Publications: Intellectual Property Licenses Need to be Reviewed in Light of Recent Supreme Court MedImmune and KSR Decisions and Recent DOJ/FTC Antitrust Enforcement Statements

On January 9, 2007, the United States Supreme Court changed the landscape for intellectual property licensees and licensors by finding, in an 8-1 decision, that a patent licensee has standing to challenge the validity of a patent despite having entered into a licensing agreement with respect to the patent. The Court’s decision in MedImmune, Inc. v. Genentech, Inc. reversed a line of decisions authored by the Federal Circuit which had restricted the ability of licensees to seek declaratory judgments regarding the validity of licensed patents. The prior law had strongly suggested that one could not challenge the patent without first repudiating the license agreement. Justice Antonin Scalia referred to this choice as a “bet the farm” mentality which is not required to trigger a “case or controversy” under Article III of the Constitution.

Separately, on April 9, 2007, the DOJ and FTC issued a long-expected report entitled “Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition.” This report summarized extensive hearings on the subject conducted in 2002. The report supplements and clarifies the DOJ/FTC 1995 Joint Guidelines For The Licensing of Intellectual Property.

On April 30, 2007 the Supreme Court unanimously held, in KSR International v. Teleflex Inc., that the Federal Circuit had made it too difficult to establish patent invalidity through the obviousness test. KSR will make it harder for patentors to defend their patents against claims of invalidity.

Implications of MedImmune, KSR and the New DOJ/FTC Report for Intellectual Property Licensors

The MedImmune and KSR decisions have serious consequences for intellectual property owners who have licensed their innovations: Licensees can now challenge the validity of the patent while still getting the benefit of using the patent under the terms of the license. Because of KSR, a licensee now has a better chance of establishing patent invalidity.

MedImmune will require several changes in licensing strategy on the part of licensors:

1. Rigorous Evaluation of Licenses Needed
   One can no longer assume that because you have licensed your patent, you will be immune from suit for patent infringement. This suggests the need for a rigorous evaluation of enforceability of license arrangements.
2. Correction/Prevention of Potential Patent Misuse
   Licensors should review their existing licensing agreements to determine whether any of the terms of those agreements could be classified as patent misuse. The logic of MedImmune is easily extended to the terms of the license itself.

   Patent misuse is an equitable doctrine that applies when a licensor is found to have improperly used their patent to obtain advantages outside the four corners of the patent itself. Various forms of misuse are identified in case law, in the DOJ/FTC Joint Guidelines For the Licensing of Intellectual Property, and in the new FTC/DOJ Report and include such terms as tying the licensing of a patent to payment for another patent or product, certain types of grantback clauses, obligations to pay royalties after the expiration of one or more patents, etc. If patent misuse is found, a licensee will not have to pay royalties until the misuse is rectified, and may even seek a return of royalties paid during the term of misuse.

3. Insertion of Defensive Licensing Terms
   Licensors should attempt to insert provisions in their licensing agreements that deter MedImmune-type challenges such as allowing termination of the license in the case of a challenge to the license, arbitration clauses and fee-shifting provisions. While it is not clear if all of these terms will be enforced by courts, a solid licensing strategy will help to build as imposing a bulwark against litigation as is possible.

Implications of MedImmune, KSR and the New DOJ/FTC Report for Intellectual Property Licensees and Licensors

The MedImmune and KSR decisions have created opportunities for intellectual property licensees who feel burdened by the amount of royalty payments, the terms of the license, or who have a reasonable belief that the patent was improperly issued or is being applied beyond the allowable scope of claims. Licensees now have the opportunity to challenge the validity of the patent while still getting the benefit of using the patent under the terms of the license. In addition, current license terms may not be in accord with the intentions expressed in the April 2007 DOJ/FTC Report. Alternatively, the new DOJ/FTC Report may be read to allow certain licensing practices that may previously have been seen as misuse.