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Biotech patent licensees may be able to have their patent and invalidate it too

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For biotechnology companies, the decision to license a potentially problematic patent for a product years from commercialization is a difficult one, especially when the royalties will cut into precious margins. And what if the patent under consideration is of questionable validity?

Biotechnology companies often lean toward taking the license because the royalties are far less than the triple damages and attorneys' fees accompanying willful infringement and, for start-ups, because potential funding sources may want to receive such comfort in diligence reviews.

Once licensed, the common wisdom has been that the licensee must breach the license agreement (i.e., stop paying) in order to challenge the licensed patents -- thereby exposing itself to a breach of contract and patent infringement suit.

A case that is currently before the Supreme Court could clarify this issue in favor of disgruntled licensees. The case involves a dispute between MedImmune Inc. and Genentech Inc. relating to a valuable patent on processes for making antibodies. MedImmune has a license from Genentech and pays Genentech royalties. MedImmune has simultaneously filed a lawsuit seeking a declaration from the court that the patent is invalid.

Previous case law established that a patent licensor cannot use the fact that a licensee once paid royalties to prevent the licensee (who has ceased paying) from attacking the validity of the patent. (The licensor, of course, would then be free to sue the erstwhile licensee for patent infringement.)

This case is different because MedImmune has continued to pay royalties and has otherwise complied with the license agreement, so Genentech cannot sue MedImmune for patent infringement.

The case will turn on whether MedImmune may launch a declaratory judgment attack on the patent while benefiting from the shelter of the license agreement. The U.S. constitution does not allow courts to hear a case if there is no genuine "case or controversy." This principle is reflected in the federal law that governs declaratory judgment lawsuits. The lower courts decided that there was no actual controversy at stake because, as a compliant licensee, MedImmune could not be sued for patent infringement or breach of the license agreement.

However, the Supreme Court, which recently heard arguments in this case, may come to a different conclusion. The MedImmune case comes at a time when the US patent system is under close legislative and industry scrutiny. Validating the "pay and challenge" strategy would give an important tool to those who want to weed out weak patents.

Licensors and licensees will be keeping close tabs on the Supreme Court's decision, which is expected by mid-2007. Speaking of licensors, how might they protect themselves? In most cases, a licensor cannot contractually oblige a licensee to refrain from attacking the licensed patents. It remains to be seen whether a license provision that simply states that the license will terminate if the licensee challenges the patent would be enforceable in the United States. If MedImmune has its way, licensors are sure to give it a try.

Submitted by Lance Kurata, a Member, and Susan Foster, an Associate, with Mintz Levin PC in San Diego.

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