MedImmune's Impact May Be Greater Than Many Suspect

The Supreme Court's recent decision in MedImmune, Inc. v. Genentech , Inc., 127 S.Ct. 764 (2007), may have broader implications than some realize. MedImmune holds that a licensee that believes it does not infringe any valid claim of the licensed patent may seek relief from the patent through a declaratory judgment action, even while the license remains in effect. If successful, the licensee is relieved of royalties; if unsuccessful, the license remains in place and royalty payments continue at the agreed rate.

At first, it might seem that the future impact of this decision could be controlled if patentees simply build covenant not to sue language into their license agreements. But the MedImmune decision has most likely resuscitated an earlier Supreme Court decision as well – Lear Inc. v. Adkins, 395 U.S. 653 (1969) – which speaks to this very point. In Lear, the Court held a patent licensee is not estopped to challenge the validity of the licensed patent. However, the court also held, in specific terms, that public policy strongly favors challenges to invalid or overly broad patents, and that contract clauses that purport to limit such challenges would be deemed void. In the years following Lear, some lower courts confirmed declaratory judgment suits could proceed even in the face of contract clauses that had been intended to bar such suits. See, e.g., Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., 444 F.2d 425 (9th Cir. 1971). Moreover, if the declaratory judgment was successful, most courts found that royalties paid after the filing date of the declaratory judgment action should get repaid.

In later years, Lear was eroded by a series of Federal Circuit decisions, the core of which has now been overturned by MedImmune, thus reestablishing Lear as good law. Thus, it is entirely possible that over time, companies accused of patent infringement will first seek a license -- to cap their exposure -- and then bring a declaratory judgment action to see if they can avoid that exposure altogether. Such tactics will trigger countermeasures, of course, which will certainly make for a new and interesting landscape for those involved in patent licensing. The new precedent will also have implications for the settlement of on-going litigation.