Earlier today, in Medtronic, Inc. v. Mirowski Family Ventures, LLC, the Supreme Court held that "when a licensee seeks a declaratory judgment against a patentee to establish that there is no infringement, the burden of proving infringement remains with the patentee." Justice Breyer wrote the opinion for a unanimous Court, reversing the Federal Circuit's earlier opinion from 2012. Based on the tenor of the questioning during oral argument, this outcome was not surprising. However, this case now disrupts the balance of power between a patent holder and a licensee. It is often the case that an agreement reached between two parties is mutually beneficial to both. Now, thanks to this opinion, licensees may be emboldened to subsequently force the patent holder to prove that the licensed products or processes infringe the patents at issue. The licensee would have little risk in doing so because the patent holder cannot assert counterclaims. Therefore, the best that can be hoped for from the patentee's point of view is to maintain the status quo. This could end up creating a disincentive for patent holders from entering into licensee agreements. At the very least, patent holders will need to be mindful of this decision and its impact while negotiating the terms of any license.
As we have reported previously, this case was the inevitable consequence of the Supreme Court's MedImmune decision, which allowed a patent licensee to challenge the validity and/or non-infringement of a patent in a DJ action without repudiating the license. In that case, the Court reasoned that "[t]he 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 legal rights finds no support in Article III." Medlmmune, Inc. v. Genentech, Inc., 549 U.S. 118, 134 (2007). However, in such cases, the licensee is not actually under the threat of an infringement action, so the Court essentially created a patent-license exception to the Article III case-or-controversy requirement. In fact, even though the licensee now has standing to bring such a DJ action, the patent holder does not have reciprocal standing to even bring infringement counterclaims. This contributes to the dichotomy by which the patent holder has everything to lose and nothing to win.
In the present case, the Court relied on three legal propositions to conclude that the burden of proving infringement should remain with the patentee in MedImmune-type cases: (1) "the burden of proving infringement generally rests upon the patentee," (2) "'the operation of the Declaratory Judgment Act'" is only procedural, and (3) "'the burden of proof' is a 'substantive aspect of a claim.'" The Court did, however, point to three "practical considerations" that also lend support to this conclusion. The first stems from the potential scenario that Justice Scalia raised during oral argument:
Let's assume that we put the burden of proof where you [the patent holder] want it. Okay? So this declaratory judgment action is defeated. All right? Nonetheless, they [the licensee] say: Still and all, we are going to go ahead and not pay any royalties. And then you bring - - you bring an infringement action, right?
Justice Scalia noted that in such a scenario, the entire case would need to be relitigated, because the best that the patent holder can establish in the original DJ case "is that [the licensee] didn't prove non-infringement." Justice Breyer posed essentially the same scenario, but considered what would happen if the evidence was inconclusive, such that neither side could establish infringement/non-infringement by a preponderance of the evidence. The result would be that both sides would lose the infringement question in the respective actions, thereby leaving that issue undecided and ultimately resulting in uncertainty among the parties. To head off any criticism that this scenario might be "fanciful," Justice Breyer pointed out that the Restatement (Second) of Judgments provides that relitigation of an issue is not precluded if the burden of proof is different in the second case. Thus, this is potentially a real concern.
The logic of the other two "practical considerations" is more suspect. First, Justice Breyer repeated the concern of Medtronic (the licensee in this case), pointing out that "an alleged infringer" would have to "negate every conceivable infringement theory." Notwithstanding the fact that referring to the licensee as an "alleged infringer" is somewhat misleading, because the license would make any allegation of infringement impermissible, the underlying assumption is questionable. To defeat an allegation of infringement of one or more patent claims, an alleged infringer need only establish that one element of the broadest claim or claims is missing. If the licensee cannot meet this evidentiary hurdle, perhaps they should not be able to bring a DJ action in the first place. Of course, the possibility of an infringement theory under the Doctrine of Equivalents complicates the matter, but in general, establishing non-infringement can be a more clear-cut than establishing infringement, because for the latter, all elements of an asserted claim must be proven. Furthermore, it isn't clear why "[a] patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim," as Justice Breyer suggested. This is especially true considering that the alleged product (or process) is likely within the possession of the licensee.
The last suggested "practical consideration" centered on the original purpose articulated in the MedImmune case: to avoid the "dilemma" that would be caused by requiring a licensee to choose "between abandoning his rights or risking suit." Of course, Justice Breyer had to acknowledge that a shift in burden would not deprive Medtronic of the right to seek a DJ action. Nevertheless, he wrote that requiring the licensee to bear the burden of proof of non-infringement would "create a significant obstacle," thereby putting such a party at a disadvantage. However, if a non-infringement position is so weak that a shift in burden would create an obstacle to filing suit, maybe the licensee should not be filing a DJ action.
The Court had little concern over the impact that this case would have on the patent community. In response to the Intellectual Property Owners Association's concern that the Court's holding would permit a licensee to "force the patentee into a full-blown patent infringement litigation," Justice Breyer shifted the "blame" to the patent holder. The license in dispute in this case had a provision for identifying any new Medtronic products that would be subject to the license. The patent holder was permitted to identify any new products that it believed were covered by the patent, and if Medtronic disagreed, they were contractually permitted to initiate a DJ action. Nevertheless, Justice Breyer described the situation as the patent holder setting "the present dispute in motion by accusing Medtronic of infringement." Of course, characterizing it this way makes it easier to "see no convincing reason why burden of proof law should favor the patentee." Finally, Justice Breyer pointed out that the public interest in maintaining a "well-functioning patent system" is offset by its interest in preventing patent holders from exacting royalties for the use of ideas beyond the scope of the patents at issue. As this author has had it explained to him, when any Judge or Justice uses the phrase "patent monopoly," you can be certain things are not going to go well for the patent holder. As an indication, Justice Breyer used that phrase twice in the penultimate paragraph discussing the public interest.
As a final note, the Court did address the issue of jurisdiction raised by Tessera Technologies, Inc.'s Amicus brief. The issue was whether the federal courts had subject-matter jurisdiction to hear this case, considering that the nature of the action that the declaratory judgment defendant would have brought could be characterized as seeking damages for a breach of contract. Of course, this problem also stems from this Court's MedImmune decision, which allowed standing in a case where there was really no genuine dispute "of sufficient immediacy and reality." Nevertheless, the Court was not convinced. Instead, the case that the declaratory judgment defendant would have brought, according to Justice Breyer, would have been one for patent infringement, because Medtronic would have had to stop paying royalties. "The relevant question concerns the nature of the threatened action in the absence of the declaratory judgment suit," and as such, the Court found that this case was "properly characterized as an action 'arising under an Act of Congress relating to patents.'"
Medtronic, Inc. v. Mirowski Family Ventures, LCC (2014)
Opinion of the Court by Justice Breyer