John W. Schlicher, Article on Licensing and MedImmune

JOHN W. SCHLICHER

PATENTS, PATENT LITIGATION, PATENT DISPUTE RESOLUTION AND

SETTLEMENT, LICENSING, ANTITRUST, LAW AND ECONOMICS

John W. Schlicher, “Patent Licensing, What to Do After MedImmune v. Genentech,” 89 Journal of the Patent and Trademark Office Society 341 (2007)(Article) (Table of Contents)

Introduction and Summary (excerpts)

I. Introduction

Since Lear v. Adkins in 1969, patent licensing has occurred under legal constraints on how the validity or invalidity of a patent affects the rights of a patent owner and the obligations of a licensee. For about fifteen years after 1969, the law was in a state of mild chaos. The legal situation then settled down, and people generally adapted licensing practices to the law. On January 9, 2007, the Supreme Court stirred the pot again in MedImmune v. Genentech. Section II of this paper is a summary of the significance of this decision. Section III describes the facts, the legal issue, and the result in MedImmune. Section IV explains how Lear and now MedImmune influence future licensing and royalty decisions. Sections V and VI offer recommendations for what licensees and patent owners should do. Section VII describes legislation I suggested 20 years ago for addressing this problem, one the patent reformers have ignored.

II. Summary

A MedImmune problem arises when a patent owner grants a license that defines the royalty obligation by reference to validity. In that situation, MedImmune means that, if a patent owner says something that permits the licensee to allege that it believed the patent owner would terminate the license and sue for infringement if the license failed to pay royalties, the licensee may pay under protest, and bring an action for a declaratory judgment that the license means royalties are payable only if the patent is valid, and the patent is invalid. If the licensee wins on both issues, the royalty obligation ends at some time the MedImmune decision declined to identify. If the licensee loses on the contract issue or invalidity, it loses nothing.

MedImmune says only that a court has jurisdiction to decide whether a license, as properly interpreted, means that royalty payments are dependent on validity. The Court did not say how the issue should be decided in that case. Therefore, the full implications of MedImmune are unknown. If a patent owner wins on the contract issue, such as by showing that the reference to validity applied only to judgments in actions between the patent owner and a third party, the patent owner may avoid a decision on validity. If the owner loses, the licensee may try to prove invalidity. Many patent licenses have been written in a way that will make it very difficult for the patent owner to win on the contract issue.

MedImmune has the following effect. If patent owners define royalty obligations by reference to validity, and the courts interpret those definitions to mean that royalties are payable only if the patent is valid, patent owners must choose between having rights under the license (royalties) or patent rights (damages and an injunction). Potential licensees need not choose. They may have rights under the license (freedom from damages and an injunction), and the right to litigate whether the patent is valid. If successful in litigating validity, the licensee eliminates the patent owner’s rights under the license, the royalties. In sum, if licenses are written in that way, patent owners must choose between having the benefits of licensing or infringement litigation. Licensees may have the benefits of both licensing and validity litigation.

If a patent owner has defined royalties in that way, the owner’s main hope of avoiding a MedImmune declaratory judgment action is that the licensee will conclude that its business interests are not served by trying to kill the patent, or that the royalty savings do not justify the investment in invalidity litigation. Patent owners will try to avoid MedImmune actions by not saying anything to licensees that could be understood to indicate that the patent owner would terminate and sue for infringement, if the licensee does not pay. However, if, as happened in MedImmune, a patent owner creates a controversy by telling a licensee that it expects the licensee to pay royalties on some product, careful language is unlikely to prevent declaratory judgment actions.

MedImmune should not control licenses that define royalty obligations without reference to validity. Patent owners should be able to avoid MedImmune declaratory judgment actions by defining royalty obligations in that way, and dealing separately with the effect of invalidity judgments in third party actions. See Section VI, A. I have recommended these approaches for years. … [M]any licensees will argue that MedImmune applies to all licenses. ...

MedImmune should cause patent owners to refocus on how they deal with Lear, and the possibility that MedImmune will be extended to all licenses. The simplest and most direct response to Lear and an extension of MedImmune is to provide that the patent owner may terminate the license, if the licensee alleges in any action that the licensed patent is invalid. See Section VI, B, 2. Patent owners should also consider a provision that the licensee will not assert in any action that the licensed patent is invalid and will not commence or prosecute any action or claim seeking judgment that the patent is invalid. See Section VI, B, 1. ... If a patent owner does not believe these provisions are sufficient ..., there are a variety of other approaches to termination rights, royalty obligations, and other terms to deal with Lear and MedImmune actions. See Section VI, B.

Ultimately, if a patent owner believes that there is any chance that it will face a MedImmune action in which royalties are found to be dependent on validity, the patent owner should license only at rates that are not discounted based on the likelihood of a validity judgment, not discounted based on the risk of validity litigation, and not reduced based on saving infringement litigation costs. … See Section IV.

If all efforts to avoid MedImmune fail, and royalties always ultimately depend on validity judgments, the value of patents will decline for companies that license patents for royalty revenue exceeding validity litigation costs by a margin that justifies licensee litigation. … Patent owners and licensees have a mutual interest in legislation to solve this potential problem. See Section VII.