NATURE BIOTECHNOLOGY VOLUME 26 NUMBER 2 FEBRUARY 2008 183

Recent Supreme Court decisions and licensing powerJennifer Giordano-Coltart & Charles W Calkins

The recently decided eBay and MedImmune cases interject both reassurance and uncertainty into the present patent licensing landscape, affecting the strategic decisions to be considered during negotiations.

Perhaps more so than in any other area of business, intellectual property, particularly

patents, is the key asset of companies in the pharmaceutical and biotechnology industries. Universities, emerging pharmaceutical and biotechnology companies, and the research and development units of larger pharmaceutical and biotechnology companies protect their invest-ments in research, and their investors, by filing for patents. Companies’ stock prices rise and fall on the issuance and expiration of patent rights. Market share and selling price—and there-fore a company’s profits—for pharmaceutical products are maintained and protected against generic competition during the lives of patents covering the products.

Like other forms of property, the rights granted by patents can be sold or exchanged between and among companies through legal contracts, referred to as licenses. Universities can license their patent rights in their research to life science companies that will attempt to develop commercial products from the research. Emerging life science companies may license their small- or large-molecule platforms to joint venture partners to collaborate on clinical trials and commercialization. Life science companies of every size seek to in-license product lines for commercialization and to out-license product lines that do not fit within their current market strategy. As a result, licenses have a major role in the pharma and biotech industries.

For many years the basic legal principles applying to licenses have remained relatively unchanged. Over the past two years, however,

the United States Supreme Court has issued opinions in two cases that directly affect licenses, and therefore the strategic decisions to be con-sidered during license negotiations. In addi-tion, the Supreme Court will be considering another case during this term that could also directly affect licenses and licensing strategy. This article provides an overview of the cases and their potential impact. In addition we offer some suggestions on potential license clauses in view of the cases.

eBay Inc. v. MercExchange, LLCFor operating businesses, the possibility of hav-ing to completely stop making, using, marketing and/or selling a product, or using a technology, if found to infringe a patent is a powerful bar-gaining chip in hands of a patent holder. Until recently, parties found guilty of patent infringe-ment could almost always be permanently enjoined from using the patented technology if requested by the patent holder. In such a legal environment, so-called ‘patent trolls’ (see Box 1) could and did force companies to nego-tiate unfavorable licensing agreements in order to avoid the risk of being permanently enjoined from the use of critical technology.

The legal landscape, however, was altered by the Supreme Court’s decision in eBay Inc. v. MercExchange, LLC1. The Court held that a patentee should be entitled to a permanent injunction only if it satisfies the traditional equity-based test for injunctive relief by show-ing that (i) it has suffered irreparable injury; (ii) the remedies available at law, such as money damages, are inadequate to compensate it for the injury; (iii) the balance of hardships between the patentee and the infringing party favors an equitable remedy; and (iv) the public interest would not be disserved by an injunction.

In altering the almost automatic standard for injunctive relief, the Court decreased the lever-age of a patent holder during licensing negotia-tions, as potential licensees can now worry less

about being enjoined. The Court did recognize a difference between patentees who practice their patented technology and those who do not, finding that it would be more likely that patentees who practice their technology would be able to meet the standard for injunctive relief. Fortunately for universities and emerging tech-nology companies, the Court further recognized a need to differentiate between those patentees who do not practice their invention because of inadequate capacity or insufficient capital, such as independent inventors or university research-ers, and patent trolls who exist solely to license their technology to those who are already using the technology in the market place as a means of extracting fees. A critical distinction between these types of patentees is that the former are using licensing programs toward the goal of developing their inventions into marketable products, and use their patents as a shield to pro-tect their right to exclude, market share, reputa-tion, goodwill or name recognition, whereas the latter use their patents as a sword, seeking only to maximize fees from market participants.

Since eBay, some trends have already become apparent. Although the vast majority of relevant cases have resulted in the grant of a permanent injunction after determination of infringe-ment, there have been at least nine cases where injunctive relief was denied. Two striking gen-eralizations can be drawn from these cases, with some caveats. First, where the parties were direct competitors, the courts almost unani-mously granted an injunction. Direct competi-tion alone, however, was not sufficient to win an injunction: patentees were still required to prove that they had suffered irreparable harm and that there was a nexus between that harm and the infringement. Also, courts have varied in how they have weighed the relevance of harm suffered by third-party licensees, as opposed to the patentee itself. Second, where the patentee or plaintiff was a non-practicing entity (NPE), the courts almost unanimously denied injunc-

Jennifer Giordano-Coltart is at the Duke University School of Law, Science Drive and Towerview Road, Durham, North Carolina 27708, USA. Charles W. Calkins is at Kilpatrick Stockton LLP, 1001 West Fourth Street, Winston-Salem, North Carolina 27101, USA. e-mail: giordano-coltart@law.duke.edu or ccalkins@kilpatrickstockton.com

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184 VOLUME 26 NUMBER 2 FEBRUARY 2008 NATURE BIOTECHNOLOGY

tive relief, especially where the party had shown a willingness to license the patented invention and no commercial activity in practicing it, and was challenging large corporate market leaders. However, a persistent unwillingness to license the patent to the defendant or infringer, though not to other licensees, has been weighed in favor of injunctive relief.

These generalizations in part derive from the patentee’s burden to show that it has been irreparably harmed. Courts have found that pat-ent trolls, unlike direct competitors, usually do not suffer harms that require injunctive relief to rectify (for example, loss of market share, barriers to market entry, reputation damage, long-term customer loss). Although disputes over pharmaceutical patent infringement have gone both ways, the one court addressing the application of eBay to a research institution that developed its technology through licensing programs granted a permanent injunction. The court found that the infringement irreparably harmed the institute’s reputation and compro-mised its ability to recruit top scientists and control its licensing program. Similarly, other courts have commented that infringement could cause small inventors and university researchers to suffer damage to their goodwill, reputation, R&D opportunities and ability to bring a unique product to market sufficient to meet the require-ments for injunctive relief.

In this new legal landscape, the next big question is how courts will address the issue of continued infringement post trial where a per-manent injunction is not granted. Courts have taken varied approaches to setting what will in effect be licensing fees. One approach has been to apply the pre-judgment royalty rate (the com-pensation rate calculated by the court for the use of the patented technology) to post-judgment infringement. Because a court’s licensing fees will be likely to be less favorable to a patentee than ones that they could have negotiated before trial, this approach provides strong incentive for

would-be licensors to negotiate outside the con-text of litigation. A second approach has been to increase the pre-judgment royalty rate for post-judgment infringement. Because of the complexity of licensing agreements, courts will either be faced with repeatedly refereeing the parties as they dispute the details of effectuating the order or be placed in the position of drafting a licensing agreement with specific instructions as to payments and collateral issues. In the face of this inefficiency and potential compulsory licensing, the parties have incentive to spend their time and money negotiating their own licensing terms rather than litigating. A third approach has been to leave post-judgment to a second, subsequent action for willful infringe-ment. Because plaintiffs can be awarded up to treble damages for willful infringement, this approach shifts some of the negotiating power back into the hands of the patentee and thereby increases the chances that the parties will enter into a license agreement. It also gives infringers more time to choose their best course of action: continued infringement, designing around the patent or negotiating a licensing agreement. A fourth potential approach would be a hybrid one in which the pre-judgment royalty rate is converted on a specified date to treble damages, which could encourage more timely resolution of disputes.

No matter how courts address post-judg-ment infringement, it is clear that eBay’s higher threshold for injunctive relief has influenced pat-ent licensing by reducing settlement leverage for would-be patent trolls and shifting negotiating power toward potential licensees. The expense of litigation and the risk of uncertain outcomes provide strong motivation for parties to nego-tiate outside the context of litigation to reach reasonable agreements. NPEs may still choose to bring infringement suits but must now have well-defined, detailed licensing plans that reflect legitimate business reasons for selectively licens-ing their technology. Although the Supreme

Court took steps to protect small inventors and researchers, it will take time to evaluate how closely courts will adhere to its edict. On a final note, in the absence of presumptions, injunctive relief is now a matter of judicial discretion, and therefore very difficult to overturn on appeal. As a result, this issue must be fought and won at trial, if it is to be won at all.

MedImmune, Inc. v. Genentech, Inc.In MedImmune, Inc. v. Genentech, Inc.2, the Supreme Court again reversed Federal Circuit precedent by holding that a patent licensee need not terminate or breach its license in order to create a case or controversy to support an action for declaratory judgment of invalidity. The Court’s conclusion rested on its principle that an action by a party seeking relief (that is, MedImmune) that eliminates a threatened harm but that is coerced by the party against whom relief is sought (that is, Genentech) does not preclude Federal court subject mat-ter jurisdiction. In this case, Genentech sent its licensee, MedImmune, a letter indicating that it believed MedImmune’s product was covered by a Genentech patent that had issued after the licensing agreement had gone into effect, and that it expected MedImmune to begin paying royalties on the product. MedImmune began to pay royalties, despite believing that the pat-ent was invalid and unenforceable and did not cover its product, because it felt that the letter constituted a threat by Genentech to bring will-ful infringement charges against it, which could result in treble damages if successful and thereby knock out 80% of MedImmune’s business.

Before this case, a licensee had to breach its licensing contract (that is, stop paying royal-ties, infringe) to contest the validity of a patent or the applicability of a patent to its products or services and thereby face the risk of treble damages for willful infringement if it lost the suit. Now, a patent licensee can continue to pay royalties and remain in good standing with its licensing agreement while bringing suit against its licensor in federal court for a declaratory judgment that the patent it is licensing is invalid or unenforceable, thereby voiding the licensing agreement, or not appli-cable to the license agreement at all.

Before entering into license agreements, licensees may now want to conduct a cost-ben-efit analysis (of paying royalties versus bringing a litigation suit) to determine the best course of action. Some licensees may enter into license agreements more willingly, considering licenses to be a form of insurance that limits their liabil-ity if they are unsuccessful in challenging the underlying patent. Because license contracts seem less final after MedImmune, licensors may now want to negotiate for higher royalty

Box 1 What is a patent troll?

Patent troll and patent commodity trader are titles that attach to organizations whose business plan consists of using their patent portfolio as a means of obtaining licensing fees from those who would like to use the patented technology, rather than as a basis for producing and selling goods. ‘Troll’ and ‘trader’ are most commonly used to refer to companies that have not participated in the R&D used to develop the patented technology but have acquired their patents from others (for example, small inventors, bankrupt companies) for the purpose of licensing. Often trolls and traders are shell companies backed by heavily financed investors who aim to use their acquired patent rights against deep-pocketed market players to negotiate exorbitant licensing fees before litigation or during settlement. On the other end of the scale, non-practicing entitiy (NPE) is most commonly used to refer to parties such as small inventors, university researchers and small biotechnology companies that prefer to develop their patented technology through licensing programs, rather than raising the often extraordinary amount of capital necessary to develop and market a product.

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NATURE BIOTECHNOLOGY VOLUME 26 NUMBER 2 FEBRUARY 2008 185

rates or front-loaded fees to compensate for the risk that licensees may challenge the validity of the licensed patents and pull the licensor into expensive litigation.

Licensors may now also negotiate for licens-ing provisions that (i) reduce or eliminate the licensee’s perception of a threat (for example, have new patents automatically added to the license portfolio, so that the licensee bears the burden of removing them); (ii) raise barriers to the licensee’s ability to challenge to the license contract or its underlying patents (for example, no-sue and no-patent-re-examine covenants; specific express admissions or representations by the licensee as to the validity and applicabil-ity of licensed patents as preconditions of the license; specific, continuing, legally permissible royalty payments based in trademark or trade secret law, etc.; termination power to licensor); and (iii) increase the cost or decrease the ben-efit to the licensee challenging the contract or patents (for example, increased royalty rates; attorneys fees placed on licensor; extension on statute of limitations for patent infringement damages; non-reimbursement of royalty pay-ments during litigation; inconvenient choice of venue) (see Box 2).

Although the enforceability of contractual bars to validity challenges—as part of either non-breached licensing contracts or settlement agreements—is debatable, there are no cases that address this issue specifically. In light of the potential costs of litigation, licensors may choose to negotiate for arbitration provisions that would help reduce the cost of resolving any patent validity or applicability challenges and termination provisions that would not permit a licensee to cure a failure to pay royalties when due (as may happen between the parties when arguing as to the validity or applicability of the underlying patent).

In addition, either before beginning licensing negotiations or to strengthen existing contracts, licensors may consider strengthening their pat-ents by (i) requesting re-examination by the US Patent and Trademark Office of any unconsid-ered prior art; (ii) filing for a reissued patent to address other validity concerns; or (iii) filing infringement suits before granting licenses in an attempt to strategically bolster the enforce-ability of any contractual bars or impediments in licenses granted as part of consent decrees or settlements. Licensors should also take several steps to create a seamless armor out of their pat-ent rights (for example, clearly identify all true inventors to avoid invalidity due to improper inventorship; verify proper agreements to ensure ownership rights; keep permanent, complete and continuous records to prove first to invent status; check compliance with all applicable regulatory procedures).

Quanta Computer, Inc. v. LG Electronics, Inc.In Quanta Computer, Inc. v. LG Electronics, Inc.3, the Supreme Court is again assessing an issue that could transform patent licens-ing: Do patent holders have the right to limit the downstream uses of an invention after they have granted a license? The default rule in patent law is the doctrine of exhaustion, or first-sale doctrine, under which the patent holder controls the first sale of a protected good but not any subsequent sales. In the licensing context, a licensor can collect only one licensing fee per protected good. Quanta will determine whether licensors can condi-tion the sale of protected goods so as to have control over subsequent sales (for example, the sale of goods into which protected goods have been incorporated). Those in favor of allowing patent holders to control subsequent sales argue that this would allow patent hold-ers to fine-tune their licensing programs to obtain fees based on what other parties will do with the protected goods. Opponents argue that it is necessary to firmly draw the line so that consumers can be confident in their abil-ity to use, repair or resell the goods that they purchase. Industries that rely on component manufacturers (such as electronics and com-puters) will be most heavily affected by this decision, but the ramifications could affect all industries and licensing negotiations.

ConclusionsThe recent Supreme Court cases eBay and MedImmune interject both reassurance and uncertainty into the present scheme of pat-ent licensing, the latter of which will need to be addressed in future negotiations. Because of the uncertainty raised by these cases, it is unclear whether these decisions, particularly MedImmune, will really benefit either party in achieving the desirable win-win license agree-ment. On the front end, MedImmune seems to have eliminated the finality of a negoti-ated agreement, which changes the dynamics of the negotiations and potentially makes the entire labor-intensive program fruitless, while on the back end the decision may lead to iron-clad contracts that may result in more onerous circumstances than would have arisen from just breaching the licensing contract before MedImmune. Now, with the dispute in Quanta, the patent community is waiting to see how much control licensors will be able to exert on the downstream uses of their technology. Over time, courts will determine which terms licen-sors may impose on licensees and, hopefully, the result of this process will be stronger patents that can be marketed effectively as useful products and services, as was the original intent of the patent system.

1. 126 S. Ct. 1837 (US 2006).2. 127 S. Ct. 764 (US 2007).3. 128 S. Ct. 28 (2007) (grant of writ of certiorari).

Box 2 Contractual restrictions limiting validity challenges post-MedImmuneLicensors should consider one of more of the following clauses:

1. As a method to increase the license fee if a lawsuit or re-examination petition is filed by or for the licensee and again if the court finds the patent infringed and not invalid or the patent-issuing organization finds the claims valid:

In the event Licensee initiates, pursues or in any way supports a challenge to the validity or enforceability of any of the claims of the Licensed Patents, including a challenge in or before a Court and/or a patent-issuing organization, the royalty to be paid by Licensee shall immediately be increased to twice the amount set forth herein; if the validity and enforceability of a claim covering a Licensed Product is upheld, the royalty to be paid by Licensee relating to such Licensed Product shall be increased to three times the amount set forth herein.

2. As a method to discourage a licensee from challenging the validity or enforceability of a licensed patent claim:

In the event Licensee initiates, pursues or in any way supports a challenge to the validity or enforceability of any of the claims of the Licensed Patents, including a challenge in or before a Court and/or a patent-issuing organization, an additional royalty of ##### (for example, $1,500,000.00) shall become due and payable by Licensee to Licensor as of the date of initiation of such challenge.

3. As a method to discourage a licensee from challenging the validity or enforceability of a licensed patent claim by inserting a nonbinding arbitration clause in the agreement:

Prior to initiating, pursuing or in any way supporting a challenge to the validity or enforceability of any of the claims of the Licensed Patents, including a challenge in or before a Court and/or a patent-issuing organization, Licensee agrees to enter nonbinding arbitration with Licensor under the rules and conditions set forth in Article__ and by the provisions of the Federal Arbitration Act (Title 9, USC).

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