Businesses and manufacturers that need to use a patented process or technology other than their own often face a dilemma: either pay royalties even though the patent seems weak, or use the process or technology without a license and risk an infringement lawsuit involving staggering costs and penalties – even a court-ordered cessation of business. Usually a business chooses to take a license and pay royalties. This is clearly an expensive and distasteful option if the technology ought to be freely available.
Historically, once a business entered a license agreement it could not challenge the underlying patent unless the agreement terminated or was breached. But then any further use of the technology could result in treble damages. Thus, licensees were frequently trapped by their agreements – forced to pay royalties without any ability to test the sufficiency or applicability of the patents covered by the agreement.
The U.S. Supreme Court has opened the courthouse doors to licensees who desire to challenge whether an underlying patent is valid, enforceable, or infringed. In an 8 to 1 decision, Medimmune, Inc. v. Genentech, Inc., decided January 9, 2007, the Court overturned long- standing precedent. No longer is a patent licensee required to terminate or breach its agreement before it can challenge the patent.
The case involved a drug manufacturer that entered into a patent license agreement with the holder of both an issued patent and a pending patent application. Royalties were due on sales of products falling within the patents, “which have neither expired nor been held invalid. ...” After a patent was granted on the pending application, the holder demanded royalties, but the manufacturer felt the patent was invalid, unenforceable, or otherwise not infringed. Facing treble damages and the inability to manufacture a product responsible for 80% of its sales, the manufacturer continued to pay royalties under protest and filed suit to determine the sufficiency and scope of the patent.
The trial court and the Federal Circuit Court of Appeals ruled that so long as a patent licensee was in good standing it could not establish a “case” or “controversy” that allows judicial review. Previous cases had concluded that no actual controversy existed unless and until a license agreement was broken or terminated. Practically, however, few businesses could afford to risk the consequences that could result if royalty payments terminated while the use of a disputed patent continued. The Supreme Court recognized the practical business problems caused by such a position, and ruled that continuing payment under the license does not waive the right to challenge the patent..
The case has potentially far-reaching practical effects. It allows licensees to directly challenge the validity and enforceability of an underlying patent while continuing to operate. A licensee can seek a determination that its particular method or product is non-infringing. Those determinations would frequently end the obligation to pay patent-related royalties. For licensors of patented technology, the case has implications over how license agreements should be drafted. For example, a license agreement may govern access to trade secrets, know-how, or other goods and services that are independent of the patent. Royalty obligations for such access may continue even if a patent challenge is successful. From a public policy perspective, the decision can be viewed as a response to the criticism that commerce and innovation is impeded by the recent proliferation of weak patents. In many industries there is no one with incentive to oppose a weak patent other than licensees who have felt coerced into paying royalties. This decision allows them to challenge the merits and scope of an underlying patent.
For a copy of this opinion or to discuss its impact in the business strategy of your company, call a member of our Intellectual Property, Internet and Technology Practice Group.