Jeffrey M Butler
Kenyon & Kenyon LLP
United States
Patent licensing in light of MedImmune
v Genentech
As with any contract, during the term of a patent licence
under which it was licensed as a defence in a suit for
agreement circumstances may change such that one
unpaid royalties, reasoning that public interest outweighs
party may wish to avoid its contractual obligations to the
the mandate of state contract law.
other party. For example, the licensee may believe that
Many feel that Lear left some issues unresolved. For
the licensed patent is no longer valid. Under what
example, may a party contract away its right to challenge
circumstances may the licensee challenge the validity of
the validity of a patent? May a licensee bring a
the licensed patent? Various US courts have grappled
declaratory judgment action challenging a licensed
with this question and, at the time of writing, the US
patent, while at the same time continuing to pay royalties
Supreme Court is due to hear arguments on the issue in
and remaining a licensee in good standing? This second
MedImmune Inc v Genentech Inc (427 F 3d 958 (Fed Cir
question is the subject of the MedImmune Case.
2005), cert granted February 21 2006, Case 05-608).
After Lear: implications for declaratory
Licensee estoppel
judgment actions
Contract law generally holds parties to their agreement
Several cases decided by the US Court of Appeals for the
and forbids a purchaser from repudiating a promise
Federal Circuit have dealt with the extent to which a
because it later becomes dissatisfied with the bargain.
licensee may challenge the licensor’s patent and, in
Accordingly, until 1969 the doctrine of licence estoppel
particular, under what circumstances the licensee may
existed in the United States, providing that a patent
bring suit for a declaratory judgment of invalidity.
licensee could not assert that the licensed patent was
An accused infringer may bring an action pursuant to
invalid (eg, see Automatic Radio Manufacturing Co v
the Declaratory Judgment Act against a patentee seeking
Hazeltine Research Inc, 339 US 827 (1950)). In estopping
a declaration from the court that the patent in suit is
licensee validity challenges, the courts reasoned that,
invalid (or unenforceable or not infringed). However,
under the principles of state contract law, a patent
Article III, Section 2 of the US Constitution sets limits on
licensee cannot accept the benefit of the bargain (ie, a
the applicability and reach of the declaratory judgment
licence), while at the same time challenging the
remedy. In order for the federal courts to have jurisdiction
sufficiency of the consideration proffered by the patentee
in any case (including a declaratory judgment action),
(ie, attacking the patent’s validity).
there must be an actual controversy between the parties;
In 1969, however, the Supreme Court overruled this
general principle by permitting licensee validity
the federal courts are not empowered constitutionally to
give mere advisory opinions.
challenges, recognising that invalid patents may confer
For its part, the Federal Circuit has addressed this
monopoly power with respect to ideas that belong in the
limitation on declaratory judgment actions by requiring
public domain, and that eliminating such patents would
a reasonable apprehension of a patent-infringement suit
further the public interest by placing the inventions
on the part of the declaratory judgment plaintiff (eg, see
claimed by invalid patents in the public domain (Lear Inc
Gen-Probe Inc v Vysis, Inc, 359 F 3d 1376 (Fed Cir 2004)).
v Atkins, 395 US 653 (1969)). Lear had sought to raise
Moreover, that reasonable apprehension must be
invalidity as a defence in a suit for licence royalties. In
coupled with ongoing infringing activity by the plaintiff
rejecting the doctrine of licensee estoppel, the court
or concrete steps taken by the plaintiff with the intent to
allowed a licensee to challenge the validity of the patent
conduct such activity.
Building and enforcing intellectual property value 2007 103
United States Kenyon & Kenyon LLP
Declaratory judgments of invalidity in the patent
similar facts, came before the Federal Circuit. In reliance
licensing context
on the Gen-Probe precedent, the court concluded that a
In a number of cases the Federal Circuit has held that, if a
reasonable apprehension of suit could not exist if the
licensee does not materially breach the licence, there is no
licensee remained in good standing. In other words, the
jurisdiction for a declaratory judgment action – the licence
Federal Circuit reiterated the holding that, before a
protects the licensee from suit so that it cannot have a
licensee can challenge the patent under which it is
reasonable apprehension of the suit. However, there is
licensed, it must commit material breach of the licence
some debate as to whether such a holding is in accordance
(eg, by ceasing payment of royalties) and put itself at risk
with the precedent set by other circuit courts in decisions
of an infringement suit.
rendered before 1982.
To the surprise of some, the Supreme Court agreed to
In CR Bard Inc v Schwartz (716 F 2d 874 (Fed Cir 1983))
review the Federal Circuit’s decision. This gives the
the patentee, Schwartz, sued Bard, the licensee, in the state
Supreme Court an opportunity to evaluate the Federal
courts for various breaches of the licensing contract. Bard
Circuit’s approach in view of the policy concerns
subsequently brought a federal suit under the Declaratory
expressed in Lear, and perhaps ultimately redefine the
Judgment Act to have the licensed patent declared invalid.
scope of the actual controversy requirement in the
Before commencement of the federal suit, Bard had
context of a patent licence.
stopped paying royalties to Schwartz, but the licence
Genentech owns the Cabilly I patent and its
agreement was not terminated. Examining all the
continuation, Cabilly II, both of which are licensed to
circumstances, the federal court determined that a
MedImmune. The parties negotiated the licence in 1997
controversy sufficient for Bard to bring suit existed. By
while the Cabilly II patent was involved in a lengthy
failing to pay royalties, Bard had materially breached the
interference proceeding involving the earlier-filed Boss
agreement and, even though neither party had terminated
patent, owned by Celltech. The US Patent and Trademark
the licence, it no longer insulated Bard from an
Office (USPTO) had granted Boss priority. Ultimately,
infringement suit brought by Schwartz. Furthermore, the
Genentech and Celltech settled their differences by
fact that Schwartz had previously sued Bard demonstrated
agreeing to an arrangement whereby Cabilly II would be
that he was willing to bring suit to protect his patent rights.
considered to have priority over Boss (later revoked),
Thus, Bard had a reasonable apprehension of suit which
and Celltech would receive a share of the royalties from
satisfied the actual controversy requirement.
the new patent (Cabilly II). Eleven years after the USPTO
By the time the Federal Circuit decided the Gen-Probe
Case, the material breach prerequisite had become
declared an interference, the Cabilly II patent finally
issued in 2001.
established law in the Federal Circuit. Gen-Probe, the
A significant portion of MedImmune’s business comes
licensee, and Vysis, the patentee, had been opposing
from sales of Synagis, a monoclonal antibody developed
parties in several prior litigations. While negotiating a
to combat an infectious respiratory tract disease in infants.
settlement to those litigations, Vysis informed Gen-Probe
After Cabilly II issued, Genentech notified MedImmune
of newly issued US Patent 5,750,338 (the ‘338 patent). To
that Cabilly II covered the Synagis product and that, under
avoid an infringement suit, as part of the settlement with
their licence agreement, MedImmune owed royalties with
Vysis Gen-Probe entered into a licence agreement covering
respect to its sales of that product. Although MedImmune
the ’338 patent. Six months after Vysis granted the licence,
reportedly felt that Synagis was not covered by
Gen-Probe filed a declaratory judgment suit challenging
Genentech’s patent and that the patent was invalid, it
the validity of the patent. In a letter notifying Vysis of the
elected to protect itself from an infringement suit
suit, Gen-Probe stated its intention to continue paying
involving its key product by paying the requested
royalties in accordance with the licence until the resolution
royalties, albeit “under protest”. Despite making the
of the litigation. Throughout the court proceedings, the
payments, MedImmune attempted to bring suit against
licence agreement remained in effect, protecting Gen-Probe
Genentech for a declaratory judgment of patent invalidity.
from an infringement suit. On these facts the court
However, applying Federal Circuit law, particularly Gen-
concluded that no reasonable apprehension of suit existed
Probe, the court held that MedImmune, as a licensee in
and, therefore, the requirement of an actual controversy
good standing, lacked a reasonable apprehension of suit,
was not satisfied. Thus, Gen-Probe was not entitled to a
and thus the courts could not properly adjudicate the
declaration as to the licensed patent’s validity.
declaratory judgment action.
The MedImmune Case
Licensee’s dilemma
Shortly after Gen-Probe, MedImmune, a case with quite
Does the actual controversy requirement of the Declaratory
104 Building and enforcing intellectual property value 2007
Kenyon & Kenyon LLP United States
Judgment Act (28 USC Section 2201(a)) require a material
example, consider the case of a start-up company that
breach of a licence agreement by a licensee prior to suit for
takes a licence from a patentee with greater leverage in
declaratory relief for patent infringement, invalidity or
order to avoid litigation involving the start-up’s new
unenforceability?
product. If that start-up later concludes that the
In evaluating the dismissal of MedImmune’s
underlying patent is invalid, and if the licence royalties
declaratory judgment action, the Supreme Court will
amount to a substantial tax on the start-up, the continued
confront the issue of whether – under the Declaratory
royalty payments on the invalid patent may hinder the
Judgment Act and in accordance with the requirements of
start-up’s ability to introduce its product or adversely
Article III of the Constitution – a licensee in good standing
affect the price of that product to the detriment of the
may sue for a declaratory judgment. The existing legal
public. If a licensee must materially breach its licence and
standard, which requires the licensee to commit a material
put itself at risk of an infringement suit before
breach and not be in good standing in order to bring such
challenging the patent’s validity, licensees such as this
a suit, places a licensee in a dilemma. If the licensee
hypothetical start-up may only rarely challenge those
believes the licensed patent is invalid, it either can
potentially invalid patents.
continue to pay homage to the patentee by paying
In MedImmune, in which Synagis is MedImmune’s
royalties, thus avoiding the risk of an infringement suit, or
biggest-selling product accounting for around half of the
can jeopardise the licence by materially breaching it and
company’s total sales, the risk of an infringement suit
bring a declaratory judgment action. But it cannot have it
(and the damages and injunctions that could result if it
both ways – at least not under current law. If the Supreme
were not to prevail in that suit) may be too great for the
Court upholds the Federal Circuit’s Gen-Probe doctrine,
company to accept. MedImmune also seems to be taking
which the Federal Circuit followed in its MedImmune
the position that the Gen-Probe line of cases, which
decisions, thus requiring material breach, the dilemma
requires a material breach by the licensee before a
will remain a reality for patent licensees in the United
declaratory judgment of invalidity may be sought and
States. On the other hand, if the Supreme Court rules that
obtained, is contrary to Lear and inconsistent with the
a licensee may constitutionally bring such a suit without
precedent of other circuits.
first having to breach the licence agreement materially, the
In MedImmune a number of entities have filed non-
dilemma will mostly disappear, and instead licensees will
party (amicus curiae) briefs. Among these is one from the
be given the power to pick and choose if and when to
solicitor general, on behalf of the United States, which
attack the licensed patent.
supports MedImmune and stresses the need for a more
Many feel that permitting licensees to have that
efficient mechanism to act as a check on weak patents.
power by reversing MedImmune may ultimately hamper
The non-parties assert that allowing licensees in good
patent licensing in the United States; licensors may be
standing to challenge such patents in an adversarial
less willing to grant patent licences if they believe that
proceeding (eg, in a declaratory judgment action) would
their licensees – which often are in a unique position to
be beneficial. Some argue that increasing numbers of
challenge the patent – not only may face little risk if they
weak patents have issued that should be freely
do so, but may even be incentivised to do so. A licence
challengeable by those with the greatest economic interest
agreement would essentially be an insurance policy. If a
to do so, namely licensees. The Supreme Court in Lear
declaratory judgment suit were unsuccessful, the licence
recognised the strong public interest in eliminating
agreement would remain in effect and the licensee could
invalid patents and the fact that licensees are often in the
continue practising the patent on the previously
best economic position to further that interest. Some also
negotiated terms – that is, after an unsuccessful suit the
argue that licensees that have taken a licence under a
royalties called for in the licence agreement would
group of patents (eg, a pool licence) should not be obliged
basically cap the downside. It is also possible that more
to breach the licence agreement and place themselves at
litigation would result if MedImmune were reversed (due
risk of an infringement claim under all the pooled patents
primarily to an increase in licensee challenges), and that
if they wish to challenge the validity of single patent.
in turn could result in the need for licensors to demand
This is by no means a one-sided debate; there are
higher royalties since there is a greater risk of increased
substantial arguments that militate towards the court’s
costs on the part of the licensor.
endorsing the Gen-Probe doctrine. For example, by
On the other hand, it could be argued that barring a
bringing a successful declaratory judgment action to
licensee in good standing from bringing a suit
invalidate a licensed patent, the licensee can essentially
challenging the validity of the licensed patent may, in
avoid the obligations for which it bargained. Is such a
some instances, produce an inequitable result. For
one-sided escape clause in the public’s best interests?
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United States Kenyon & Kenyon LLP
Allowing licensees to avoid their obligations may
changed circumstances, namely the grant of the Cabilly II
introduce uncertainty into the negotiation of future
patent after the negotiation of the licence. MedImmune
licences. It may even act as a disincentive on the part of
could argue that, due to the agreement between Celltech
patentees to grant licences, which in turn could
and Genentech that resulted in the issue of the Cabilly II
adversely affect the exploitation of new inventions.
patent, the patentee extended the monopoly for the
patented technology by 12 years. Does this constitute a
Comment
changed circumstance that warrants the licensee’s
When the Supreme Court decides MedImmune it will
challenge to the validity of the Cabilly II patent?
presumably address the actual controversy requirement
If the Supreme Court follows the Federal Circuit’s
of the Declaratory Judgment Act. The court may interpret
Gen-Probe (and MedImmune) approach and holds that a
that requirement more broadly than has been the case in
reasonable apprehension of suit is necessary, and that it
the past. However, if threat of a suit is not a prerequisite,
is not possible for a licensee in good standing to possess
it potentially may be difficult to define ‘actual
such apprehension reasonably, this distinction will not
controversy’ in a way that limits declaratory judgment
matter. However the Supreme Court decides the case,
plaintiffs to actual licensees (ie, to exclude the possibility
there will have been a healthy public debate regarding
of having a third party seek a declaratory judgment to
whether the Gen-Probe doctrine (and, for that matter, the
challenge the validity of a licensed patent which may
Lear doctrine) is good public policy – does it elicit an
affect its business). The court may also decide that the
effective and economical check on patent validity
requirement is met in cases where the parties’ respective
challenges, particularly with respect to assailable
positions changed after the grant of the licence and this
patents, and does it maintain a proper balance of risk
change unfairly affects the licensee. For instance, it could
between the licensee and the licensor in a way that
be argued that MedImmune was unfairly affected by
promotes and enhances the licensing of US patents?
Jeffrey is an attorney at law and a registered patent attorney with extensive
experience in litigation and adversarial matters concerning all aspects of
intellectual property, including patents, trademarks, copyright, antitrust,
unfair competition and trade secrets. He also has significant experience in
domestic and international IP licensing, acquisition and exploitation. Jeffrey
holds a JD from George Washington University. He has authored and coauthored articles and presented papers, seminars and symposia on
numerous IP and litigation topics.
Jeffrey gratefully acknowledges the contributions of Michele Y Antis
and Joseph Zihal, associate and summer associate respectively at
Kenyon & Kenyon.
106 Building and enforcing intellectual property value 2007
Jeffrey M Butler
Partner, New York
Tel +1 212 908 6040
Email jbutler@kenyon.com
Kenyon & Kenyon LLP
United States