In the aftermath of MedImmune, lower courts will have to deal with not only the Supreme Court’s holding but also the many questions left unanswered. As Genentech’s Cabilly II patent was found to be invalid by the U.S. Patent and Trademark Office two months after the MedImmune decision, resolving any questions through further litigation of this particular suit looks to be unlikely, at least in the near future. Regardless, both licensees and licensors should consider the MedImmune decision when renegotiating and preparing patent license agreements, as its full effect remains to be seen.