[Puiblished in 2007]
The Declaratory Judgment Act provides:
In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.28 U.S.C. § 2201(a). The “actual controversy” requirement is rooted in Article III of the United States Constitution, which only confers federal jurisdiction over “cases” and “controversies.”The Federal Circuit, which has appellate jurisdiction over all patent cases, has long held that a patent licensee in good standing cannot seek a declaratory judgment of patent invalidity or non-infringement because the patent license eliminates any “reasonable apprehension of imminent suit” and, with it, the requisite “case” or “controversy” required by Article III. In January, 2007, however, the Supreme Court held otherwise in MedImmune, Inc. v. Genentech, Inc. In MedImmune, the Supreme Court rejected the Federal Circuit’s “reasonable apprehension of imminent suit” test and held that a licensee is “not required, insofar as Article III is concerned, to break or terminate [a] license agreement before seeking a declaratory judgment in federal court that [an] underlying patent is invalid, unenforceable, or not infringed.” This holding may offer some licensees a choice they did not have before – (a) repudiate the license and risk paying treble damages for acts of infringement that occur during the patent challenge, as they were previously required to do, or (b) continue paying royalties while challenging the patent, thereby avoiding treble damages, but perhaps forfeiting these payments if the patent challenge is successful.
Practical Implications
Despite lingering uncertainties, licensors and licensees are left to deal with MedImmune’s practical effects. Licensees, for example, need to decide whether to repudiate a license before initiating suit and risk treble damages or opt for the “insurance policy” by continuing to pay royalties that may ultimately be lost if the patent challenge is successful. This decision is an economic one, and will invariably hinge on a cost-benefit analysis of each choice, the probability of a successful outcome, and the licensee’s tolerance for risk. Licensees should also consider whether litigation will make future dealings with licensors more expensive or altogether impossible, as licensors might, for example, demand greater royalties from “problematic” licensees than those who quietly cut a check.
Conclusion
Where the Federal Circuit once provided a bright-line test, the Supreme Court’s MedImmune decision has introduced a new degree of uncertainty as to what facts create subject matter jurisdiction for declaratory judgment actions challenging a patent. MedImmune itself will undoubtedly permit some patent licensees to challenge a patent while still paying royalties, although the licencees may forfeit recovery of the payments. Moreover, MedImmune’s holding may have application in broader jurisdictional disputes. Indeed, the Federal Circuit has already started applying MedImmune in declaratory judgment cases outside the licensing context. As such, parties need to carefully consider the financial and strategic ramifications at each stage of patent licensing and litigation in view of the new options and risks posed by MedImmune.
The Declaratory Judgment Act provides:
In a case of actual controversy within its jurisdiction, . . . any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.28 U.S.C. § 2201(a). The “actual controversy” requirement is rooted in Article III of the United States Constitution, which only confers federal jurisdiction over “cases” and “controversies.”The Federal Circuit, which has appellate jurisdiction over all patent cases, has long held that a patent licensee in good standing cannot seek a declaratory judgment of patent invalidity or non-infringement because the patent license eliminates any “reasonable apprehension of imminent suit” and, with it, the requisite “case” or “controversy” required by Article III. In January, 2007, however, the Supreme Court held otherwise in MedImmune, Inc. v. Genentech, Inc. In MedImmune, the Supreme Court rejected the Federal Circuit’s “reasonable apprehension of imminent suit” test and held that a licensee is “not required, insofar as Article III is concerned, to break or terminate [a] license agreement before seeking a declaratory judgment in federal court that [an] underlying patent is invalid, unenforceable, or not infringed.” This holding may offer some licensees a choice they did not have before – (a) repudiate the license and risk paying treble damages for acts of infringement that occur during the patent challenge, as they were previously required to do, or (b) continue paying royalties while challenging the patent, thereby avoiding treble damages, but perhaps forfeiting these payments if the patent challenge is successful.
Practical Implications
Despite lingering uncertainties, licensors and licensees are left to deal with MedImmune’s practical effects. Licensees, for example, need to decide whether to repudiate a license before initiating suit and risk treble damages or opt for the “insurance policy” by continuing to pay royalties that may ultimately be lost if the patent challenge is successful. This decision is an economic one, and will invariably hinge on a cost-benefit analysis of each choice, the probability of a successful outcome, and the licensee’s tolerance for risk. Licensees should also consider whether litigation will make future dealings with licensors more expensive or altogether impossible, as licensors might, for example, demand greater royalties from “problematic” licensees than those who quietly cut a check.
Conclusion
Where the Federal Circuit once provided a bright-line test, the Supreme Court’s MedImmune decision has introduced a new degree of uncertainty as to what facts create subject matter jurisdiction for declaratory judgment actions challenging a patent. MedImmune itself will undoubtedly permit some patent licensees to challenge a patent while still paying royalties, although the licencees may forfeit recovery of the payments. Moreover, MedImmune’s holding may have application in broader jurisdictional disputes. Indeed, the Federal Circuit has already started applying MedImmune in declaratory judgment cases outside the licensing context. As such, parties need to carefully consider the financial and strategic ramifications at each stage of patent licensing and litigation in view of the new options and risks posed by MedImmune.
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