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Supreme Court Eliminates Obstacle to Declaratory Relief in Patent Cases

January 17, 2007
If you are a party to a patent license agreement, the U.S. Supreme Court just made it easier to go to court to test the validity of the patent or whether a licensed product would actually infringe the patent.

Last week, the Court reversed a doctrine adopted by the Federal Circuit Court of Appeals - the specialized federal appellate court for patent cases - which had limited the ability of patent licensees to challenge their license agreements. Under the Federal Circuit's rule, the licensee had to repudiate the license agreement or refuse to pay license fees before it could challenge the patent's validity or application. Only then would there be a sufficient threat of imminent harm to justify a court issuing a declaratory judgment. The Supreme Court disagreed, allowing a party that was paying license fees under protest to also seek a declaratory judgment of non-infringement or invalidity.

The decision in MedImmune, Inc. v. Genentech, Inc., turned on the question of the district court's jurisdiction to decide a claim seeking a declaratory judgment. Under the Constitution, the powers of the federal courts are limited to deciding actual cases or controversies. Generally, that means that there must be a concrete dispute between the parties, not a hypothetical one. The issue at the Supreme Court was whether there was a concrete dispute between the parties where they had a license agreement and the licensee had neither repudiated the agreement nor stopped making the payments demanded by the patent holder.

In MedImmune, the plaintiff MedImmune had developed a medicine that the defendant contended was covered by a patent license agreement between the parties. The drug accounted for more than 80% of MedImmune's revenues. Genentech demanded royalties under the license agreement. If MedImmune did not pay royalties, Genentech could have terminated the license agreement and sued the plaintiff for treble damages and attorney fees and could have sought an injunction against continued sales of the drug. MedImmune made the payments under protest and then sued for a declaration that the patent was invalid or was not infringed by its product.

The Court held that there was a sufficient case or controversy, concluding that a party should not have to bet its business by repudiating the agreement in order to get into court. Even though it was unlikely that MedImmune would be sued while it was paying license fees, it was effectively coerced into making those payments by the threat of infringement litigation if it did not pay. That was enough for the Court.

The Court did not address the merits of the case. Nor did it decide to what extent, if any, parties could contractually agree not to pursue declaratory relief. This decision should affect all license agreements, and potentially all contracts, not merely those involving patents. But while it may make it easier to get into federal court, its effect on any existing license agreements you may be a party to will likely turn on the language and circumstances of the particular agreement.

The decision is available at:

HTML version: http://laws.lp.findlaw.com/us/000/05608.html

PDF version: http://www.supremecourtus.gov/opinions/06pdf/05-608.pdf

If you have questions about your existing license agreements, please call one of us.