By Kevin Noonan --
Back in the 1970's, Firesign Theater had a comedy album entitled "Everything You Know is Wrong." This seems to be the Supreme Court's current opinion on the Federal Circuit; the Court hasn't actually affirmed a CAFC decision since J.E.M. Ag Supply v. Pioneer Hi-Bred Int'l. Inc. in 2001.
The trend continues in MedImmune, Inc. v. Genentech, Inc., where the Court not only reversed the Federal Circuit's decision that the licensee, MedImmune, failed to state a case or controversy under Article III, but rejected the CAFC's GenProbe v. Vysis line of cases on the issue. In GenProbe, the Federal Circuit held that a licensee who believes it does not infringe the licensed patent, or that the patent is invalid, could not continue to pay royalties under the license and challenge validity or infringement by a declaratory judgment action. The CAFC distinguished Supreme Court precedent on licensee estoppel in Lear v. Adkins because in that case the licensee had refused to pay patent royalties. The Federal Circuit's precedent on the question left licensees with a Hobson's choice: continue to pay royalties on an invalid patent or one they did not infringe, or refuse to pay and run the risk of being liable for treble damages, attorney's fees, and an injunction.
The underlying dispute involved Synagis®, MedImmune's drug to prevent respiratory infections in infants and young children. MedImmune had licensed from Genentech a patent and (at the time) pending application related to recombinant expression of chimeric antibodies. The license terms provided that MedImmune agreed to pay royalties on such antibodies that "would, if not licensed under th[e] Agreement, infringe one or more claims of either or both [of the covered patents and] which have not expired nor been held invalid by a court or other body of competent jurisdiction." Upon grant of the application as a patent, Genentech informed MedImmune that it expected royalties under the patent for the Synagis® product. MedImmune paid, but only "under protest and with reservation of all [its] rights." The Court noted, in particular, that Synagis® represented 80% of MedImmune's revenue, and that failure to pay royalties would have left MedImmune liable for treble damages, attorney's fees, and a possible injunction against further sales of Synagis®.
MedImmune filed a declaratory judgment action, but the District Court below granted Genentech's motion to dismiss for lack of subject matter jurisdiction; specifically, because there was no "case or controversy" between the parties as required under Article III of the U.S. Constitution. This decision was based on controlling Federal Circuit precedent in GenProbe Inc. v. Vysis, Inc. In that case, the Federal Circuit held that the existence of the license "obliterate[d] any reasonable apprehension" that the licensee would be sued under the license, and hence took the case outside declaratory judgment jurisdiction under Article III. The Federal Circuit affirmed the District Court's dismissal of MedImmune's suit, at least in part because (as the Supreme Court noted) the three-judge panel hearing the appeal could not overturn the court's GenProbe precedent.
The Supreme Court, in an opinion written by Justice Scalia (Justice Thomas dissenting), noted that there would be no dispute had MedImmune taken the ultimate step of refusing to pay patent royalties, and that its own declaratory judgment jurisprudence had not always drawn "the brightest of lines" as to what did or did not fall properly within the scope of declaratory judgment jurisdiction. In reversing the CAFC, the Supreme Court pointed out that it had long been the case that a party did not need to put itself at risk when the issue was government action. Thus, a party that disputed a law (such as one prohibiting public distribution of leaflets; Steffel v. Thompson) could raise a case or controversy under Article III without having to violate the law and be at risk for prosecution ("the declaratory judgment procedure is an alternative to pursuit of the arguable illegal activity"; Rehnquist, A.J.). The principle was based on the existence of coercion, because the behavior that vitiated the threat of prosecution -- compliance with the law -- was coerced by the threat.
Turning to private causes of action, the Court referenced lower courts that had permitted subject matter jurisdiction in cases where a private party was in a position to coerce another's behavior. Justice Scalia did find one case, fortuitously enough, in the Court's precedence that appeared on point. In Altvater v. Freeman, the Court held there was subject matter jurisdiction under Article III's case and controversy requirement in a dispute involving patent royalty payments compelled under an injunction. In that case, the Court held that Federal Courts had jurisdiction to hear the declaratory judgment action by the plaintiff licensees on the validity of the underlying patent, even while paying "under protest" the patent royalties ordered by the injunction. Just as argued by MedImmune here, in Altvater the Court based subject matter jurisdiction on the peril involved with forcing the declaratory judgment plaintiffs to "risk not only actual but treble damages in infringement suits." The Altvater Court held that "the requirements of 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 challenge the legality of the claim."
Applying the Altvater precedent to the instant case, the Court first rejected the distinction drawn by the Federal Circuit in GenProbe: that Altvater involved patent royalty payments compelled by an injunction. The proper analysis was not that the injunction was a form of government action that fell within Steffel v. Thompson-like exemptions. The Court noted that the Altvater Court did not base its decision on risks stemming from a contempt citation by the court, but rather (as here) on the risks of increased damages owed to the patentees for willful patent infringement (i.e., a private cause of action). The Court also distinguished Willing v. Chicago Auditorium Association, a case where the Supreme Court had denied subject matter jurisdiction. In that case, the declaratory judgment plaintiffs had applied for judicial imprimatur for tearing down a building in the face of a lease term preventing it. Justice Scalia distinguished the Willing precedent in part because the Declaratory Judgments Act was not law when Willing was decided. Without overruling Willing, the Court opined that it was "confident" that a different result would have been obtained had "the legal disagreement between the parties been as lively" as in this case.
The Court made short work of the other arguments presented by Genentech. The license was not just an "insurance policy" against a lawsuit. Moreover, the promise to pay royalties on patents that have not expired or been deemed invalid is not a promise not to seek a holding of the patent's invalidity. The Court also rejected application of the common law precept that a party could not challenge a contract while enjoying its benefits. While explicitly refusing to opine on whether its estoppel decision in Lear was predicated on that plaintiff having repudiated its license, the Court maintained that the principle did not apply since MedImmune was not challenging the validity of the contract but rather the validity of the underlying patents that formed the basis for the contractual obligation to pay royalties.
The Court thus held that a patent licensee could sue under the Declaratory Judgment Act for a determination of invalidity or non-infringement while continuing to pay patent royalties under the license, and that such a suit fulfilled the "cases or controversies" requirement of Article III. The result is a boon for those who believe (albeit with scant evidence) there are a plethora of invalid patents holding hostage unwilling licensees. The decision appears to bring some common sense to the question, since it is unlikely that either Lear or the Declaratory Judgments Act envisioned, sanctioned, or required the type of Catch 22 created by the Federal Circuit's jurisprudence. And the case gave the Supreme Court one more opportunity to reverse settled Federal Circuit precedent, a recently recurring pastime for the Court.
We all await the Court's decision in KSR v. Teleflex to see whether and to what extent this trend continues.