The Supreme Court Decides that a Patent Licensee Need Not Breach the License Before Challenging the Licensed Patent

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On January 9, 2007, the Supreme Court decided that a patent licensee need not refuse to pay royalties under the license before filing a declaratory judgment action against the licensor/patentee for a declaration that the patent is invalid,unenforceable, or not infringed. In MedImmune, Inc. v. Genentech, Inc., U.S. Supreme Court No.05-608 (Jan. 9, 2007), the Court held that the Article III limitation of federal courts’ jurisdiction to “Cases” and “Controversies,” as reflected in the “actual controversy” requirement of the Declaratory Judgment Act, did not require a patent licensee to terminate or be in breach of its license agreement before it seeks a declaratory judgment.

The MedImmune decision restores to licensees the ability to challenge the infringement, scope, or validity of a licensed patent while continuing to pay royalties. Under such a “pay and sue” strategy, so long as the royalties are paid, the patentee/licensor cannot terminate the license and sue the licensee for infringement because there is no breach of the license. The worst-case scenario for the

challenging licensee is that the patentee retains the royalties paid and the terms of the license are

maintained. The Court’s decision allowing a licensee to “pay and sue” is likely to have an impact on

licensee/licensor relationships, the number of patent suits, and the terms found in license

agreements.

In 2004, the Federal Circuit had rejected this “pay and sue” strategy in Gen-Probe Inc. v. Vysis, Inc.,

359 F.3d 1376 (Fed. Cir. 2004), holding that unless a licensee breaches the license by refusing to

pay royalties, there is no actual controversy, and the federal courts lack jurisdiction. In MedImmune,

in an opinion by Justice Scalia joined by seven other Justices (with Justice Thomas dissenting), the

Supreme Court rejected the Federal Circuit’s analysis.

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