Patent Owners Beware: Offering a License Could Land You in Court

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Intellectual Property Section

by Michael I. Coe, Stephen W. Palan and Mark M. Supko

n a recent decision sure to have far- occurred or was at least imminent.4 The under protest, but then filed an action seek- I reaching consequences for patent own- effect of the reasonable apprehension of ing a declaratory judgment of noninfringe- ers, the U.S. Supreme Court in suit requirement was that a patentee gen- ment and invalidity as to the new patent. MedImmune v. Genentech rejected the tra- erally could offer a license without a sub- ditional “reasonable apprehension of suit” stantial risk of a declaratory-judgment The district court dismissed MedImmune’s requirement for bringing a declaratory action simply by taking care not to accuse declaratory judgment action for lack of judgment action on a potentially infringed the prospective licensee of infringement.5 subject-matter jurisdiction, relying on well- patent.1 Now, as the federal circuit con- established Federal Circuit precedent hold- firmed in SanDisk v. STMicroelectronics, Rejection of the Reasonable ing that a patent licensee in good standing there appears to be virtually no circum- Apprehension of Suit Test cannot satisfy the reasonable apprehen- stance under which a patent owner can Ironically, despite the chilling effect that sion of suit requirement.6 The Federal offer a license to a potential infringer with- MedImmune may have on patent licensing Circuit affirmed the dismissal, relying on out risking a lawsuit.2 offers, the case actually arose in the con- the same precedent.7 MedImmune then text of a fully executed license agreement. appealed its case to the Supreme Court. Declaratory Judgment Jurisdiction MedImmune, a drug manufacturer, had Before MedImmune licensed an existing Genentech patent and In analyzing the dismissal of Grounded in Article III of the U.S. a pending patent application relating to MedImmune’s declaratory judgment Constitution, the Declaratory Judgment Act the production of certain antibodies. After action, the Supreme Court first reviewed creates subject-matter jurisdiction in fed- the patent application issued, Genentech its own precedent interpreting the eral courts only where there is a case of informed MedImmune that its most popu- Declaratory Judgment Act. While conced- “actual controversy” between the parties.3 lar drug product, Synagis, was covered by ing that its cases “do not draw the To determine whether the actual contro- the newly issued patent, and that brightest of lines between those declara- versy requirement was met in a given Genentech therefore expected additional tory-judgment actions that satisfy the case- declaratory-judgment case, the U.S. Court royalties under the license agreement. or-controversy requirement and those that of Appeals for the Federal Circuit (the do not,” the Court observed that its deci- court to which all patent appeals are While MedImmune believed the new sions require a real, substantial, definite taken) traditionally required a showing of patent did not cover its product, it was and concrete dispute for which specific some affirmative action by the patentee unwilling to breach the license agreement relief can be granted.8 that justified a reasonable apprehension of and risk the possibility of treble damages, an infringement suit on the part of the attorney fees and an injunction, since As framed by the Supreme Court, the key declaratory-judgment plaintiff, plus some Synagis accounted for as much as 80 per- question in the case at hand was whether activity by the plaintiff sufficient to show cent of MedImmune’s revenue. So a party can satisfy the “actual controversy” that the potentially infringing conduct had MedImmune paid the additional royalties requirement of the Declaratory Judgment

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Act even though its own actions (e.g., infringement analysis, including diagrams MedImmune decision. While recognizing MedImmune’s payment of royalties) elimi- detailing how SanDisk’s products allegedly that MedImmune addressed declaratory- nated any imminent threat of harm (i.e., a satisfied the elements of ST’s patent judgment jurisdiction in the context of a patent infringement suit by Genentech). claims. Likely mindful of the reasonable signed license agreement, the Federal The Supreme Court answered yes, by apprehension of suit requirement, ST Circuit analyzed how the Supreme Court’s analogizing to cases involving coercive acknowledged that these materials “would rationale should be applied to conduct government action. It noted that in such allow SanDisk to DJ” ST, but assured prior to the existence of a license. cases, a party facing a genuine threat of SanDisk that “ST has absolutely no plan government enforcement need not “bet whatsoever to sue SanDisk.”12 The Federal Circuit noted that, without the farm” by taking the violative action some affirmative act by the patentee, a before seeking a declaration that it was potential infringer merely learning of the acting within its rights.9 existence of a patent or perceiving that a ... in the context of patent poses an infringement risk would Thus, in the context of coercive private not support declaratory-judgment action, the Court reasoned that Article III coercive private action, jurisdiction. However, Article III jurisdic- does not require a declaratory-judgment tion would arise if a patentee’s actions plaintiff to “bet the farm” or “risk treble the Court reasoned that “put[] the declaratory judgment plaintiff in damages and the loss of 80 percent of its the position of either pursuing arguably business” before seeking declaratory Article III does not illegal behavior or abandoning that which relief.10 he claims a right to do.”14 ST’s presenta- require a declaratory- tion of a detailed infringement analysis to Based on this analysis, the Supreme Court judgment plaintiff to SanDisk was deemed sufficient to satisfy held that MedImmune need not break or this standard.15 terminate its license agreement with “bet the farm” or “risk Genentech in order to seek a declaratory In a concurring opinion in SanDisk, Judge judgment against Genentech’s new patent. treble damages and the Wilson Curtis Bryson accurately observed The Supreme Court criticized the Federal that the Federal Circuit’s new test would Circuit’s reasonable apprehension of suit loss of 80 percent of its have a broad reach. He noted that any test as “conflict[ing] with,” “contradict[ing],” invitation to license would give rise to an and “in tension with” Supreme Court business” before seek- Article III case or controversy “if the precedent on the requirements for declara- prospective licensee elects to assert that its tory-judgment jurisdiction.11 ing declaratory relief. conduct does not fall within the scope of the patent.”16 Bryson opined further that, The Federal Circuit’s Broad under this new standard, there is “no prac- Application of MedImmune After several more months of negotiation, tical stopping point short of allowing In SanDisk v. STMicroelectronics, the SanDisk brought an action for declaratory declaratory judgment actions in virtually Federal Circuit relied on the Supreme judgment of noninfringement and invalid- any case in which the recipient of an invi- Court’s MedImmune decision to reverse a ity as to ST’s patents. In response, ST tation to take a patent license elects to dis- district court’s dismissal of a declaratory moved to dismiss for lack of subject-mat- pute the need for a license and then to sue judgment action for failure to present an ter jurisdiction. Applying the traditional the patentee.” 17 actual controversy. However, unlike the reasonable apprehension of suit test (this facts in MedImmune, in SanDisk the was pre-MedImmune), the district court The Practical Effects of MedImmune accused infringer had not yet entered into granted ST’s motion on the basis that and SanDisk a license agreement with the patentee. there was no actual controversy between The MedImmune and SanDisk decisions the parties. The district court noted that reflect a new balance of power between STMicroelectronics (ST) had approached ST’s infringement analysis did not consti- patentees and potential infringers. No SanDisk seeking to cross-license certain of tute an express charge of infringement longer can a patentee offer a license to a the companies’ patents relating to flash and that, under the totality of the circum- potential infringer knowing that, so long memory-storage products. After exchang- stances, there was no actual controversy as it does not explicitly or implicitly ing several letters, the parties met and ST because ST told SanDisk that it did not threaten an infringement suit, the patentee made a presentation that purported to intend to sue.13 need not fear being dragged into pro- show how SanDisk’s products infringed tracted litigation. To the contrary, in the various ST patents. At the conclusion of The Federal Circuit reversed, noting the post-MedImmune/SanDisk world, a poten- the meeting, ST presented SanDisk with a recent rejection of the reasonable- tial infringer presented with an offer of a packet of materials that documented its apprehension-of-suit test in the patent license can establish declaratory-

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Intellectual Property Section

judgment jurisdiction simply by taking the licensing issues are complex. The position that its activities fall outside the approach could lead to undesired effort scope of the patent at issue. ... in the post- and expense to litigation while negotiations continue. As Judge Bryson implicitly recognized in MedImmune/SanDisk his SanDisk concurrence, control over the world, a potential Conclusion timing of litigation is now shared by the Under the new legal regime, patentees prospective licensee. Even if the patentee infringer presented with need to be more cautious and discriminat- is careful not to make any accusation of ing in how, and who, they approach in infringement, or even avoids identifying an offer of a patent license negotiations. Those patentees who particular products that might be covered are unwilling or unable to litigate their by a patent, a prospective licensee need license can establish patents in court must be especially careful, only ask whether the patentee believes its since they now have little control over activities fall within the scope of the declaratory-judgment whether a license offer will escalate into a patent.18 If the patentee says no, it has lawsuit. Thus, it may be advisable to avoid made a damaging admission that will limit jurisdiction simply by “hard-ball” negotiation techniques which future litigation; if the patentee says yes or taking the position that could provoke a retaliatory declaratory- equivocates, it will have satisfied the judgment suit. In any event, patentees that SanDisk test and created declaratory judg- its activities fall outside seek to license their patents would be ment jurisdiction.19 well-advised to do advance work in order the scope of the patent to be able to bring suit quickly, or react The relaxation of the declaratory judgment quickly to a declaratory-judgment suit, in jurisdictional requirement significantly at issue. the event the negotiations break down. diminished the leverage that patentees previously enjoyed in licensing negotia- Potential licensees, on the other hand, tions. Under the old regime, a patentee A patentee that desires to control the now enjoy a much more level playing field typically would try to avoid creating course of litigation now has few options when approached for a patent license. declaratory-judgment jurisdiction to pre- when making a license offer to a potential The prospect of a declaratory judgment serve the patentee’s historical prerogative infringer. One possibility is to file suit first, action may tend to deter those patentees to decide whether, when, and where and then negotiate with an accused who are merely “fishing” for royalties, and patent litigation would take place. This infringer during the course of a pending patentees with a more serious claim of was a significant advantage, as the paten- lawsuit. This approach, however, involves infringement will likely approach license tee could embark on licensing negotia- the expense and burden of a lawsuit and negotiations more gingerly than in the tions without forfeiting the ability to also requires a reasonable investigation past. Those companies that are regularly choose a convenient or strategically beforehand of the facts underlying the targeted by royalty-seeking patentees important forum, while also ensuring that alleged infringement beforehand (i.e., to should develop the capacity to file suit a litigation did not commence until the satisfy the requirements of Rule 11 of the quickly when faced with a patent threat, patentee had completed its preliminary Federal Rules of Civil Procedure), which as a well-chosen declaratory-judgment suit legal work (giving the patentee a further may or may not be feasible or economical or two may establish a company’s reputa- leg up on the potential infringer).20 without information from the potential tion as an uninviting target. infringer. A variation on this approach is Likewise, a patentee was often able to for the patentee to file but not immediately Although the full ramifications of the avoid the burden, risk, and expense of serve an infringement complaint against MedImmune decision in the patent world actually litigating its patents, yet still take the potential infringer before offering a have yet to be felt, at least one thing is advantage of the specter of litigation dur- license. This would buy the patentee up to clear: any patent owner who decides to ing licensing negotiations. The continued 120 days, under Rule 4(m) of the Federal offer a license to a potential infringer must viability of these privileges of the patentee Rules of Civil Procedure, to negotiate a be prepared to defend its patent rights in are now very much in doubt. Under the license agreement before having to com- court. It also appears likely that fewer new regime, a patentee has a very limited plete service of process. If a satisfactory licensing offers will be made outside the ability to prevent a prospective licensee agreement is reached, the complaint can context of litigation, as a patent owner from taking the initiative itself by filing a be withdrawn. While such an approach must sue first or risk losing control over preemptive suit at the time and in the may allow a patentee to effectively choose the timing and location of a lawsuit in forum of its choosing. the forum (under the first-to-file rule), a which its patent rights will be determined. significant downside is that 120 days may In an age when federal court dockets are not be enough time to reach a deal if the already bogged down by ever-increasing

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caseloads, an unfortunate consequence of MedImmune is thus the creation of a significant disincentive to trying to resolve Michael I. Coe holds a bachelor’s degree in chemical physics, which patent disputes absent litigation. q allows his patent litigation practice to cover a wide range of technologies. Coe’s practice principally involves intellectual property litigation in district court and before the U.S. Court of Appeals for the Federal Circuit. Endnotes: He is a member of Crowell & Moring LLP’s intellectual property group in 1 MedImmune, Inc. v. Genentech, Inc., 549 U.S. ___, Washington, D.C. 127 S. Ct. 764 (Jan. 9, 2007). 2 SanDisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372 (Fed. Cir. Mar. 26, 2007). 3 28 U.S.C. § 2201(a). 4 See, e.g., Teva Pharm. USA, Inc. v. Pfizer, Inc., 395 F.3d 1324, 1330 (Fed. Cir. 2005); BP Chems. Ltd. v. Union Carbide Corp., 4 F.3d 975, 978 (Fed. Cir. 1993). 5 See, e.g., Phillips Plastics Corp. v. Kato Hatsujou Stephen W. Palan holds a bachelor’s degree in electrical engineering, Kabushiki Kaisha, 57 F.3d 1051, 1054 (Fed. Cir. and practices in a wide variety of electrical, computer and electro- 1995); see also Shell Oil Co. v. Amoco Corp., 970 F.2d 885, 888 (Fed. Cir. 1992). mechanical technologies. Before entering private practice, Palan worked 6 MedImmune, 127 S. Ct. at 768 (citing Gen-Probe as an examiner at the U.S. Patent and Trademark Office. He is a member Inc. v. Vysis, Inc., 359 F.3d 1376 (Fed. Cir. 2004)). of Crowell & Moring LLP’s intellectual property group in Washington, D.C. 7 Id. 8 Id. at 771 (citing Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, 240-241 (1937)). 9 Id. at 772. 10 Id. at 775. 11 Id. at 774 n.11. 12 SanDisk, 480 F.3d at 1375-1376. 13 Id. at 1377. Mark M. Supko co-chairs the intellectual property group of Crowell & 14 Id. at 1381. Moring LLP. His practice focuses on intellectual property litigation and 15 Id. at 1382. counseling, with a heavy emphasis on patent litigation in the computer, 16 Id. at 1384. electrical and mechanical arts. Prior to pursuing a career in the law, 17 Id. at 1385. Supko trained and worked as a systems engineer for a leading U.S. 18 Id. at 1384. systems integration company. 19 Id. at 1384-85. 20 Some federal courts are known to be well-versed in patent matters (e.g., the U.S. District Court for the Northern District of California), particularly patent-friendly (e.g., the U.S. District Court for the Eastern District of Texas), or fast (e.g., the U.S. District Court for the Eastern District of Virginia).

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