MedImmune Sterne Kessler Goldstein Fox by alicejenny


									 Patent Licensing in the
Wake of MedImmune, eBay,
   KSR and Microsoft

    Timothy J. Shea, Jr. – Director
    Sterne, Kessler, Goldstein & Fox P.L.L.C.

    Drafting and Negotiating Patent
    License Agreements
    West Legalworks - One Day Workshop

    Boston, MA
    June 14, 2007

• Several very significant decisions
  by U.S. Supreme Court in patent
  cases within the past year

• Cases are changing the rules of the
  game for patent licensing

• Reflects heightened interest of
  Court in patent cases

• Reasons for heightened scrutiny:

      • Increased value of technology and IP in U.S. economy

      • Increase in number of patents sought and granted

      • Increased public awareness of importance of patents
          – NTP v. Research in Motion (Blackberry case)

      • Rise of patent holding companies
          – NTP

      • Perception that patents are stifling innovation more than
        promoting it
          – FTC Report


• Common Themes:

  – Federal Circuit reversed

  – Traditional legal principles in areas such
    as equity and jurisdiction apply equally to
    patent cases
     • No special rules for patent disputes

  – Elevation of helpful guidelines to rigid
    rules by Federal Circuit is improper


• Result:
  – Elimination of bright line rules relied on by
    Federal Circuit is leading to greater
    uncertainty in areas such as permanent
    injunctions, DJ jurisdiction, obviousness

  – Incremental erosion of patentee’s power (or
    at least return to pre-Fed. Cir. Level)

  – Playing field shifting in favor of defendants
    and licensees

eBay Inc. v. MercExchange L.L.C
• 126 S.Ct.1837 (May 15, 2006)
   – Unanimous decision (Thomas)

• Issue: Does traditional four-factor test for
  permanent injunctive relief apply to patent

• Background:
   – MercExchange in business of patent licensing

   – Patent at issue was business method patent for
     electronic market for sale of goods between private
   – MercExchange sought to license patent to eBay
       • Had previously licensed it to other companies

eBay Inc. v. MercExchange L.L.C
• No agreement 0 MercExchange filed suit

• Dist. Ct.
   – Jury found patent valid and eBay had infringed
   – Permanent Injunction denied
       • D. Ct. concluded award of damages sufficient

• Fed. Cir. Reversed
   – Applied “general rule that courts will issue permanent
     injunctions against patent infringement absent
     exceptional circumstances”

eBay Inc. v. MercExchange L.L.C

• Supreme Court reversed Fed. Cir.
  – “well-established principles of equity” require
    plaintiff seeking permanent injunction to
    satisfy 4-factor test:
       1.   irreparable injury
       2.   remedies at law (e.g. money damages)
       3.   balance of hardships between plaintiff and
       defendant justify PI
       4.   public interest not disserved by PI


eBay Inc. v. MercExchange L.L.C
• Fed. Cir. erred in holding statutory right
  to exclude alone justifies presumption
  the injunction should be granted

• Court looked to Patent Act
   – Injunctions “may” issue “in accordance with
     principles of equity”

• Copyrights
   – Similar right to exclude, but no special rule
     for injunctions
      • Traditional rule applies
eBay Inc. v. MercExchange L.L.C
• Neither Dist. Ct. nor Fed. Cir. Applied proper
   – Dist. Ct. erred in concluding that MercExchange’s
     willingness to license and lack of commercial activity
     practicing patents meant could not show irreparable
       • Court notes universities and independent inventors who
         seek to license may still meet 4-prong test

   – Fed. Cir. Erred in concluding injunction should be
     denied only in exceptional circumstances

• S. Ct. did not opine on appropriateness of
  injunction in this case

eBay Inc. v. MercExchange L.L.C
• Roberts Concurrence (Scalia, Ginsburg)
   – Notes “long tradition” of granting injunctive relief in
     “vast majority” of patent cases
   – Suggests tradition should continue

• Kennedy Concurrence (Stevens, Souter,
   – notes tradition of granting injunctions but suggests
     recent developments may require change
       • Rise of licensing industry
       • Questions business method patents
       • Quotes FTC report on innovation

eBay Inc. v. MercExchange L.L.C

• Kennedy concurrence
  – “When the patented invention is but a
    small component of the product the
    companies seek to produce and the
    threat of an injunction is employed
    simply for undue leverage in
    negotiations, legal damages may well
    be sufficient to compensate for the
    infringement and an injunction may
    not serve the public interest.”

Injunctive Relief after eBay

• Survey of approximate two dozen post-
  eBay cases
  – Injunction granted in about 70% of cases
     • Very likely where direct competitors, competing
       products, loss of market share, harm to reputation
  – Injunction denied
     • More likely where plaintiff not practicing invention,
       established licensing program, significant harm to
       business of infringer
         – Finisar Corp. v. Directv Group, Inc.
             » Finisar not practicing invention
             » Injunction would put Direct TV out of market
         – Z4 Techs., Inc. v. Microsoft
             » No irreparable harm, hardship for Microsoft
eBay – Impact on Licensing

• Injunctions no longer automatic

• Risk to potential infringer mitigated

• Injunctions even more difficult for patent

• Primary weapon of trolls (i.e., threat of
  shutting down potential infringer’s
  business) now less potent
MedImmune, Inc. v. Genentech, Inc.

• 127 S.Ct. 764 (Jan. 7, 2007)
  – Scalia
  – 8-1
• Issue: Must a patent licensee terminate
  or be in breach of license before it can
  seek a declaratory judgment that the
  underlying patent is invalid,
  unenforceable, or not infringed?

• Answer: No

MedImmune, Inc. v. Genentech, Inc.

• Background
     • MedImmune entered into agreement with
       Genentech in 1997 to license “Cabilly” patent and
         – Covered MedImmune’s product Synagis

     • Cabilly II issued in 2001
         – Genentech sent letter to MedImmune stating
           royalties due on Cabilly II

     • MedImmune disputed validity, but paid royalties
       under protest rather than risk treble damages and
       injunction preventing sale of Synagis (80% of
     • MedImmune brought DJ action

MedImmune, Inc. v. Genentech, Inc.

• Dist. Ct. dismissed for lack of
  subject-matter jurisdiction
  – Citing Gen-Probe v. Vysis, Inc. (Fed.
    Cir. 2004)
     • Held that patent licensee in good standing
       cannot establish Art. III case or
       controversy regarding validity,
       enforceability, or scope of patent because
       license “obliterate[s] any reasonable
       apprehension” that licensee will be sued

• Fed. Cir. affirmed
MedImmune, Inc. v. Genentech, Inc.

• Supreme Court reversed
  – Set forth standard for DJ jurisdiction
     • “[W]hether the facts alleged, under all the
       circumstances, show that there is a
       substantial controversy, between parties
       having legal interests, of sufficient
       immediacy and reality to warrant the
       issuance of a declaratory judgment.”

  – Court noted that no dispute that
    standard would be met if MedImmune
    had ceased making payments.
MedImmune, Inc. v. Genentech, Inc.
  – However, as long as payments made, no
    risk of suit by Genentech

  – Court analogized to constitutional challenge
     • Where threatened action by government is
       concerned, no requirement to expose self to
       liability before bringing suit to challenge basis for
       the threat

     • Subject matter jurisdiction not precluded simply
       because threat-eliminating behavior was
       effectively coerced

MedImmune v. Genentech

 – Cited earlier decision in Altvater v.
   Freeman, 319 U.S. 359 (1943)
    • Patent licensee’s failure to cease
      payment of royalties did not render
      nonjusticiable dispute over validity of
    • Fact paid under injunction does not
      render distinguishable

MedImmune, Inc. v. Genentech, Inc.

  – “The rule that a plaintiff must destroy a large
    building, bet the farm, or (as here) risk treble
    damages and the loss of 80 percent of its
    business, before seeking a declaration of its
    actively contested rights finds no support in
    Article III.”

  – Court rejected Genentech’s argument that
    common-law rule that a party to a contract
    cannot challenge its validity and, at same
    time, reap its rewards applies

Impact of MedImmune

• Dramatic shift in balance of power
  between parties to existing license
  – Little downside to licensee in
    challenging validity of licensed patent
  – More power to licensee to compel
  – Increased uncertainty for licensors
     • No repose
     • Potential for sudden increase in litigation
Impact of MedImmune

• Potential licensees now have
  incentive to take license to reduce
  exposure then seek DJ

• Licensors must carefully examine
  existing license relationships
  – Where DJ more likely, determine if
    termination possible

Questions Unanswered by MedImmune

• Status of Licensee Estoppel
  – “We express no opinion on whether a
    nonrepudiating licensee is similarly
    relieved of its contract obligation
    during a successful challenge to a
    patent’s validity – that is, on the
    applicability of licensee estoppel
    under these circumstances.”

Questions Unanswered by MedImmune

• Legality of Contractual Limitations on
  Licensee Challenges?
  – Can licensors include provision that license
    will terminate if licensee challenges validity?
     • Not clear - presumption against restrictions on
       licensee’s right to challenge validity, but S. Ct. in
       MedImmune specifically declined to address Lear.
  – Other contractual provisions to consider:
     • Admissions that licensed patent examined and
     • Escalated royalties/milestones in event of suit?
     • Forum selection clauses?
     • Notice of suit?

Post-MedImmune Cases

• SanDisk Corp. v. STMicroelectronics (Fed. Cir.
  March 26, 2007)
• Appeal of Dist. Ct. dismissal of DJ action
• Background:
   – Parties are competitors in flash memory field
   – ST’s VP of IP and Licensing sent letter to CEO of
     SanDisk noting patents that “may be of interest” and
     seeking meeting to discuss cross-license
   – At cross-licensing meeting, parties discussed patent
     mapping and infringement analyses. However,
     parties said no plans to sue each other
   – Parties exchanged cross-licensing offers
   – A few weeks later, SanDisk filed DJ action

Post-MedImmune Cases

• SanDisk con’t
• D. Ct. granted ST’s motion to
  dismiss on ground SanDisk did not
  have reasonable apprehension of
  – “studies and determined infringement
    analyses . . . Did not constitute the
    requisite ‘express charges [of
    infringement] carrying with them the
    threat of enforcement.”

Post-MedImmune Cases

• SanDisk con’t.
• Citing MedImmune, Fed. Cir.
  – Recognized MedImmune as rejection
    of Fed. Cir. reasonable apprehension
    of suit test
  – Mere knowledge of existence of
    patent of another, even if perceived to
    pose infringement risk, will generally
    not give rise to DJ jurisdiction absent
    some affirmative act by patentee

Post-MedImmune Cases
• SanDisk con’t.
   – “We hold only that where a patentee asserts rights
     under a patent based on certain identified ongoing or
     planned activity of another party, and where that party
     contends that it has the right to engage in the
     accused activity without license, an Article III case or
     controversy will arise and the party need not risk a
     suit for infringement by engaging in the identified
     activity before seeking a declaration of its legal

   – Fed. Cir. Noted infringement analysis was essentially
     assertion of rights by ST based on specific, identified
     activity of SanDisk
       • Referred to infringement liberally at meeting
       • Asked for royalties
       • Statement that does not intend to sue does not moot
         actual controversy created by its acts.

Post-MedImmune Cases

• Bryson concurrence
  – Worried about “broad implications” of
  – “Therefore, it would appear that under
    the court’s standard virtually any
    invitation to take a paid license . . .
    Would give rise to an Article III case or
  – Predicts “sweeping change” in the law
    of DJ jurisdiction
Post-MedImmune Cases

• Dilemma:
  – May be able to avoid DJ by sending
    general offer to license without
    specifying infringing activity
  – However, may not be enough to put
    on notice.
  – Incentive for licensor to file suit then
    seek to negotiate license
     • File but don’t serve

Post-MedImmune Cases
• Teva Pharm. v. Novartis Pharm.
  (Fed. Cir. March 30, 2007)
  – Teva filed ANDA to market generic
    version of Novartis’ drug FAMVIR®
    • Para. IV cert. that did not infringe any of
      five patents listed by Novartis in Orange
  – Novartis sued Teva on drug patent
  – Teva sought DJ on four nonasserted
    method patents

Post-MedImmune Cases
• Teva v. Novartis
• D. Ct. dismissed DJ for lack of
• Fed. Cir. Reversed
  – Considered “all circumstances” and found
    actual case or controversy
  – Factors:
     • Listing in Orange Book
        – May not itself be enough for DJ but a factor
     • Teva’s submission of ANDA was act of
     • Purpose of Hatch-Waxman – to obtain patent
     • Existing litigation on drug patent

Post-MedImmune Cases

• Teva v. Novartis
  – Patent owner may not be able to sue
    on only select patents listed in Orange
    Book covering same product

  – Concurrence suggests Orange Book
    listing alone should be enough for DJ

Microsoft Corp. v. AT&T Corp.
• Decided April 30, 2007 (Ginsburg)
• Background
  – AT&T has patent on computer used to
    digitally encode and compress recorded
  – Windows OS contains software code that
    enables computer to do this
  – Microsoft sells Windows to overseas
    manufacturers who then install on computers
    and sell to public
     • Key – Microsoft provides master disk from which
       manufacturers make copies that are installed on

Microsoft Corp. v. AT&T Corp.

• AT&T sued Microsoft for infringement
  under 271(f)
  – 271(f)(1)
     • “Whoever without authority supplies or causes to
       be supplied in or from the United States all or a
       substantial portion of the components of a
       patented invention, where such components are
       uncombined in whole or in part, in such a manner
       to actively induce the combination of such
       components outside of the United States in a
       manner that would infringe the patent if such
       combination occurred within the United States,
       shall be liable as an infringer.”

Microsoft Corp. v. AT&T Corp.
• D. Ct. found Microsoft liable
• Fed. Cir. Affirmed

• Supreme Court reversed
   – Because Microsoft did not supply actual copies
     loaded on computers, no 271(f) liability
   – Here “component” was copy of Windows, not
     Windows in abstract
   – Ease of copying not relevant to analysis
   – Presumption against extraterritoriality
   – To prevent copying abroad, must pursue patents
      • Problem for software patents

KSR Int’l v. Teleflex Inc.

• Decided April 30, 2007 (Ginsburg)
• Patent on adjustable pedal assembly
  with electronic pedal position sensor
  attached to a fixed pivot point
• Prior art taught
  – Pedal assembly with electronic sensor on
    pivot point
  – Sensors of type claimed
  – Location of sensor on fixed portion of pedal

KSR Int’l v. Teleflex Inc.

• D. Ct. granted SJ of obviousness
• Fed. Cir. Reversed

  – Said D.Ct. did not apply teaching,
    suggestion, motivation (TSM) test
    strictly enough
     • References needed to address precise
       problem facing inventors in order to be

KSR Int’l v. Teleflex Inc.

• Supreme Court reversed (again)
  – Fed. Cir. applied TSM test in overly
    narrow, rigid manner
     • Graham test is flexible
     • Improvement must be more than
       predictable use of prior art elements
     • Not limited to references dealing with
       precise problem addressed
        – Any need or problem known in the field and
          addressed by patent can provide reason for
          combining elements
     • “Obvious to try” could be enough in some
KSR Int’l v. Teleflex Inc.

• Impact of KSR
  – TSM test not dead
     • Still considered “helpful insight” but not overriding
  – Return to flexible approach
     • Less difficult to make out prima facie case were
       combination of known elements
  – Concern about increased use of hindsight at
  – Licensing
     • More leverage to licensees and potential infringers
         – Particularly in view of MedImmune and eBay

Patent Licensing in the Wake of MedImmune,
          eBay, KSR and Microsoft

             Thank You

          Timothy J. Shea, Jr.
Sterne, Kessler, Goldstein & Fox, P.L.L.C.
             (202) 772-8679


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