The Cost of Cake

MedImmune, Inc. v. Genentech, Inc.

The patent law bar is in a dither over the Supreme Court's decision in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (U.S. 2007).  MedImmune changes the rules for when a patent licensee may use a declaratory judgment (DJ) action to challenge a licensed patent. Before MedImmune,  a licensee usually had to stop paying royalties and breach the license in order to bring a federal court action challenging the validity or enforceability of licensed patents-a requirement, it appeared, dictated by the rules regarding subject matter jurisdiction.  Under the old rules, there simply wasn't a case or controversy sufficient to support federal court jurisdiction unless the licensee stepped up to the plate and took enough action to create adversity and a "reasonable apprehension" of suit.

The MedImmune decision changes the ante. Now, a patent licensee may remain in good standing under the license and still bring a DJ action to challenge the validity or enforceability of the licensed patent.  Under the MedImmune decision it seems unhappy licensees can have their cake and eat it too. 

Certainly, licensors can expect a flurry activity in MedImmune's wake as licensees seek to leverage the decision to their advantage, particularly when the license includes a package of patents.  Whether through audit, threats, or actual litigation, some licensees may use a MedImmune club to challenge the validity or enforceability of involved patents in order to negotiate lower royalty rates.

Our take?  Not so fast.

Many licenses contain contractual provisions stipulating to the validity and enforceability of the licensed patents.  How courts will handle these provisions is still anyone's guess.   Should they be deemed enforceable, licensee DJ actions and threats thereof will lose much of their possible bite.

Licensors also can and should evolve their license agreements to obviate the potential problems MedImmune raises.   Contract language requiring tripled royalties or attorneys fees as a penalty for unsuccessful challenges will certainly reduce frivolous actions.  Licensors may also begin to include termination provisions giving them the right to terminate the license for all patents in a package upon a challenge to the validity or enforceability of a particular one. 

Licensors may even use litigation itself as a way to control validity or enforceability challenges.  Licensors could file a complaint for infringement, which the licensee would answer with a counterclaim asserting invalidity and a counterclaim asserting unenforceability.   Getting the desired license would require the licensee to enter into a binding settlement or consent judgment resolving from the outset patent validity and enforceability.

As these and other MedImmune-influenced provisions roll out, licenses will learn that the decision is not the free-for-all many have made it out to be.  In the long run, we believe that licensees will still have to pay, and maybe even pay more, in order to have their cake.

The articles on our Website include some of the publications and papers authored by our attorneys, both before and after they joined our firm. The content of these articles should not be taken as legal advice.