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The Supreme Court’s recent Medimmune v. Genentech decision has changed the patent-licensing landscape. The Medimmune court held that Medimmune was not required to break or terminate its license agreement with Genentech before seeking a declaratory judgment in federal court that Genentech’s licensed patent was invalid, unenforceable, and not infringed. This changes long-standing Court of Appeals for the Federal Circuit authority. This decision is a win-win for patent licensees. Licensees can now have their cake � a license to sell a patented product or process � and eat it too. So long as they pay royalties (under protest), licensees can challenge a licensed’s patent’s validity, enforceability or infringement without having to risk the penalties for breaching or terminating the agreement and without the risk of a patent infringement suit. The same is not true for licensors. Licensors may be left with the downside of having to defend against a lawsuit without having any legal recourse of their own through a breach of contract action or patent infringement action. What the decision means for future license negotiations is uncertain and will no doubt be played out in the courts. Medimmune makes and sells Synagis, a drug used to prevent respiratory tract disease in infants and young children. Synagis has accounted for more than 80 percent of Medimmune sales since 1999. In 1997, Medimmune and Genentech entered into a patent-license agreement. The license covered an issued patent directed to “chimeric antibodies” (Cabilly I) and a pending patent application directed to “the co-expression of immunoglobin chains in recombinant host cells” (Cabilly II). Medimmune agreed to pay royalties on a specific antibody that would infringe claims of either or both of the patents, providing the patents were not expired and were not held invalid. Medimmune began selling its Synagis product in 1999, but never paid any royalties to Genentech under the agreement. In 2001, the Cabilly II patent issued. Genentech wrote to Medimmune and accused the Synagis product of infringing the Cabilly II patent and told Medimmune that it expected royalty payments under the agreement. Medimmune disagreed that its product infringed any claims in the Cabilly II patent and believed that Genentech’s patent claims were invalid and unenforceable. Medimmune took the letter as a threat to sue it for infringement if it did not pay royalties, thus posing the risk of an injunction against the sale of Synagis, attorney fees and treble damages. So Medimmune elected to pay royalties � specifically said to be “under protest” and with reservation of all rights � and file a declaratory judgment action to have the Cabilly II patent declared invalid, unenforceable and not infringed. Genentech moved to dismiss Medimmune’s declaratory judgment claim for lack of subject matter jurisdiction because there was no Article III “case or controversy.” The district court, relying on controlling Federal Circuit precedent � Gen-Probe v. Vysis � dismissed the case. The district court’s options were indeed limited in view of Gen-Probe. Gen-Probe had held that a patentee licensee in good standing (abiding by the terms of the patent license) cannot establish an Article III case or controversy with regard to the validity, enforceability or scope of the licensed patent because the license agreement removed any chance that the licensee would be sued for patent infringement, thereby negating the “reasonable apprehension” of a suit � the Federal Circuit’s touchstone for declaratory jurisdiction. Following its Gen-Probe precedent, the Federal Circuit affirmed the district court’s decision dismissing Medimmune’s declaratory judgment claim. The Supreme Court granted certiorari. The Supreme Court disagreed with the district court and Federal Circuit. Per eight Supreme Court justices, an Article III case and controversy existed between Genentech and Medimmune, because the licensee was continuing to pay the royalties only because of the coercive effect of the situation � breaching the license to establish jurisdiction would subject the licensee to the risk of a patent-infringement suit that carried a huge downside. But Justice Clarence Thomas dissented. The question that separated Thomas from his fellow justices boiled down to whether Medimmune’s paying royalties “caused the dispute to no longer be a case or controversy within the meaning of Article III.” The dissent’s answer was essentially that of Gen-Probe: An actual threat of suit was required for jurisdiction to exist, and because paying royalties eliminated that, the case or controversy requirement was not satisfied. The majority’s answer was that paying royalties did not eliminate the case or controversy requirement because the steps that the dissent, and the courts below, had relied on as negating the threats of suit were themselves coerced. The majority did not think Medimmune should have to expose itself to infringement or contract liability, attorney fees and treble damages to have its rights determined. The Supreme Court grounded its decision in the declaratory-judgment standards applied when one seeks to determine his/her rights in the face of government action, such as testing the constitutionality of a statute. Under those circumstances, actual violation of the law is not a predicate to Article III jurisdiction. The Supreme Court saw no material difference between government action and the threat of private action for purposes of Medimmune’s declaratory judgment action. The Supreme Court found support for its conclusion in several of its own decisions. It further reinforced its decision by pointing to decisions from other federal and state courts, which had found jurisdiction when the “plaintiff’s self-avoidance of imminent injury is coerced by threatened enforcement action of a private party rather than the government.” Then the Supreme Court further buttressed its decision with its “fortuitously close” decision in Altvater v. Freeman, in which it held that a patent licensee who continued to pay royalties under a disputed license “did not render nonjusticiable a dispute over the validity of the patent.” But the Federal Circuit had considered and rejected this precedent as fact-limited in deciding Gen-Probe. The Federal Circuit had distinguished Altvater on the basis that it involved an injunction, government action. The Medimmune Supreme Court disagreed with that basis of distinction, holding that the Altvater court had not found jurisdiction to exist simply because the coercive situation was government action (an injunction); rather, the Altvater court had noted that the consequence of not paying royalties would be the risk of actual and treble damages in an infringement suit from a private actor. The Altvater court acknowledged that the threat of business injury by a private party was just as coercive as certain kinds of government action. Medimmune faced a similar dilemma. Synagis was its bread-and-butter product. If Medimmune did not pay royalties, it faced an infringement or breach-of-contract suit, attorney fees and potentially treble damages. But by paying royalties, Medimmune avoided “imminent injury” to itself and its business. It was undisputed that if Medimmune was not paying royalties there would be an actual dispute between the parties. And the Supreme Court saw no reason why Medimmune’s self-avoidance measures � paying royalties � should eliminate Article III jurisdiction where those measures were coerced, largely the same reasoning as in Altvater. Although Genentech urged the Supreme Court to exercise its discretion and dismiss the action, the Supreme Court declined. For starters, that issue was not preserved since it was not raised below. Further, the Supreme Court noted that dismissal of an action on discretionary grounds was better left for the district court, and the district occur did not address that issue. The Medimmune decision has changed the patent-licensing landscape, including the dynamics of licensing negotiations because licensees now have built-in leverage that they did not have before. What does it mean for existing licenses and licensing negotiations? What about existing licenses? Medimmune leaves no doubt that a licensee can continue to reap the benefits of a patent license and still challenge the licensed patent’s validity and unenforceability, as well as seek a declaratory judgment that the products or processes covered under the license do not infringe the patent. Maybe not such a bad deal? The only real downside for the licensee is the legal fees associated with the declaratory judgment action. Even though it is paying royalties under protest, those are payments it would have continued to make in the absence of a challenge. Moreover, the reward of being relieved from license obligations and being able to continue to practice the licensed patent royalty-free in the future is probably worth the risk. Although a licensee has options, a licensor’s options appear limited. When the declaratory judgment action is filed, the licensor has no breach of contract action or infringement action because the licensee is paying royalties. The licensor is thus forced to incur the legal fees and other costs of defending against the licensee’s declaratory judgment action, without any real upside. What about licensing negotiations? Licensees now have leverage in the negotiations that they did not have before. But what about the licensors? Is there a way for licensors to build in protection to a license to forestall a declaratory judgment action or to protect them if one is filed? Maybe. One way the patent licensor can protect itself is to change the financial terms of the license. For example, the licensor can negotiate a fully paid-up license with a significant lump-sum payment, or a series of lump-sum payments (although that may not be as effective). Perhaps the licensor can build in increasing royalty payments or a lump-sum payment if a declaratory judgment action is filed. Maybe the licensor can build in a provision preventing the licensee from recouping any royalties paid while the declaratory judgment action was pending even if the patents is held invalid, unenforceable or not infringed. Another option for the licensor may be a “penalty” payment if a declaratory judgment action is filed. But whether a licensor can use such financial terms in the license as a deterrent to a licensee filing a declaratory judgment action may be questionable under Lear v. Adkins. There is a well-established policy that it is in the public interest to challenge patent validity so invalid patents are not enforced. Generally, provisions preventing a licensee from challenging patent validity are unenforceable. So whether financial terms, such as those posed above, or other creative financial terms would be enforceable is uncertain. The only clear answer from Medimmune is that licensees have a definite advantage over licensors, in that they can challenge patents essentially free from the risk of liability for patent infringement or breach of contract. The answer for licensors is much more uncertain. Creative financial licensing terms are an option, but what kinds of terms will hold up is unclear and will likely play out in future courts. � Lynn Malinosk is chairwoman of Woodcock Washburn’s litigation operations management group. Malinoski specializes in patent litigation at both the trial and appellate level. Her practice involves varied technologies such as pharmaceuticals, medical devices, and analytical chemistry. Malinoski has an LL.M in trial advocacy. She also received her B.S., cum laude, in chemistry from St. Joseph’s University, and her J.D., magna cum laude, from Temple University. Prior to attending law school, Malinoski was a research chemist with GlaxoSmithKline.

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