MedImmune, Inc. v. Genentech, Inc.: The Supreme Court Opens the Door for Future Patent Challenges

January 22, 2007

In the recent Supreme Court case, MedImmune, Inc. v. Genentech, Inc., et al. (S.Ct. No. 05–608), the issue of whether licensees can sue to invalidate the licensed patent while still paying licensing fees was considered.  Previously, a licensee who wished to challenge the validity of a licensed patent had to first cease paying royalties.  In doing so, the licensee risked treble damages, attorney’s fees or injunctions, should the patent subsequently be found valid and infringed.  Thus, the licensee was required to choose between continuing to license a patent of questionable validity, or cease payments and sue, risking enhanced damages if the patent was subsequently found valid.  In an 8-to-1 decision, the Supreme Court partly resolved this dilemma, ruling that a licensee could, in fact, sue to challenge the validity of the underlying patent while still paying royalties to the patent owner. 

While providing licensees a more favorable option when licensing a patent of questionable validity, the wake of MedImmune raises issues related to drafting of licenses.  Some of these issues are addressed below.

First, to minimize financial risk and optimize the outcome of a potential challenge, a licensor may want to consider including a venue clause.  A licensee may take a license to remove the threat of treble damages for willful infringement, and then subsequently sue in their own jurisdiction.  The ability to select the venue can be quite powerful, especially where the licensor is a small company that cannot afford higher legal bills to defend the suit in another jurisdiction.  Further, having the “hometown advantage” where all the potential jurors have a natural bias to “their” company is an advantage.  A sample venue clause is as follows:

Jurisdiction. Licensee consents to the exclusive jurisdiction and venue of the federal and state courts located in Hamilton County, Ohio, United States of America, in any action arising out of or relating to this Agreement. Licensee hereby explicitly waives the rights to any other venue to which it might be entitled by cause of action, domicile or otherwise.

Second, a licensee may want to include a no-contest clause, in which the parties agree the licensee will not contest the validity of the patent.  Such a clause was missing in MedImmune, but could potentially deter a licensee from bringing suit.  A sample no-contest clause is as follows: 

No Contest Clause. Licensee agrees not to directly or indirectly challenge or cause to be challenged the validity or enforceability of any Licensed Patent, or Licensor’s ownership of any Licensed Patent, before any court, agency or tribunal, unless Licensee is charged with infringement of any Licensed Patent by Licensor or its affiliates. Licensee acknowledges that any breach of this clause will be cause for immediate termination of this Agreement.

Under this clause, the contract is terminated upon challenge of the patent, forcing the licensee to at least think twice before bringing suit, as a challenge to the patent leaves the licensee without a license and a significant - if not certain - risk of any future licenses being highly unfavorable.

Finally, under MedImmune, in which licensees can now challenge licensed patents more easily, licensors may want to consider front loading fees.  That is, a licensor may want to try to get as much money as possible up-front or early in the license.  This way, in the event of a challenge and loss of patent, the licensor has accrued more money with which to defend such a challenge.  Licensors can accomplish this by obtaining greater up-front fees (a large payment upon execution of the license) followed by lower royalty rates or yearly fees.  This becomes especially important in cases where a smaller company grants a patent license to a large company - the larger company, under MedImmune, now has both the means and ability to bring an expensive patent suit, presenting a significant financial risk to the smaller company.

A few final thoughts: 

Licenses with more favorable or modest terms overall may be less likely to be challenged.  The more onerous the license terms, the more likely the licensor will have an incentive to challenge the validity of the patent.

The best overall strategy is to not give the licensee a reason to challenge the patent in the first place.  Ensure that all ownership rights are known and in writing.  Further, correctly name all true inventors, especially where the patent arises from collaborations - incorrect inventorship may invalidate the patent.  And finally, keep very good records and check compliance with regulatory procedures such as government reporting for inventions made with government funds.

In summary, the MedImmune decision fosters the ability of patents to be challenged by licensees, requiring both licensor and licensee to carefully consider and draft agreements that anticipate future challenges. 

For further information, please contact Stephen Albainy-Jenei at salbainyjenei@fbtlaw.com.

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