MedImmune v. Genentech - Supreme Court Ruling May Have Major Impact on Patent Licensing

by Alan Schwartz Ocio

A new United States Supreme Court ruling is expected to have a major impact on patent licensing.

In MedImmune Inc. v. Genentech, et al., No. 05-608 (2007), the Court held that a licensee is not required to breach or terminate a license agreement in order to file an action challenging the validity, enforceability or scope of a licensed patent. Justice Antonin Scalia wrote the opinion of the Court; the lone dissenter was Justice Clarence Thomas.

Ruling Expands Licensee's Ability to File Patent Challenges

The practical effect of this decision is that a licensee may be able to file a patent challenge while continuing to maintain the benefit of its license. Previously, it was believed that a licensee had to breach or terminate its license prior to bringing suit, thereby subjecting itself to the risk of a breach of contract and/or patent infringement action and possible treble damages.

The dispute in MedImmune arose when the licensor (Genentech) informed its existing licensee (MedImmune) that the then newly issued "Cabilly II" patent covered MedImmune's Synagis® product and, thus, subjected MedImmune to increased royalties under the license agreement. MedImmune disagreed and filed a declaratory judgment action asking the U.S. District Court for the Central District of California to declare the Cabilly II patent invalid or unenforceable.

The Federal Circuit affirmed the district court's dismissal of the action on the constitutional ground that there was no "case" or "controversy," because the license had not been breached or terminated. The Supreme Court has now reversed the Federal Circuit's decision and remanded the case for further proceedings.

MedImmune Has Potential to Shift Balance of Power between Licensees and Licensors

While it is too early to predict its full impact, this decision has the potential to shift the balance of power between licensees and licensors. In the short term, licensees under existing licenses have an incentive to file patent challenges because the license would in most cases remain in place even if the challenge is not successful. Licensees could also use the threat of a patent challenge to renegotiate the terms of an existing license. It remains to be seen whether the MedImmune decision will apply to all current patent licenses, or whether licenses with different negotiation histories can escape its holding.

Over time, licensors may become less willing to license their technology, or they may seek higher royalties as compensation for the increased risk of patent challenges. A likely result is that licensors may seek to include provisions in license agreements prohibiting licensees from challenging licensed patents. This area of law is very uncertain and highly litigated. The issue of the risks of such provisions raising possible claims of unenforceability and patent misuse remains open.

In light of this decision, licensees and licensors should evaluate existing licenses to identify opportunities and risks. Going forward, licensees and licensors should consider how this decision will affect their patent licensing strategies.

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