Patent Licensors Can Prevent Challenges to Patent Validity

In 2007, the US Supreme Court ruled that a patent licensee could challenge the validity of a patent without violating the patent license.

MedImmune, Inc. v. Genentech, Inc. involved a dispute between two parties that had entered into a patent license agreement for a then-pending patent application.

Genentech claimed that Synagis, a drug Medimmune made, was covered by Genentech’s Cabilly II patent and that Medimmune owed royalties under the agreement. Although Medimmune believed no royalties were due because the patent was invalid and unenforceable and because Synagis didn’t infringe the patent's claims, Medimmune paid the royalties under protest and filed an action for declaratory relief.

The Constitutional issue in the case was whether there was an active “case or controversy” that let the courts exercise jurisdiction over the dispute, since Genentech wasn’t at risk of being sued as long as it kept paying royalties under the license.

Genentech argued

that the parties in effect settled this dispute when they entered into the 1997 license agreement. When a licensee enters such an agreement, they contend, it essentially purchases an insurance policy, immunizing it from suits for infringement so long as it continues to pay royalties and does not challenge the covered patents. Permitting it to challenge the validity of the patent without terminating or breaking the agreement alters the deal, allowing the licensee to continue enjoying its immunity while bringing a suit, the elimination of which was part of the patentee's quid pro quo.

The Court disagreed, finding that “Promising to pay royalties on patents that have not been held invalid does not amount to a promise not to seek a holding of their invalidity.”

This essentially allows patent licensees to “have their cake and eat it too.” By paying for a license, they immunize themselves from claims of patent infringement and avoid the risk of treble damages awards and injunctions prohibiting the sales of their products. While they’re protected, they can at the same time pursue litigation challenging the validity of the patents and thus their obligation to pay royalties.

To block this shield/sword scenario, patent licensors often include “no challenge” language in their licenses, such as the following:

Termination for Patent Challenge. If Licensee or any of its Affiliates challenges under any court action or proceeding, or before any patent office, the validity, patentability, enforceability, scope or non-infringement of any Patent, or initiates a reexamination of any Patent, or assists any Third Party to conduct any of the foregoing activities (each, a “Challenge”), Licensor will have the right to immediately terminate this Agreement.

As a recent law review article notes, “A considerable debate has emerged as to whether courts should enforce these ‘challenge clauses.’” The article concludes that such clauses can violate antitrust law, although no court has yet held that.

In fact, a recent federal court decision upheld such a clause. In Transocean Offshore Deepwater Drilling Inc. v. Noble Corp. Plc, the court found the clause enforceable as a “clear and unambiguous waiver.”

Thus, for the moment anyway, “no challenge” clauses can offer a measure of protection from patent challenges for licensors.