Supreme Court: Challenging a Patent During the License Term

MedImmune v. Genentech (Supreme Court 2006).

In MedImmune, the Supreme Court will answer the question of whether a licensee in good standing can challenge the validity of the patents it has licensed.  A hidden issue within this case is whether a licensee has the freedom to contract-away its right to challenge the validity of the patents during the license. 

In Lear v. Adkins, The Supreme Court gave the boot to the doctrine of “licensee estoppel” and allowed a licensee to challenge the validity of a licensed patent after termination of the license. Based on Lear, license terms that bar a licensee from later challenging the patent’s validity are (usually) unenforceable. Those decisions, however, are based on cases arising after termination of a license agreement. 

Danger for Cross-License Agreements: The reality is that many license agreements are based on the desire for “patent peace” between the parties.  Often two companies will cross-license their patents and forgo any hopes of a cash payout in favor of the certainty afforded by the agreement.  Those companies are willing and ready to give-up their rights to challenge the patents in district court (during the license term).  If MedImmune has its way, however, those license agreements would actually open the door to litigation rather than achieve the hoped security. 

The potential inability to fully settle lawsuits as they arise also has interesting implications for the sale of patent rights.  Any purchase review (due diligence) will need to look much more closely at ongoing license agreements associated with the patent to determine the extent that the license gives the licensee a right to sue.

Briefing at the Supreme Court will continue this summer to prepare for oral arguments in the October 2006 term.

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3 thoughts on “Supreme Court: Challenging a Patent During the License Term

  1. I want to know the Estoppel Law of Supre Court air-79. Please send this law to my above email address. I am waiting your reply.

    Reply
  2. Jack, Thank you for the excellent comment.

    Lear is written in broad terms. The limit of Lear as it relates to ongoing licensees, however, has not been tested because licensees in good standing have not been given DJ jurisdiction.

    This won’t be directly challenged in the courts unless the S.Ct. first allows DJ jurisdiction for ongoing licensees.

    Reply
  3. You should reread the United States Supreme Court opinion in the Lear case, as well as the preceding California Supreme Court opinion.

    Although Lear had attempted to terminate its license, the California Supreme Court held (1) that Lear’s attempted termination was ineffective because the license could not be terminated unless and until Lear stopped making the infringing gyroscopes and (2) that licensee estoppel, therefore, precluded Lear, as an existing licensee, from contesting validity.

    The U.S. Supreme Court could have made the narrow decision that, as a matter of federal patent policy, a patent licensee always has an unconditional, unilateral right to terminate his or her license and thereafter contest validity. That would have given Lear the relief it was seeking without abolishing licensee estoppel.

    Instead, the U.S. Supreme Court chose to make the broad decision that, as a matter of federal patent policy, the state law doctrine of licensee estoppel was abolished; and, therefore, an existing licensee may contest validity. The Supreme Court explained its rationale: (a) licensees may be the only ones with sufficient economic incentive to challenge (and eliminate) invalid patents and (b) if licensees are muzzled from contesting validity, the public may pay royalties on patents that never should have been granted.

    Since requiring a licensee to (a) materially breach its license (e.g., by stopping the payment of royalties) or (b) terminate its license before contesting validity would expose the licensee to the possibility of an injunction, that would discourage (and potentially muzzle) the licensee from contesting validity. Per the U.S. Supreme Court’s rationale in the Lear case, that would be adverse to the public interest in ridding the world of invalid patents.

    The facts of the MedImmune case may be distinguishable from the facts of the Lear case; but the broad, rather than narrow, rationale of the U.S. Supreme Court in the Lear case — suggests that the Federal Circuit erred and that MedImmune will prevail.

    Whether that is good or bad public policy is certainly debatable. Why hasn’t that debate taken place in Congress during the 35 years between the Lear case and the genesis of the MedImmune case: Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004)?

    Reply

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