The Licensed Patent Challenge

This year’s theme is “change” – and specifically the forces of change impacting the business of licensing.  This was a somewhat risky theme because the whole year could go by without anything significant happening and no real change.  So you can imagine my relief on January 9th, when the Supreme Court handed down its decision in the MedImmune v. Genetech case, the biggest licensing decision since Lear v. Atkins in 1969.  In the MedImmune decision, the court held that a licensee may keep paying royalties while challenging the validity of a licensed patent.  This changes the fundamental calculus of determining whether to revisit a closed deal because you can avoid any risk of triple damages by continuing royalty payments while challenging validity.

Now this was exciting.  LES had even submitted a friend of the court brief prepared pro bono by our friends at Finnegan Henderson asking for clarification on a variety issues.  We were asking for clarification on issues fundamental to the sanctity of a license and directly related to the issue before the court like “whether or not a promise not to challenge the validity of a patent is enforceable.”  So again, you can imagine my excitement as I read through the decision, looking for our questions to be answered.  Maybe LES would even get a nod of approval from the court for raising these commercially significant issues? 

As I read through the decision, my hopes were dashed.  In typical Supreme Court fashion, the Court addressed only what they believed was the issue at hand and specifically stated they were not addressing the question of “whether or not a promise not to challenge the validity of a licensed patent is enforceable.”  LES had asked the very question that would need an answer to avoid future litigation – can I avoid the result of the MedImmune case by extracting a promise from a licensee not to challenge validity?   

The Supreme Court has the ultimate say on these matters.  However, we live in the trenches where legal theory meets commercial reality.  It would be nice to know they are listening.  I look forward to an upcoming decision to see what they do with the standard for determining which inventions are obvious in the KSR v. Teleflex case. 

Some may wonder why this decision matters and what its commercial impact may be.  Thanks to the 186 respondents that participated in our “snapshot” survey in the wake of the decision, we know that LES members immediately realized the impact of the decision.

About 80% of respondents said the case holds large implications for the licensing profession.  79% said that patent licensees are somewhat more likely or much more likely in the future to challenge the validity, infringement or enforceability of a patent after consummating a license agreement when faced with substantial ongoing royalties or milestones.  57% said that patent licensors are somewhat more likely or highly more likely to seek higher upfront payments to offset the downside risk of being able to collect future royalties or milestones.

So we are left with change, and more uncertainty.  In the absence of guidance from the Supreme Court, smart licensing professionals and their lawyers are creatively drafting clauses that they believe will withstand challenge to circumvent the decision.  Will we have to wait another 40 years to get an answer as to the enforceability of these clauses?  We hear licensors saying things like “should I sue first and then conduct a license negotiation believing that there is a better chance a promise not to challenge validity from a licensee will more likely be upheld if the agreement looks more like a settlement of litigation”?  Is this progress?  I’m not sure.  But it is change, and for that I am grateful.