The court’s 8-to-1 decision held that the holder of a patent license can sue to challenge the patent’s validity without first refusing to pay royalties and putting itself in breach of the license agreement.
This seemingly technical question, in a dispute by two biotechnology companies, MedImmune and Genentech, has considerable practical importance. A license holder is much less likely to sue if it must first stop paying royalties and thereby risk becoming the target of a patent infringement suit, with the potential for triple damages and the loss of the right to continue selling its product.
In making its decision, the Supreme Court overturned a ruling by the specialized appeals court that hears all patent appeals. That court, the United States Court of Appeals for the Federal Circuit, had adopted a rule in a previous case that required a party to breach its license agreement before suing to declare a patent invalid.
As long as royalties were being paid, the Federal Circuit had reasoned, there was no actual controversy between the parties and such a lawsuit would therefore not meet the requirement of Article III of the Constitution, which limits the jurisdiction of the federal courts to resolving actual “cases” or “controversies.”
The Declaratory Judgment Act, the federal law that MedImmune invoked when it went to the federal District Court in Los Angeles for a determination of the validity of Genentech’s patent, likewise requires the existence of an “actual controversy” before a court can act.
But the dispute between MedImmune and Genentech was indeed a controversy that met the jurisdictional requirements of the statute and the Constitution, Justice Antonin Scalia wrote for the majority in overturning the Federal Circuit’s dismissal of the case, MedImmune Inc. v. Genentech Inc., No. 05-608.
Justice Scalia said the rule that a plaintiff must “bet the farm, or (as here) risk treble damages and the loss of 80 percent of its business before seeking a declaration of its actively contested legal rights finds no support in Article III.”
The decision did not resolve the underlying dispute, instead reinstating MedImmune’s lawsuit and sending the case back to the lower courts.
The case grew out of a license agreement the two companies reached in 1997 as MedImmune, then a new company, was working on a genetically engineered drug, Synagis, used to prevent a respiratory disease in infants. While MedImmune later came to public attention as the maker of the FluMist influenza vaccine, Synagis has been the company’s main product, accounting for 80 percent of its sales since 1999.
The license authorized MedImmune to use the technology developed by Genentech and its research partner, the City of Hope National Medical Center in Duarte, Calif. City of Hope is also a party in the case.
The agreement obliged MedImmune to pay royalties for the use of patents “which have neither expired nor been held invalid.”
The specific patent at issue in the case was not granted to Genentech until 2001, at which point Genentech wrote to MedImmune demanding royalties. MedImmune paid under protest, while filing its lawsuit to have the patent declared invalid.
Justice Clarence Thomas was the lone dissenter from the ruling. He said there was “no Article III jurisdiction over MedImmune’s claim,” which he called “hypothetical or conjectural.”