A New License To Sue

By Leslie Gladstone Restaino and
Thomas J. Dodd

Over the past several years, the Federal Courts have decided several cases involving the right of a licensee to sue for patent invalidity without first having to breach a license agreement.

Earlier this year, The U.S. Supreme Court ruled on one such case, MedImmune, Inc. v. Genentech, Inc.

Given the ongoing contractual agreement between MedImmune and Genentech and their license agreement, the Supreme Court had to determine whether a licensee could establish an “actual case or controversy” where the license that it seeks to challenge is still in force. In support of its decision to reverse the Federal Circuit, the Supreme Court held that the standard for determining whether a particular declaratory judgment action satisfies the “actual case or controversy” requirement is “whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant” relief. The Court held the standard was satisfied in the present case even though MedImmune had not refused to make royalty payments under the license agreement. The Court cited Altvater v. Freeman, 319 U.S. 359 (1943), which held that a licensee’s failure to stop paying royalties — which were paid under protest and under an injunction decree — did not make the patent dispute nonjusticiable.

The MedImmune decision has substantially muddied the waters for patent holders interested in licensing their patents to interested parties. Prior to MedImmune, so long as the patentee made no explicit threat of filing an infringement suit, there existed a degree of assurance that patent license negotiations did not constitute an actual controversy to which DJ jurisdiction attached. MedImmune effectively eliminated that assurance by extending the definition of “case or controversy” to include both explicit and implicit threats.

In the wake of MedImmune, licensees have greater freedom to challenge the validity of patents while keeping their licenses intact. Licensees now enjoy greater bargaining power to renegotiate existing licenses, thus it may be practical to renegotiate existing licenses before a lawsuit is filed. Patent owners, on the other hand, may choose to forgo licensing opportunities in light of the sword of freedom to challenge patent validity now provided to prospective licensees. There are a number of contractual workarounds that can be considered when drafting license agreements after MedImmune. Workarounds can become critical if the same patents are already licensed to other third parties (as is often the case in Life Science technology). The licensor should consider adding a provision to terminate the license in the event that the licensee challenges the validity of any underlying patented technology. Licensors should be mindful, however, of the 1969 case of Lear, Inc. v. Atkins, which treats as a nullity any attempt by a patent licensor to withhold from the licensee the ability to contest the validity of licensed patents. Nevertheless, certain provisions may be crafted to ease the impact of the “nochallenge” bar. First, the licensor should consider requiring front-loaded royalty payments or lump sum payments at the time of license execution to decrease the licensee’s financial incentive to challenge the patented technology. In the life sciences industry, however, this can be difficult to attain, as many growth-stage companies lack the resources to pay such lump sums at the outset. Moreover, many companies will make royalty payments only in the event that certain regulatory milestones are achieved. Second, the licensor should consider requiring good-faith discussions between the parties prior to the ability of the licensee to challenge patent validity. Third, the licensor must conduct negotiations without alleging or implying infringement. Other contractual workarounds include: (1) variable royalty rates that escalate during the pendency of any lawsuit challenging patent validity; (2) mandatory arbitration in the event of a patent validity or noninfringement lawsuit; (3) forum selection clauses in the event of a lawsuit; and (4) mandatory administrative proceedings (such as re-examination, and if the current patent law reform bills pass, cancellation) prior to challenging the patents in federal court. Optional termination clauses in the event of a patent validity challenge can also be considered, however, the enforceability of such provisions may be questionable in light of Lear. MedImmune has obscured the heretofore bright-line test for DJ jurisdiction in patent challenges by licensees.

From a business standpoint, this seems to decrease the long-term value of licenses, especially where the relationship between the respective parties is or has been less than harmonious.

The Authors have published a detailed article on this topic in the New Jersey Law Journal. Read a reprint.

Leslie Gladstone Restaino is a member of Sills Cummis Epstein and Gross of Newark, practicing in the intellectual property and corporate practice groups.

Thomas J. Dodd is a senior patent attorney at Johnson & Johnson.

The views and opinions express in this article are those of the authors and do not necessarily reflect those of their respective firms.

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