The Supreme Court is keeping up with its new trend of taking patent cases, and its most recent grant of certiorari addresses an issue that I thought about a lot in the context of a case I worked on for two years.
Patently-O reports that the Court has granted cert in Medimmune v. Genentech on the question of whether a patent licensee in good standing can bring a declaratory judgment action challenging the validity of the licensed patent.
A declaratory judgment action is an action in which a party asks a court to declare its rights with respect to another party. In a typical suit for damages, a plaintiff asserts that another party has aggrieved it somehow (such as by breaching a contract, committing negligence, or engaging in patent infringement), and asks the court to impose an award of monetary damages in compensation for the injury. A declaratory judgment action is different because instead of asking for damages, the plaintiff is asking the court merely to issue a statement: that a disputed contract term means "X" and not "Y," for example, or that a patent is invalid or unenforceable.
The conditions under which a court can hear such a dispute are somewhat limited. The Constitution prohibits federal courts from hearing merely hypothetical questions; ordinarily, the parties must have an "actual controversy" - a real dispute over a real injury - before the court will hear the issue. But in some cases, courts have held that a declaratory question is nevertheless ripe for adjudication even though any actual injury has yet to occur. Such cases can arise in the context of disputes over the meaning of contract terms, for example, where a court may rule that it is unfair to require a party to breach the contract and risk great liability before the court will interpret the contract. Similarly, in patent law, it has been held that under certain circumstances, when a patent holder accuses another party of infringing the patent, there is a sufficient "actual controversy" such that the accused party can seek a declaration that the patent is invalid to avoid proceeding indefinitely under the Damocles' sword of an infringement suit.
So what of a patent licensee, who is paying for the right to practice the patented invention, but concludes that the patent might be invalid and wants to challenge it without risking the protections of its license? It used to be that courts prohibited licensees from challenging the validity of the licensed patent in court, on the theory that taking the license is an implied acknowledgment of validity that estopped a subsequent challenge. In 1969, though, the Supreme Court rejected this theory in Lear v. Adkins, holding that such estoppel ran contrary to the public's interest in having bad patents identified and declared invalid. The Court reasoned that the licensee, as a party actually paying real money for the privilege of practicing the claimed invention, had a greater stake in the patent's validity than other members of the public. Therefore, the Court reasoned, the licensee was in the best position to challenge the patent's validity and should not be estopped from doing so.
In 2004, however, the Federal Circuit (the United States Court of Appeals with exclusive jurisdiction over appeals in patent cases) decided in a case called Gen-Probe v. Vysis that a licensee in good standing cannot bring a declaratory judgment suit challenging the patent. Such a licensee, the Gen-Probe Court ruled, was protected by the license from suit for patent infringement, and therefore did not meet the constitutional requirements for an actual controversy that I described above. Later, the Federal Circuit applied Gen-Probe to deny declaratory judgment jurisdiction in the Medimmune case that the Supreme Court is now going to review. Under these decisions, if a licensee wishes to challenge the licensed patent, it must forfeit the license - and face the prospect of liability for willful infringement if its challenge is unsuccessful.
When the original Gen-Probe result came down, it turned a case I was working on upon its head. We represented several patent licensees who had taken a license to a patent family years previously. The original patents in the family expired, and our clients thought their obligations under the license were concluded, when a new patent in the family - a submarine patent - suddenly issued. We believed the new patent was invalid and unenforceable, and sought a declaratory judgment to that effect. Both our clients as well as some of the other licensees who had also sued expected to rely on the protection of our licenses in the event our challenges were unsuccessful. The progress of the Gen-Probe case caused both sides to change strategies a couple of times and left the status of all the licenses very, very murky. At one point we had petitioned the court to enjoin the patentee from terminating our license. Later, after Gen-Probe, the patentee tried to retroactively un-terminate our licenses - to deprive us of declaratory judgment jurisdiction - and we had to consider litigating to prevent them from affirming our license when just months before we had tried to prevent the termination!
Gen-Probe ultimately did not have a dispositive effect on our case - the patentee eventually forfeited a substantial portion of its rights under the license, and all the remaining claims settled. But I think it is very good that the Supreme Court is going to consider the issue of a licensee's right to sue for declaratory judgment. Lear v. Adkins reflects some very compelling public policy in favor of allowing those most suited and most motivated to challenge bad patents to do so. Even if Gen-Probe and its progeny are not technically at odds with Lear, their effect is against that policy and should be mitigated. Patentees argue that allowing licensee declaratory judgment suits to proceed gives an unfair advantage to the licensee, allowing risk-free litigation where the licensee comes out none the worse for wear - still protected by a license - if it loses. I think this argument is outweighed by the fact that the patentee should not have any right to collect royalties on an invalid or unenforceable patent. And if the patentee wins a declaratory judgment action, it comes out little the worse for wear (except for litigation expenses, which are a burden on both parties), and with a stronger patent to boot. Allowing licensee challenges is essential to correct implementation of that fundamental policy. Inhibiting challenges to bad patents undermines the value of the patent system.