In The Aftermath Of Medimmune v. Genentech, Is It All Doom And Gloom For Licensors Or Are There Rays Of Hope In The Future?

Originally published in BNAI IP & Technology Programme, April 2007

Copyright Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

I. Introduction

The United States Supreme Court does not traditionally grant certiorari in many patent cases but the recent flurry of decisions by the high court may provide a bleak outlook for patent owners. While Congress has yet to provide a meaningful patent reform, the Court's decisions could have a significant effect on the patent system. The combination of the Supreme Court's decisions in, first, eBay Inc. v. MercExchange L.L.C. and, second, MedImmune v. Genentech has created a one-two punch signaling the Court's new and unsympathetic attitude toward patentees. At first glance the forecast does not appear bright for patent owners, but in light of MedImmune v. Genentech, there are rays of hope that may provide optimism to patentees.

The Supreme Court's first blow to patent owners came by way of its holding in eBay, Inc. v. MercExchange L.L.C., 126 S. Ct. 1837 (2006). Before eBay, the Federal Circuit continually indicated that injunctions should be denied to a patentee only in the "unusual" case," in "exceptional circumstances," and "'in rare instances' ... to protect the public interest." Id. at 1841. However, in a decision adversely affecting patent holders, the Supreme Court held a patentee must demonstrate a traditional-four factor test to have a permanent injunction granted and no such categorical grant of an injunction (as applied by the Federal Circuit) should be permitted. Id.

The Court delivered a second blow to patent owners in MedImmune, Inc. v. Genentech, Inc. by holding that a licensee is no longer required to terminate or materially breach its license agreement in order to bring a suit challenging validity or infringement of a patent. 127 S. Ct. 764 (2006). The Court's decision provides a gloomy outlook to patent owners as it shifts strength within a license agreement from the licensor-patentee to the licensee. Licensees now have increased bargaining power to renegotiate existing licenses. Additionally, the MedImmune decision may create broad and negative consequences for patentees because it calls into question the Federal Circuit's declaratory judgment jurisdiction outside the licensing context. Despite these adverse consequences for patent owners, there are rays of hope that may ease the blow of the Court's ruling.

The Court's decision will inevitably change the way license agreements are drafted. The patentee-licensor may protect itself by adding various provisions to the contract and limiting the licensee's incentive to file a declaratory-judgment action against the licensor-patentee. For instance, instead of opting for a running royalty for the patented good, a licensor may seek to obtain a paid up license at signing of the agreement. In addition, a licensor may seek protection by inserting a provision into the license agreement that allows for termination of the agreement should the licensee contest the validity of the licensed patent. A patentee-licensor may also deter the licensee's motivation to file a declaratory-judgment action by inserting a provision in the agreement that mandates a forum in the event of an invalidity suit initiated by the licensee. The patentee may also seek a no-challenge concession from the licensee. Another technique a licensor may use is to limit any recoupment of royalties previously paid by the licensee during a validity challenge. Because the Court's ruling provides little finality with respect to license agreements, may have some leverage to demand a higher royalty rate from the licensee the patentee to protect its interests.

II. The Historical Background

A number of Supreme Court and Federal Circuit decisions have created the foundation for the Court's MedImmune decision. In 1969, the Supreme Court decided the principal case governing the licensee's right to contest the validity of a licensed patent. In Lear, Inc. v. Adkins, the Court overruled the doctrine of licensee estoppel, allowing a licensee to challenge the validity of a patent while stopping the payment of royalties. 395 U.S. 653, 673 (1969). In reaching its decision, the Court emphasized the strong public interest in challenging invalid patents. Id. After this decision, a licensee's dilemma was created if the licensee discovered it was paying royalties on an invalid patent. The licensee was faced with the choice of ceasing royalties and breaching the contract, and concomitantly bringing a declaratory-judgment action for patent invalidity, or continuing to pay the licensor for essentially free technology.

Since its inception, the Federal Circuit has shown its skepticism of the...