By Dennis Crouch
Medtronic v. Mirowski, ___ U.S. ___ (2014) [CaseText]
In a unanimous opinion, the US Supreme Court has reversed the Federal Circuit – holding that the patentee has the burden of proving infringement even in declaratory judgment actions by a licensee in good standing. I had previously noted that the Federal Circuit decision here was “odd” and likely to be rejected by the Supreme Court. The case should generally be seen as further emboldening licensees to challenge their licensed patents.
Medtronic has licensed a number of implantable heart stimulator patents from Mirowski. While still paying royalties (into an escrow account) and remaining in good-standing as a licensee, Medtronic filed a declaratory judgment action asserting that its products were not covered by the patent and that it therefore owed no contract damages. Prior to 2007, the Federal Circuit had ruled that a licensee in good standing had no declaratory judgment standing. However, in MedImmune, Inc. v. Genentech, Inc., 549 U. S. 118 (2007), the Supreme Court held that Article III’s case-or-controversy requirement can be satisfied by the fact that a licensee faced the threat of suit if it ceased making payments).
The district court sided with Medtronic – finding that Mirowski failed to prove infringement. However on appeal, the Federal Circuit vacated – holding instead the ordinary burden of proving infringement shifted in declaratory judgment cases a licensee in good standing. On writ of certiorari the Supreme Court has decided that the district court’s analysis is the better course of action and now holds that:
[W]hen a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee.
The Supreme Court based its decision on three notions: (1) the Patentee ordinarily bears the burden of proving infringement; (2) the Declaratory Judgment Act is only procedural; and (3) the burden of proof is a substantive aspect of the claim. Following this triple premise, the court concluded that the filing of a declaratory judgment action could not shift the burden of proof.
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The decision is fairly short, but has a few interesting aspects.
First, the court provided a policy-based analysis that calls-to-mind the problems faced by many accused infringers who receive a demand letter or broadly written complaint alleging infringement:
[The Federal Circuit rule can] create unnecessary complexity by making it difficult for the licensee to understand upon just what theory the patentee’s infringement claim rests. A complex patent can contain many pages of claims and limitations. A patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent. Until he does so, however, the alleged infringer may have to work in the dark, seeking, in his declaratory judgment complaint, to negate every conceivable infringement theory.
It is this same sentiment that has been driving a movement to increase the pleading standards in patent cases.
Second, the court re-iterated its historic position that patent rights should be open to challenge as a mechanism for maintaining a well-balanced patent system.
The public interest, of course, favors the maintenance of a well-functioning patent system. But the “public” also has a “paramount interest in seeing that patent monopolies . . . are kept within their legitimate scope.” Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U. S. 806 (1945). A patentee “should not be . . . allowed to exact royalties for the use of an idea . . . that is beyond the scope of the patent monopoly granted.” Blonder-Tongue Laboratories, Inc. v. University of Ill. Foundation, 402 U. S. 313 (1971). And “[l]icensees may often be the only individuals with enough economic incentive” to litigate questions of a patent’s scope. Lear, Inc. v. Adkins, 395 U. S. 653, 670 (1969). The general public interest considerations are, at most, in balance. They do not favor a change in the ordinary rule imposing the burden of proving infringement upon the patentee.
Read the decision here: https://casetext.com/case/medtronic-v-mirowski
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Can License Terms Privately Change The Baseline Rules Set Here?: An ongoing and open question is whether the rules regarding licensee standing and burdens are hard-and-fast or instead whether they should are to be treated as default rules that can be altered by contracting parties. As an example, a licensee could agree (as part of a license agreement) not to file a declaratory judgment action challenging patent rights while in good standing or could agree that in a DJ action the licensee had the burden of proving non-infringement. The open question is whether these private contractual provisions would be deemed unenforceable on public policy grounds. Although open, the implicit suggestion from the decision is that those provisions would be unenforceable. I draw that conclusion from the court’s positive citation of Lear, Precision, and Blonder-Tongue.
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Standing: The Supreme Court began the opinion with a discussion of jurisdiction that seems to step-back somewhat from its recent decision in Minton v. Gunn. The particular question raised was whether the case was a patent lawsuit or instead merely a contract dispute. If the former, then the case is heard in Federal Court and by the Federal Circuit. If the latter, then the case would be in state court unless there the parties exhibit diversity jurisdiction and, a diversity case would have been appealed through a regional circuit court of appeals rather than to the Federal Circuit.
Subject matter jurisdiction over a declaratory judgment action is ordinarily based upon whether the complementary coercive action brought by the DJ defendant would necessarily present a federal question. Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U. S. 1 (1983).
Here, the Supreme Court determined that the potential coercive action was patent infringement. The court based its conclusions upon its reading of the license that gave power to Mirowski to terminate the contract and sue for patent infringement if Medtronic stopped paying royalties. According to the Supreme Court, it is of no matter that Mirowski could instead sue for contract damages – a result that would have been much more likely. In its Amicus Brief, Tessera wrote:
Because there was simply no chance that the licensee suddenly would abandon the contractual dispute resolution procedure after nearly twenty years when it could resolve the very same patent issues within the contractual framework, and when both licensed patents were, in any event, set to expire within a year, a coercive patent infringement action by the licensor cannot reasonably be said to have been anticipated or threatened at the time of the initial filing.
The Supreme Court here rejected Tessera’s argument:
The relevant question concerns the nature of the threatened action in the absence of the declaratory judgment suit. Medtronic believes—and seeks to establish in this declaratory judgment suit—that it does not owe royalties because its products are noninfringing. If Medtronic were to act on that belief (by not paying royalties and not bringing a declaratory judgment action), Mirowski could terminate the license and bring an ordinary federal patent law action for infringement. Consequently this declaratory judgment action, which avoids that threatened action, also “arises under” federal patent law.
With this ruling, the Supreme Court has thrown another wrench in federal patent jurisdiction doctrine.
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Understanding the good policy reasons behind this decision, what happens to the licensee who DJ’s on non-infringement and then loses, with the licensor having now proven infringement.
Does such licensee keep the license (absent a term indicating DJ is a material breach of the license contract)?
If so, here’s a consideration:
When threatened, fold immediately and seek license on most reasonable possible ongoing terms. These may well be considerably lower than you would get at the close of an infringement trial when you’re dead-to-rights “guilty” and the licensor has spent $5Mio proving same.
Next, immediately begin paying your royalty payments to escrow and DJ for non-infringement. Licensor spends time and money proving you are covered by the patents. If the licensor wins, you still have the more favorable pre-litigation royalty rate.
On the other hand, if I’m the licensor, the next license I offer will have severable clauses forbidding DJ and alternatively jacking the royalty rate in the event of a DJ, recognizing that the up-front was a lowball agreed to in avoidance of litigation costs proving infringement…
In other words, the law of unintended consequences will march forward.
Agreed.
First, the court provided a policy-based analysis that calls-to-mind the problems faced by many accused infringers who receive a demand letter or broadly written complaint alleging infringement:
“[The Federal Circuit rule can] create unnecessary complexity by making it difficult for the licensee to understand upon just what theory the patentee’s infringement claim rests. A complex patent can contain many pages of claims and limitations. A patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent. …
The public interest, of course, favors the maintenance of a well-functioning patent system. But the “public” also has a “paramount interest in seeing that patent monopolies . . . are kept within their legitimate scope.” Precision Instrument Mfg. Co. v. Automotive Maintenance Machinery Co., 324 U. S. 806 (1945). “
Good stuff! I’m glad to know that the Supreme Court seems very much aware of these issues.
Thanks for the excellent write-up, Dennis.
It seems the Court’s decision on burden of proof was a foregone conclusion once it adopted the terminology that the issue between the parties was “infringement” and not just whether the putatively licensed products were covered by the licensed patents. I think if it had characterized the issue the latter way, the jurisdiction issue addressed in the first part of the opinion would have been a much closer question.
As it stands, it seems to me the part of the opinion that will have the most impact going forward is the decision regarding jurisidiction. Now whenever there is a DJ case brought be a licensee, there will be federal jurisdiction so long as there is some hypothetical situation where the licensee would stop paying royalties and the patent owner would terminate and sue for infringement, regardless of the facts as they actually exist.
One the most interesting points made by the court concerned estoppel. When the burden of proof on an issue changes, there is no estoppel.
Thus, if I understand this correctly, an infringer win in the DJ action would not preclude the patentee from bringing suit for patent infringement against such a prevailing infringer with the same or similar goods.
This lack of estoppel would mean DJ action would fail its essential purpose.
But did I understand the Supreme Court correctly?
[…] commentators have more details on the case and its implications such as Patently-O, Gray on Claims and Comparative Patent Remedies. […]
Not having considered this issue for quite some time, might someone be able to direct me to authority explaining why the licensor/patentee here was precluded from filing a counterclaim in response to the licensee’s DJ action?
The licensor couldn’t assert breach of contract because the licensee kept paying. The licensor couldn’t assert infringement because it had no means to cancel the licensing contract that was being performed by the paying licensee.
Does this give the licensee more bargaining power, at least where infringement is less than clear-cut? For example, the licensee could say “let’s reduce these royalty rates, or we will dispute infringement in a DJ.” If the license royalty is not much less than what a court might find to be a reasonable royalty once infringement is successfully proven, wouldn’t the licensee have a minimal downside in bringing the DJ, and a substantial upside?
Just curious.
Compared to the federal circuit’s decision yes it gives them more bargaining power because they can challenge the deal even after they made it, with the patentee still maintaining the burden to prove infringement, apparently. Though I wouldn’t say it is a huge bargaining chip, compared to the other result it is rather large I would suppose.
Yeah, the bargaining power increase wouldn’t be that great. Sophisticated licensees and licensors will factor this risk into the overall price and structure of the license, at the outset.
The upshot of this decision is that places a check on bulk patent licenses, where the licensor grants a license to hundreds of patents to a less sophisticated licensee for way too much money, simply because there are simply too many patents to analyze. In these situations, the larger companies can often force the smaller company to enter into a big license because of the overwhelming number of patents in the portfolio and the practical impossibility of analyzing each one. This decision is going to motivate licensors to focus licensing efforts on parties where they actually have a legitimate infringement read, rather than the IBM-style of sending you a threatening letter listing 500 “potentially relevant” patents, with no explanation of any of them, and then insisting that you need a license.
It might also discourage a reluctant licensee from paying some lump sum, up-front payment (or a paid up license) since a licensee might want to negotiate for longer term royalty payments and then make those smaller payments while they challenge a patent in a DJ action.
Right result.
Careful NWPA, keep talking like that and you’ll be branded anti-patent for sure!
There is nothing pro- or anti- patent inherent in the decision, 6. No matter which way the decision went.
JAZOW! probably a one page opinion lol. Can’t wait to read!
Had this case been tried differently, the burden of proof as to infringement would not have effected the outcome of this case in the district court. The patent owner’s expert had inspected the devices in question (cardiac resynchronization therapy devices) and submitted a rule 26 report as to infringement. The report, however, apparently limited its presentation to the claim limitations in dispute and thus “did not expressly map the products in question to every limitation of the relevant claims.” 695 F.3d 1266, 1270. It would have been a simple matter for the expert to have included, in his report, a mapping onto the products of the limitations not in dispute. Had he done so, the patent owner would have carried its burden. Because he didn’t, the case ended up in the Supreme Court.
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