On MedImmune and Licensees Suing Licensors

by F.

Yesterday, the US Supreme Court made it easier for patent licensee to sue licensors for invalidity of the licensed patent. This is a big decision and seems to me to be a good thing. So what, exactly, does the decision mean, other than that “the law changed?”

Consider what the old, pre-MedImmune rule was. Patent holders licensed their patents under—you guessed it—patent licenses (basically, a contractually promise not to sue). Folks who sign these licenses are called—wait for it—licensees. In this case, Genentech basically had a patent on a certain chemical. MedImmune wanted to make that chemical. Without a licenses, MedImmune would have been infringing Genentech’s patent. Infringement is very expensive if you get caught, which MedImmune probably would have been. Knowing that it would likely infringe, MedImmune had two choices: fight or “bend over and grease up” (aka BOGU, at one time a favorite expression of Steve Ballmer, I’ve been told).

Fighting meant challenge the validity of the patent; if the patent was found by a court to be invalid, then MedImmune could make the chemical with impunity. Fighting, though, is expensive (as in millions of dollars of legal fees) and slow. The alternative (BOGU) is to buy a license from Genentech. This is also expensive, but would have been less than fighting, on a risk-adjusted basis (otherwise, MedImmune would just fight).

Notice I said that MedImmune had a choice: fight or BOGU. Why not both? Ah, exactly. Under the old rule, they couldn’t. They had to license or fight, essentially. Technically, they could have licensed and then fought, but this would mean breaching the license—ignoring it, essentially, then suing. Since MedImmune’s licensing made them aware of the patent, their damages were now higher, since “knowing” infringement results in triple damages. So, once MedImmune licensed the chemical, they were essentially locked in and couldn’t fight.

But no longer. Now, says the Supreme Court, the licensee can take a license and fight the patent at the same time—hedging the risk of infringement. As I said, this seems like a good thing. First, I’ve never seen a very good empirical case for patents, particularly given the long patent term in the US (20 years). Usually, the case is hand-waiving, talking about “incentives” and so on. (That’s the good argument; the bad argument resorts to quasi-moralistic “property rights” that people think are God given or something. As if.) But there isn’t much data on whether these incentives are worth the cost. In the absence of evidence, the default should be no government intervention, in my view.

But, pushing aside the constraints of reality for a moment, What do the lawyers say? Shocking as this may sound, the lawyers for patent holders don’t like it, while the lawyers for potential infringers do like it. Here’s what one patent litigator said:

This decision allows companies that have taken out licenses to challenge the validity of a patent while also enjoying the benefits of that very same patent.

OK. That’s not much of an argument; it’s really just saying “we have a new rule.” Duh. But he goes on:

MedImmune turns all fundamental assumptions about the stability and finality of a patent license completely on their head… The Court has upset the risk/benefit calculation that underlies virtually every patent license.

This is true, but the question is, So what? When laws change, predictability and stability change for a time, then everything settles into a new equilibrium. Is that bad? He doesn’t say. I’m sure P.W. Botha was concerned that dismantling apartheid would upset the “predictability and stability” of the South African economy. And speaking of racial segregation, I guess we shouldn’t have desegregated in the US because, shucks, it was a pain in the ass to remove all those “This drinking fountain for coloreds only” signs. This is a bullshit argument: it proves too much. It’s almost never convincing without numbers attached to it.

Here’s the same argument, again, by a different lawyer (they are so, so, so creative):

By allowing licensees that are taking full advantage of the benefits of the license, including immunity from a patent infringement lawsuit, to challenge the patents in the agreement, patentees lose the quid pro quo in the arrangement…. Countless licensed patents are now potentially open to a new attack from even good licensees. To the IP community, this is yet another curtailment of the strength of patent rights.

In other words, “the law changed and I don’t like it.” Boo hoo. Here’s a tissue. Again, no real fact-based argument. Just a statement of what patent holders want. Well, I kinda figured they wouldn’t like it. But oh well.

Shockingly, the US Government seemed to be on the correct side of things:

Paul Clement, solicitor-general, wrote in a brief to the court: “Some patents are invalid, and there is a strong federal policy . . . in ridding the economy of such patents.”

So why is this ruling good? It helps purge the system of bad patents, of which there are many. As Pamela Samuelson said,

Everybody knows there are a lot of weak patents out there…. A lot of inventors take very substantial risks going out into a field of technology, and sometimes they get their foot blown off when some patent is out there like a land mine.

Of course, lawyers win with the new rule. Any change in the law requires lawyers to interpret it and sue about it. “It’s a rare patent where you can’t find something to challenge. There will be an explosion in litigation by these licensees,” says [a patent litigator]. “Companies can have their cake and eat it too.” Ka-ching. The system works!

Sources: WSJ, FT, Legal Times.