MedImmune, SanDisk and the new standard for declaratory judgments by qtq21276

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									MedImmune, SanDisk and Their Effect on Patent Licensing

                  Lauren C. Bruzzone
           Senior IP Counsel, Global Services
      International Business Machine Corporation
               MedImmune, SanDisk and Their Effect on Patent Licensing 1

1. “Previously”: Declaratory Judgments and Patent Licensing Activities Prior to
MedImmune

The Declaratory Judgment Act, 28 U.S.C.§ 2201 provides:

             (a) In a case of actual controversy within its jurisdiction…
       any court of the United States, upon the filing of an appropriate
       pleading, may declare the rights and other legal relations of any
       interested party seeking such declaration, whether or not further
       relief is or could be sought. Any such declaration shall have the
       force and effect of a final judgment or decree and shall be
       reviewable as such. 2

Prior to MedImmune and its progeny SanDisk, the Federal Circuit had held that an actual
controversy exists in patent cases only if there is:
“(1) an explicit threat or other action by the patentee, which creates a reasonable
        apprehension on the part of the declaratory plaintiff that it will face an
        infringement suit, and
(2)      present activity which could constitute infringement or concrete steps taken with
        the intent to conduct such activity” 3

The prevailing interpretation of this “reasonable apprehension” standard was that a patent
owner could make an explicit assertion of infringement to a prospective licensee without
fear of a declaratory judgment action so long as it:
a.      did not threaten to sue for infringement, or
b.      did not engage in other conduct that would lead to a reasonable apprehension of
        suit on the part of its prospective licensee.

(Note that the term “patent owner” is used rather loosely through out this article to
describe a party with a right to assert a patent against another party. Hence, this term
includes both the assignee of a patent and an exclusive licensee. 4 )

2. MedImmune: MedImmune, Inc. v. Genentech. Inc., 127 S.Ct. 764 (2007)

In MedImmune, the Supreme Court summarily rejected the Federal Circuit’s “reasonable
apprehension” standard.

The issue brought before the Court in MedImmune was whether a patent licensee was
required to terminate or breach its license agreement before it could seek a declaratory
judgment that the licensed patent was invalid, unenforceable or not infringed. Using the
then current standard, the Federal Circuit originally answered “yes” -- without
termination or breach there was no reasonable apprehension of being sued. 5

When the matter was appealed, however, the Supreme Court reversed the Federal
Circuit’s holding, reasoning that requiring the licensee to subject itself to penalties for


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breach (or termination) before it could challenge the patents in question essentially
contravened the purpose of the Declaratory Judgment Act. As expressed by the Court:

       “[Although a declaratory judgment plaintiff may eliminate an]
       “imminent threat of harm by simply not doing what he claimed a
       right to do .. [t]had did not preclude subject-matter jurisdiction
       [where] the threat-eliminating behavior was effectively coerced.” 6

and further:
        “The dilemma posed by the coercion – putting the challenger to the
        choice between abandoning his rights or isking prosecution – is a
        dilemma that it was the very purpose of the Declaratory Judgment
        Act to ameliorate.” 7

The Court noted that the Federal Circuit’s reasonable apprehension suit test was a)
contrary to three earlier Supreme Court cases (stretching back to 1937) which found
declaratory judgment jurisdiction in the absence of any apprehension of suit and b) in
tension with a more recent fourth case. 8 One notes that this citing of precedent makes it
unlikely that the Court will change its direction in the immediate future.

3. SanDisk: SanDisk Corp. v. ST Microelectronics Inc. 480 F.3d 1372 (Fed. Cir. 2007)

The SanDisk case is particularly instructive to patent owners who are contemplating
licensing their patents to purported infringers since this case discusses how the actions of
a patent owner can give rise to an actual case or controversy sufficient to support a
declaratory judgment action by the prospective licensee. 9

As reported in the Federal Circuit opinion 10 , the activities of SanDisk will be familiar to
any patent owner who has engaged in licensing activities. Specifically, ST
Microelectronics:
-      made a presentation that mapped SandDisk’s products to ST Microelectronics
       patents on an element by element basis;
-      during discussions referred to “ongoing infringements” by SanDisk and the
       resulting need for SanDisk to obtain a license;
-      provided documentation containing 14 patents, a reverse engineering report for
       SanDisk products and a detailed infringement analysis (presumably claim charts);
       and
-      asserted a right to a patent license fee based on its infringement analysis.

It should be noted, however, that ST also stated that it had no plans to sue SanDisk. 11

Noting that this situation differed from the MedImmune existing license case, the Federal
Circuit nevertheless used MedImmune as a basis to institute a new standard for
declaratory judgment activities in licensing situations. First, the Federal Circuit stated
that jurisdiction in this context would not arise from the mere knowledge of the existence
of a patent or even a perceived risk of infringement but would rather require an



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affirmative act by the patent owner. 12 Second, and more critical to a potential licensor,
the Federal Circuit established a new set of “triggers.” Specifically, the court stated:

       Article III jurisdiction may be met where the patentee takes a
       position that puts the declaratory judgment plaintiff in the position
       of either pursuing arguable illegal behavior or abandoning that
       which he claims the right to do. We need not define the outer
       boundaries of declaratory judgment jurisdiction, which will depend
       on the application of the principles of declaratory judgment
       jurisdiction to the facts and circumstances of each case. 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 rights. 13

At the risk of repetition, in essence, the new standard requires:
-       notification by the patent owner that a specific ongoing (or planned activity) of
        the potential licensee infringes or requires a patent license under a (implied
        specific) patent, AND
-       the potential licensee contends it has the right to engage in that activity without a
        license.

One notes that in the absence of the second prong of the test there would not be a “actual
controversy” for a totally different reason.

On a more substantive note, SanDisk is ambiguous about the activities that would satisfy
the second prong of the test. More importantly from the standpoint of the licensor, the
court was silent on how the prospective licensee need made its position known to the
prospective licensor. However, the practical effect of the lapse is probably de minimis:
one can assume the prospective licensor would be able to make a reasonable inference of
that position when the licensor receives notice of the declaratory judgment complaint.

4. Practical Effects and Possible Strategies on Licensing Efforts in Light of SanDisk

a. Safe Harbors Are No Longer Safe

Prior to MedImmune and it progeny, hopeful licensors could avoid creating an “actual
controversy” – and so avoid a potential declaratory judgment suit-- by promising not to
not sue the potential licensee 14 or making clear the to the potential licensee that it could
obtain a license under the asserted patents. 15 SanDisk makes clear that these and other 16
safe harbors previously enjoyed by licensors are no longer available.

b. Tension Between Accruing Damages under 287(a) and the New Standard



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More problematically, there is a tension (at least if one would prefer to avoid the
courtroom) between the demands of 35 U.S.C.§287(a) and the new standard.

35 U.S.C.§ 287(a) Limitation on damages and other remedies; marking and notice,
provides that:

     (a) … In the event of [a patent owner’s failure to mark its patented
    article with notice that it is patented], no damages shall be recovered
    by the patentee in any action for infringement, except on proof that
    the infringer was notified of the infringement and continued to
    infringe thereafter, in which event damages may be recovered only for
    infringement occurring after such notice.” 17

Accordingly, it is normally in the licensor’s interest to prove notice as early as possible in
the course of licensing discussions in order to begin accruing potential damages (which
presumably would be accounted for in the patent royalty negotiations). While filing of an
action for infringement constituted notice under the statute, 18 this action is generally the
last step taken by a licensor – and generally only at the end of an unsuccessful patent
negotiation. In the past, most licensors have fulfilled the notice requirements (and started
accruing damages) by providing the potential licensees with specific notice of the patents
in question and the specific accused product, system, method or process. 19

This being so, it seems fair to say that it is not obvious to the casual observer how one
can a) provide adequate notice under 287(a) (with reference to specific patents and
specific infringing products) but b) avoid the SanDisk standard of “assert[ing] rights
under a patent based on certain identified ongoing or planned activity of the other party.”
Judge Bryson makes some reference to this conundrum. Bryson considered a proposed
solution that the license merely state in its notice that the product “may” be covered by a
patent. 20 As he points out, in this situation, all the potential licensee need to is inquire
whether the patent owner believes there is infringement. A “yes” answer (or
equivocation) satisfies the declaratory judgment standard; a “no” answer is a damaging
admission. 21

c. Pre-negotiation confidentiality agreements

A SanDisk footnote 22 suggests that the patent owner can avoid risk of a declaratory
judgment action by a pre-negotiation confidentiality agreement with the licensee. Again,
the pragmatic Judge Bryson points out that only a party uninterested in maintaining its
declaratory judgment option open would be likely to agree – leaving the licensor the
unpalatable options of a) retreating from the field, b) initiating an infringement suit or c)
working without the agreement. However, since parties may be have other business
relationships or other external factors may be in play, there are possibly situations where
this might be a viable tactic. 23




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d. Filing a Preemptive Infringement suit

One commentator suggested 24 that a patent owner might file – but not serve – a
preemptive infringement suit against its potential licensee prior to the negotiations.
While the first filed suit would take precedence over any subsequently filed declaratory
judgment action (giving the licensor control of the forum and a presumptive advantage in
negotiations), there are several disadvantages to this course of action: filing a suit
introduces a certain hostility into subsequent talks; filing a suit is counter to the
underlying desire of the licensor to stay out of court; and, unless the licensor can obtain
an extensions, the filing starts a 120 day clock ticking in which to conclude the
negotiations. 25

5. Conclusion

There seems little doubt that any patent owner actively involved in a patent licensing
program has a significantly increased chance of facing a declaratory judgment suit.
While confidentiality agreements or preemptive infringement suits may be of use in
certain circumstances, in the majority of cases, the licensor will have to manage a rather
fine time line in which he weighs accruing additional damages by providing notice with
triggering the new declaratory judgment standard.

In this environment, perhaps the best course is the most pragmatic: consider the
possibility of a declaratory judgment action merely an increased cost of doing business
and counter it by more rigorous “scrubbing” of the patents in question. This would, at
least, minimize the possibility of a successful declaratory judgment.




1
  Disclaimer: the opinions expressed in this paper are those of the author and do not represent the views or
opinions of her employer.
2
  The full text of 28 USC §2201 is as follows: TITLE 28--JUDICIARY AND JUDICIAL PROCEDURE-
PART VI--PARTICULAR PROCEEDINGS - CHAPTER 151--DECLARATORY JUDGMENTS
Sec. 2201. Creation of remedy
   (a) In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other
than actions brought under section 7428 of the Internal Revenue Code of 1986, a proceeding under section
505 or 1146 of title 11, or in any civil action involving an antidumping or countervailing duty proceeding
regarding a class or kind of merchandise of a free trade area country (as defined in section 516A(f)(10) of
the Tariff Act of 1930), as determined by the administering authority, any court of the United States,
upon the filing of an appropriate pleading, may declare the rights and other legal relations of any
interested party seeking such declaration, whether or not further relief is or could be sought. Any
such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as
such.
    (b) For limitations on actions brought with respect to drug patents see section 505 or 512 of the Federal
Food, Drug, and Cosmetic Act.
Emphasis added. For historical and revision notes, amendments, effective dates, etc. refer to:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=browse_usc&docid=Cite:+28USC2201
3
  BP Chems. Ltd. V. Union Carbide Corp., 4 F.3d 975, 978 (Fed. Cir. 1993)




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4
   The Courts generally use the term “patentee.” 35 USC §100 (d) defines the word as follows: “
‘patentee’ includes not only the patentee to whom the patent was issued but also the successors in title to
the patentee.“ One notes that this definition does not include exclusive licensees who are able to bring
patent infringement suits and, if the license provides, sublicense the patents.
5
   MedImmune, Inc. v. Genentech, Inc. 427 F.3d 958 (Fed. Cir. 2005)
6
   MedImmune Inc. v Genentech, Inc, 127 S.Ct. 764 (2007), 772.
7
  Ibid. 773
8
  Ibid. 774 n.11 referencing Altvater v. Freeman, 319 U.S. 359 (1943), Maryland Casualty Co. v. Pacific
Coal & Oil Co., 312 U.S. 270 (1941) and Aetna Life Ins. Co. v. Haworth, 300 U.S. 227 (1937). The more
recent – and directly applicable case – was Cardinal Chemical Co. v. Morton Int’l, Inc., 508 U.S. 83 (1993)
which held that appellate affirmance of a judgment of noninfringement, eliminating any apprehension of
suit, does not moot a declaratory judgment counterclaim of patent invalidity.
9
  SanDisk is actually one of two (as of this writing) Federal Circuit opinion addressing the effects of
MedImmune. Teva Pharmaceuticals USA Inc. v. Novartis Pharmaceuticals Corp. 482 F.3d 1330 (Fed.
Circ. 2007) also confirmed the demise of the “reasonable apprehension of suit” test but it does not address
licensing.
10
   SanDisk Corp. v. ST Microelectronis Inc. 480 F.3d 1372 (Fed Cir. 2007), 1382.
11
   Ibid. 1376
12
   Ibid. 1381
13
   Ibid. 1381
14
   Amana Refigeration Inc. v. Quadlux Inc., 172 F.3d 852, 855 (Fed. Cir. 1999)
15
   Phillips Plastics Corp. v. Kato Hatsujou Kabushiki Kaisha, 57 F.3d 1051, 1053 (Fed. Cir. 1995)
16
   As recently as 1996, forcing a competitor to “choose between abandoning a particular business venture
or bringing matters to a head by engaging in arguable infringing activity” was considered lawful
commercial prerogatives that would not trigger the right to a declaratory judgenet. Cygnus Therapeutic
sys. V. ALZA Corp. 92 F.3d 1153, 1160 (Fed. Cir. 1996)
17
    the complete texst is as follows: 35 U.S.C. §287 Limitation on damages and other remedies; marking
and notice. a) Patentees, and persons making, offering for sale, or selling within the United States any
patented article for or under them, or importing any patented article into the United States, may give notice
to the public that the same is patented, either by fixing thereon the word "patent" or the abbreviation "pat.",
together with the number of the patent, or when, from the character of the article, this cannot be done, by
fixing to it, or to the package wherein one or more of them is contained, a label containing a like notice. In
the event of failure so to mark, no damages shall be recovered by the patentee in any action for
infringement, except on proof that the infringer was notified of the infringement and continued to infringe
thereafter, in which event damages may be recovered only for infringement occurring after such notice.
Filing of an action for infringement shall constitute such notice. ( For the complete text of 287 refer to
http://www.uspto.gov/web/offices/pac/mpep/documents/appxl_35_U_S_C_287.htm)
18
   Ibid.
19
   Amsted Industries v. Buckeye Steel Castings Co. 24 F.3d 178, 186-87 (Fed. Cir. 1994).
20
   This was accounted adequate for notice purposes in SRI Int’l Inc. v. Advanced Tech. Lab., 127 F.3d
1462 1470 (Fed. Cir. 1997)
21
   SanDisk, 480 F.3d at 1385 (Byrson, J., concurring)
22
   Ibid. 1375 n.1. One notes this is not supported by any explanation or rationale.
23
   Note that licensor statements during negotiations are not protected under Rule 408 of the Federal rules of
Evidence. The SanDisk court made clear that Rule 408 applies only to evidence of efforts towards
compromising a claim in litigation – and no such litigation was present in the SanDisk situation. Since one
normally engages in licensing negotiations to AVOID litigation, one can safely dismiss the 408 option.
24
   Moriarty, New “Hair Trigger” Can Turn Negotiations into Litigation, IP Law/360, April 4, 2007.
25
    Federal Rules of Civil Procedure 4(m) Time Limit for Service.
If service of the summons and complaint is not made upon a defendant within 120 days after the filing of
the complaint, the court, upon motion or on its own initiative after notice to the plaintiff, shall dismiss the
action without prejudice as to that defendant or direct that service be effected within a specified time;
provided that if the plaintiff shows good cause for the failure, the court shall extend the time for service for



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an appropriate period. This subdivision does not apply to service in a foreign country pursuant to
subdivision (f) or (j)(1). For entire text see: http://www.law.cornell.edu/rules/frcp/Rule4.htm




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