Supreme Court Allows Declaratory Judgment by Patent Licensee in Good Standing

In MedImmune, Inc. v. Genentech, Inc. (January 9, 2006), the U.S. Supreme Court held that a licensor was not required to break or terminate its license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed.

A declaratory judgment is a judgment of a court in a civil case which declares the rights, duties, or obligations of each party in a dispute. If a patent owner communicates an objectively reasonable apprehension of suit, the alleged infringer may bring suit under the Declaratory Judgment Act. The alleged infringer - as plaintiff in the suit - can then choose the venue of the suit subject to the court can properly having personal jurisdiction over the alleged infringer. Thus the patent owner who has been sued for a declaratory judgment loses the “home field advantage” of a potentially sympathetic jury. Travel costs to a distant courthouse can be substantial, and a party that is litigating in a distant forum will have to hire a local attorney (in addition to its regular patent litigation counsel) at significant expense.

Furthermore, if a defendant brings a declaratory judgment counterclaim, the defendant can now force the plaintiff to stay in the suit and face the potential invalidation of its claims. Infringement is a compulsory counterclaim to an action for declaratory judgment of non-infringement. This, when a patent owner fails to adequately assert an infringement counterclaim in a declaratory judgment non-infringement suit, the patent infringement claim will be deemed waived.

According to the 8 to 1 ruling and opinion by Justice Scalia:

The only Supreme Court decision in point is, fortuitously, close on its facts to the case before us. Altvater v. Freeman, 319 U. S. 359 (1943), held that a licensee’s failure to cease its payment of royalties did not render non-justiciable a dispute over the validity of the patent. In that litigation, several patentees had sued their licensees to enforce territorial restrictions in the license. The licensees filed a counterclaim for declaratory judgment that the underlying patents were invalid, in the meantime paying “under protest” royalties required by an injunction the patentees had obtained in an earlier case. The patentees argued that “so long as licensees continue to pay royalties, there is only an academic, not a real controversy,between the parties.” Id., at 364. We rejected that argument and held that the declaratory-judgment claim presented a justiciable case or controversy: “The fact that royalties were being paid did not make this a ‘difference or dispute of a hypothetical or abstract character.’” Ibid. (quoting Aetna, 300 U. S., at 240). The royalties “were being paid under protest and under the compulsion of an injunction decree,” and “unless the injunction decree were modified, the only other course of action was to defy it,and to risk not only actual but treble damages in infringement suits.” 319 U. S., at 365. We concluded that “the requirements of a case or controversy are met where payment of a claim is demanded as of right and where payment is made, but where the involuntary or coercive nature of the exaction preserves the right to recover the sums paid or to challenge the legality of the claim.” Ibid.

The Federal Circuit’s Gen-Probe decision distinguished Altvater on the ground that it involved the compulsion of an injunction. But Altvater cannot be so readily dismissed. Never mind that the injunction had been privately obtained and was ultimately within the control of the patentees, who could permit its modification. More fundamentally, and contrary to the Federal Circuit’s conclusion, Altvater did not say that the coercion dispositive of the case was governmental, but suggested just the opposite. The opinion acknowledged that the licensees had the option of stopping payments in defiance of the injunction, but explained that the consequence of doing so would be to risk “actual and treble damages in infringement suits” by the patentees. 319 U. S., at 365. It significantly did not mention the threat of prosecution for contempt, or any other sort of governmental sanction. Moreover, it cited approvingly a treatise which said that an “actual or threatened serious injury to business or employment” by a private party can be as coercive as other forms of coercion supporting restitution actions at common law; and that “to imperil a man’s livelihood, his business enterprises, or his solvency, was ordinarily quite as coercive” as, for example, “detaining his property.” F. Woodward, The Law of Quasi Contracts §218 (1913), cited in Altvater, supra, at 365.

. . . Respondents assert that the parties in effect settled this dispute when they entered into the 1997 license agreement. When a licensee enters such an agreement, they contend, it essentially purchases an insurance policy, immunizing it from suits for infringement so long as it continues to pay royalties and does not challenge the covered patents. Permitting it to challenge the validity of the patent without terminating or breaking the agreement alters the deal, allowing the licensee to continue enjoying its immunity while bringing a suit, the elimination of which was part of the patentee’s quid pro quo. Of course even if it were valid, this argument would have no force with regard to petitioner’s claim that the agreement does not call for royalties because their product does not infringe the patent. But even as to the patent invalidity claim, the point seems to us mistaken. To begin with, it is not clear where the prohibition against challenging the validity of the patents is to be found. It can hardly be implied from the mere promise to pay royalties on patents “which have neither expired nor been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken,” App. 399. Promising to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity.

For more information on this topic, please contact William F. Heinze (bill.heinze@tkhr.com) at Thomas, Kayden, Horstemeyer & Risley LLP in Atlanta, Georgia USA.

The information contained in this alert is provided for informational purposes only and does not represent legal advice. Neither the APLF nor the author intends to create an attorney client relationship by providing this information to you through this message.

 

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