For the past three years Maryland-based MedImmune Inc. has been trying to have it both ways.

While paying royalties to license a patent from Genentech Inc., MedImmune also had been suing in attempt to invalidate that same patent. The only reason it continued to pay the royalties was out of fear the California-based biotech company would sue for infringement. The district court threw out MedImmune’s declaratory judgment suit, and the Federal Circuit affirmed. Both courts held that because MedImmune was a licensee in good standing, it couldn’t reasonably fear that Genentech would sue it for patent infringement–so there was no “case or controversy” as required under Article III of the Constitution.

MedImmune appealed, and the U.S. Supreme Court will hear the case this fall.

There’s a lot on the line for patent owners and their licensees. A win by MedImmune would make it safer and easier for companies to challenge the validity of patents.

Under current Federal Circuit law, a company whose product may infringe a dubious patent has to make a difficult choice. The company can play it safe and pay for a patent license, or it can risk fighting an infringement action. But if the company loses the infringement suit and the court finds the disputed patent valid, the company can be hit with treble damages and an injunction prohibiting future sales of the infringing product.

Just threatening an injunction against a key product can drive a company to its knees.

“Current law gives patentees of very weak patents the right to exact a form of tribute by threatening infringement cases,” says Harvey Kurzweil, a partner in the New York office of Dewey Ballantine who represents MedImmune.

The situation would be quite different if a company could pay for a license–thus immunizing itself against an infringement suit–and still attack the licensed patent.

Staying Safe

When MedImmune first took a license from Genentech in 1997, it didn’t know what it was getting into.

MedImmune understood it was buying a license for a method of using recombinant DNA technology to produce human antibodies. But Genentech’s legal rights in this technology were unclear.

“MedImmune knew Genentech had applied for a patent, but didn’t know what would issue,” Kurzweil says. “In this business, you take licenses if you think there’s a possibility you may need it.”

Thus, MedImmune purchased a license rather than risk any legal troubles for its promising new drug, Synagis. The drug is used to prevent deadly respiratory illnesses in premature babies.

When the Genentech patent finally issued four years later, MedImmune believed it was invalid because of prior art. But the company didn’t stop paying royalties because it feared losing a patent infringement suit and being slapped with an injunction that prohibited the sale of Synagis, which accounted for more than 87 percent of MedImmune’s total sales revenue in 2005.

So the company again opted for a conservative approach. It remained a licensee in good standing–ensuring that Synagis would stay on the market–while simultaneously suing to have the patent invalidated.

However, this approach ran into a roadblock in the Federal Circuit. The court has repeatedly stated that for a plaintiff to bring a declaratory judgment action that challenges a patent, the plaintiff must satisfy a two-part test. The plaintiff must have “a reasonable apprehension ?? 1/2 that it will face an infringement suit” and must be currently engaged in activity “which could constitute infringement.”

As a licensee in good standing, MedImmune meets neither part of this test. So the company is asking the Supreme Court to overturn the Federal Circuit’s rule, claiming it contradicts the Court’s 1969 decision, Lear Inc. v. Adkins.

Lear’s Challenge

Lear revolved around a dispute between a patent licensor, John Adkins, and his licensee, the aviation company Lear Inc. At the time the license was made in 1955, Adkins had filed for a patent, but the PTO had yet to issue it. It was thus unclear what rights Lear might obtain under the license.

Two years later, while Adkins was still working to overcome the PTO’s objections to his application, Lear concluded that Adkins’ invention was unpatentable because of prior art. The company subsequently stopped paying royalties.

Adkins narrowed the scope of his patent application, and the PTO issued a patent in 1960. He then sued Lear in California state court, arguing the company’s failure to pay royalties was a breach of the 1955 license agreement. The California Supreme Court agreed, ruling that the license remained in effect because Lear had no right to terminate the agreement. And as a licensee, the court held, Lear was estopped from challenging the validity of the licensed patent.

The Supreme Court accepted that the license remained in effect because state law determined this issue. Thus, the only issue before the Court was whether a licensee was forbidden to assert its rights under federal law to challenge the validity of a patent.

The Court decided licensees are allowed to challenge patents. It reached its decision on policy grounds. On the one hand, a licensor had a legitimate interest in obtaining the benefit of its contract. On the other, the Court said, “federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent.”

The High Court went on to state: “Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification.”

Unknown Outcome

The Federal Circuit has interpreted Lear narrowly, arguing the case merely holds there is no patentee estoppel. According to the Federal Circuit, Lear says nothing about when a dispute becomes a justiciable “case or controversy.”

Many experts disagree, arguing that the policy issues in Lear are directly applicable in this case.

“There is a very clear tension between Lear and the Federal Circuit’s rulings,” says Arti Rai, who teaches patent law at Duke University. “Either Lear or the Federal Circuit cases have to be overturned.”

But it is anyone’s guess as to which way the court will rule. If MedImmune were to win this case, patentees would probably be less interested in granting licenses, because they could no longer use these licenses to stop competitors from challenging their patents, according to Michael Rader, an IP litigator at Boston’s Wolf, Greenfield & Sacks. Patent litigation would thus increase. And to compensate patentees for the increased risk of challenges to their patents, royalty rates for granted licenses would likely go up, says J. Mark Wilson, an IP litigator in the Charlotte, N.C. office of Alston & Bird.

If MedImmune were to lose this case, the status quo would remain in place, which would be good for many patent owners, but might be bad for society.

“Some patents can be worth billions of dollars per year,” says Harold Wegner, a patent attorney at Foley & Lardner. “If a patent is bad, should it remain out there sucking billions from consumers?”