US Patent License Decision

On Jan. 9, 2007, the US Supreme Court handed down its decision in MedImmune, Inc. v. Genentech, Inc. resulting in a significant change to the licensing landscape.  In this case, MedImmune had entered into a licensing agreement with Genentech under which MedImmune was to pay royalties for the use of Genentech’s “Cabilly I” patent and (when it issued) the “Cabilly II” patent.  When the second patent issued, Genentech sent a letter requiring the payment of royalties for the use of the second patent.  MedImmune paid under protest, then turned around and sued the licensor on the basis that the second patent was not valid or enforceable.  By continuing to make the payments, MedImmune kept the license alive.

The essential question in the case was whether a patent licensee was obliged to withhold its royalty payments and therefore commit a material breach of the license agreement before it had grounds to sue to declare the patent invalid?  Prior case law said that a licensee did have to effectively breach the agreement before it had standing to sue.  This decision overturns that line of cases and permits a licensee to challege the validity of the patent in court, while still making payments as a licensee and keeping the license.  For MedImmune, breaching and terminating the license would have effectively shut down its own business.

For patent licensors, there are two practical points to remember:

1.  Watch how you word your letters to licensees when politely requesting (or aggressively demanding) royalty payments, as such letters can be construed as a threat of litigation, providing grounds for a declaratory suit by the licensee;

2.  Consider reviewing language in the patent license to see if licensees can be forced to waive any right to challenge the validity of the licensed patent.

The fallout from this decision will be watched closely by both patent holders and their licensees.

Calgary – 12:32 MST


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