skgf_presentation_patent licensing in the wake of medimmune, ebay, ksr and microsoft_2007

Timothy J. Shea, Jr. � DirectorSterne, Kessler, Goldstein & Fox P.L.L.C.

Drafting and Negotiating Patent License AgreementsWest Legalworks - One Day Workshop

Boston, MAJune 14, 2007

Patent Licensing in the Wake of MedImmune, eBay,

KSR and Microsoft

2

Introduction

� Several very significant decisions

by U.S. Supreme Court in patent

cases within the past year

� Cases are changing the rules of the

game for patent licensing

� Reflects heightened interest of

Court in patent cases

3

Introduction

� Reasons for heightened scrutiny:

� Increased value of technology and IP in U.S. economy

� Increase in number of patents sought and granted

� Increased public awareness of importance of patents� NTP v. Research in Motion (Blackberry case)

� Rise of patent holding companies� NTP

� Perception that patents are stifling innovation more than promoting it

� FTC Report

4

Introduction

� Common Themes:

� Federal Circuit reversed

� Traditional legal principles in areas such

as equity and jurisdiction apply equally to

patent cases

� No special rules for patent disputes

� Elevation of helpful guidelines to rigid

rules by Federal Circuit is improper

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Introduction

� Result:

� Elimination of bright line rules relied on by

Federal Circuit is leading to greater

uncertainty in areas such as permanent

injunctions, DJ jurisdiction, obviousness

� Incremental erosion of patentee�s power (or

at least return to pre-Fed. Cir. Level)

� Playing field shifting in favor of defendants

and licensees

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eBay Inc. v. MercExchange L.L.C

� 126 S.Ct.1837 (May 15, 2006)� Unanimous decision (Thomas)

� Issue: Does traditional four-factor test for permanent injunctive relief apply to patent disputes?

� Background:� MercExchange in business of patent licensing

� Patent at issue was business method patent for electronic market for sale of goods between private individuals

� MercExchange sought to license patent to eBay� Had previously licensed it to other companies

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� No agreement 0 MercExchange filed suit

� Dist. Ct.� Jury found patent valid and eBay had infringed

� Permanent Injunction denied

� D. Ct. concluded award of damages sufficient

� Fed. Cir. Reversed� Applied �general rule that courts will issue permanent

injunctions against patent infringement absent exceptional circumstances�

8


� Supreme Court reversed Fed. Cir.

� �well-established principles of equity� require

plaintiff seeking permanent injunction to

satisfy 4-factor test:

1. irreparable injury

2. remedies at law (e.g. money damages)

inadequate

3. balance of hardships between plaintiff and

defendant justify PI

4. public interest not disserved by PI

NO SPECIAL RULE FOR PATENT CASES

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� Fed. Cir. erred in holding statutory right to exclude alone justifies presumption the injunction should be granted

� Court looked to Patent Act� Injunctions �may� issue �in accordance with

principles of equity�

� Copyrights� Similar right to exclude, but no special rule

for injunctions� Traditional rule applies

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� Neither Dist. Ct. nor Fed. Cir. Applied proper test� Dist. Ct. erred in concluding that MercExchange�s

willingness to license and lack of commercial activity practicing patents meant could not show irreparable harm

� Court notes universities and independent inventors who seek to license may still meet 4-prong test

� Fed. Cir. Erred in concluding injunction should be denied only in exceptional circumstances

� S. Ct. did not opine on appropriateness of injunction in this case

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� Roberts Concurrence (Scalia, Ginsburg)

� Notes �long tradition� of granting injunctive relief in

�vast majority� of patent cases

� Suggests tradition should continue

� Kennedy Concurrence (Stevens, Souter,

Breyer)

� notes tradition of granting injunctions but suggests

recent developments may require change

� Rise of licensing industry

� Questions business method patents

� Quotes FTC report on innovation

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� Kennedy concurrence

� �When the patented invention is but a

small component of the product the

companies seek to produce and the

threat of an injunction is employed

simply for undue leverage in

negotiations, legal damages may well

be sufficient to compensate for the

infringement and an injunction may

not serve the public interest.�

13

Injunctive Relief after eBay

� Survey of approximate two dozen post-

eBay cases

� Injunction granted in about 70% of cases

� Very likely where direct competitors, competing

products, loss of market share, harm to reputation

� Injunction denied

� More likely where plaintiff not practicing invention,

established licensing program, significant harm to

business of infringer

� Finisar Corp. v. Directv Group, Inc.

» Finisar not practicing invention

» Injunction would put Direct TV out of market

� Z4 Techs., Inc. v. Microsoft

» No irreparable harm, hardship for Microsoft

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eBay � Impact on Licensing

� Injunctions no longer automatic

� Risk to potential infringer mitigated

� Injunctions even more difficult for patent

�trolls�

� Primary weapon of trolls (i.e., threat of

shutting down potential infringer�s

business) now less potent

15

MedImmune, Inc. v. Genentech, Inc.

� 127 S.Ct. 764 (Jan. 7, 2007)

� Scalia

� 8-1

� Issue: Must a patent licensee terminate

or be in breach of license before it can

seek a declaratory judgment that the

underlying patent is invalid,

unenforceable, or not infringed?

� Answer: No

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� Background� MedImmune entered into agreement with

Genentech in 1997 to license �Cabilly� patent and application

� Covered MedImmune�s product Synagis

� Cabilly II issued in 2001

� Genentech sent letter to MedImmune stating royalties due on Cabilly II

� MedImmune disputed validity, but paid royalties under protest rather than risk treble damages and injunction preventing sale of Synagis (80% of revenues)

� MedImmune brought DJ action

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� Dist. Ct. dismissed for lack of subject-matter jurisdiction

� Citing Gen-Probe v. Vysis, Inc. (Fed. Cir. 2004)

� Held that patent licensee in good standing cannot establish Art. III case or controversy regarding validity, enforceability, or scope of patent because license �obliterate[s] any reasonable apprehension� that licensee will be sued

� Fed. Cir. affirmed

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� Supreme Court reversed

� Set forth standard for DJ jurisdiction� �[W]hether the facts alleged, under all the

circumstances, show that there is a substantial controversy, between parties having legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.�

� Court noted that no dispute that standard would be met if MedImmune had ceased making payments.

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� However, as long as payments made, no risk of suit by Genentech

� Court analogized to constitutional challenge� Where threatened action by government is

concerned, no requirement to expose self to liability before bringing suit to challenge basis for the threat

� Subject matter jurisdiction not precluded simply because threat-eliminating behavior was effectively coerced

20

MedImmune v. Genentech

� Cited earlier decision in Altvater v.

Freeman, 319 U.S. 359 (1943)

� Patent licensee�s failure to cease

payment of royalties did not render

nonjusticiable dispute over validity of

patent

� Fact paid under injunction does not

render distinguishable

21


� �The 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 rights finds no support in

Article III.�

� Court rejected Genentech�s argument that

common-law rule that a party to a contract

cannot challenge its validity and, at same

time, reap its rewards applies

22

Impact of MedImmune

� Dramatic shift in balance of power

between parties to existing license

agreements

� Little downside to licensee in

challenging validity of licensed patent

� More power to licensee to compel

renegotiation

� Increased uncertainty for licensors

� No repose

� Potential for sudden increase in litigation

23

Impact of MedImmune

� Potential licensees now have

incentive to take license to reduce

exposure then seek DJ

� Licensors must carefully examine

existing license relationships

� Where DJ more likely, determine if

termination possible

24

Questions Unanswered by MedImmune

� Status of Licensee Estoppel

� �We express no opinion on whether a

nonrepudiating licensee is similarly

relieved of its contract obligation

during a successful challenge to a

patent�s validity � that is, on the

applicability of licensee estoppel

under these circumstances.�

25

Questions Unanswered by MedImmune

� Legality of Contractual Limitations on Licensee Challenges?� Can licensors include provision that license

will terminate if licensee challenges validity? � Not clear - presumption against restrictions on

licensee�s right to challenge validity, but S. Ct. in MedImmune specifically declined to address Lear.

� Other contractual provisions to consider:� Admissions that licensed patent examined and

valid?

� Escalated royalties/milestones in event of suit?

� Forum selection clauses?

� Notice of suit?

26

Post-MedImmune Cases

� SanDisk Corp. v. STMicroelectronics (Fed. Cir.

March 26, 2007)

� Appeal of Dist. Ct. dismissal of DJ action

� Background:

� Parties are competitors in flash memory field

� ST�s VP of IP and Licensing sent letter to CEO of

SanDisk noting patents that �may be of interest� and

seeking meeting to discuss cross-license

� At cross-licensing meeting, parties discussed patent

mapping and infringement analyses. However,

parties said no plans to sue each other

� Parties exchanged cross-licensing offers

� A few weeks later, SanDisk filed DJ action

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� SanDisk con�t

� D. Ct. granted ST�s motion to dismiss on ground SanDisk did not have reasonable apprehension of suit.

� �studies and determined infringement analyses . . . Did not constitute the requisite �express charges [of infringement] carrying with them the threat of enforcement.�

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� SanDisk con�t.

� Citing MedImmune, Fed. Cir. Reversed

� Recognized MedImmune as rejection of Fed. Cir. reasonable apprehension of suit test

� Mere knowledge of existence of patent of another, even if perceived to pose infringement risk, will generally not give rise to DJ jurisdiction absent some affirmative act by patentee

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� SanDisk con�t.� �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.�

� Fed. Cir. Noted infringement analysis was essentially assertion of rights by ST based on specific, identified activity of SanDisk

� Referred to infringement liberally at meeting

� Asked for royalties

� Statement that does not intend to sue does not moot actual controversy created by its acts.

30


� Bryson concurrence

� Worried about �broad implications� of

decision

� �Therefore, it would appear that under

the court�s standard virtually any

invitation to take a paid license . . .

Would give rise to an Article III case or

controversy.�

� Predicts �sweeping change� in the law

of DJ jurisdiction

31


� Dilemma:

� May be able to avoid DJ by sending

general offer to license without

specifying infringing activity

� However, may not be enough to put

on notice.

� Incentive for licensor to file suit then

seek to negotiate license

� File but don�t serve

32


� Teva Pharm. v. Novartis Pharm.(Fed. Cir. March 30, 2007)

� Teva filed ANDA to market generic version of Novartis� drug FAMVIR®

� Para. IV cert. that did not infringe any of five patents listed by Novartis in Orange Book

� Novartis sued Teva on drug patent only

� Teva sought DJ on four nonasserted method patents

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� Teva v. Novartis

� D. Ct. dismissed DJ for lack of jurisdiction

� Fed. Cir. Reversed� Considered �all circumstances� and found

actual case or controversy

� Factors:� Listing in Orange Book

� May not itself be enough for DJ but a factor

� Teva�s submission of ANDA was act of infringement

� Purpose of Hatch-Waxman � to obtain patent certainty

� Existing litigation on drug patent

34


� Teva v. Novartis

� Patent owner may not be able to sue

on only select patents listed in Orange

Book covering same product

� Concurrence suggests Orange Book

listing alone should be enough for DJ

jurisdiction

35

Microsoft Corp. v. AT&T Corp.

� Decided April 30, 2007 (Ginsburg)

� Background� AT&T has patent on computer used to

digitally encode and compress recorded speech

� Windows OS contains software code that enables computer to do this

� Microsoft sells Windows to overseas manufacturers who then install on computers and sell to public

� Key � Microsoft provides master disk from which manufacturers make copies that are installed on computers

36


� AT&T sued Microsoft for infringement

under 271(f)

� 271(f)(1)

� �Whoever without authority supplies or causes to

be supplied in or from the United States all or a

substantial portion of the components of a

patented invention, where such components are

uncombined in whole or in part, in such a manner

to actively induce the combination of such

components outside of the United States in a

manner that would infringe the patent if such

combination occurred within the United States,

shall be liable as an infringer.�

37


� D. Ct. found Microsoft liable

� Fed. Cir. Affirmed

� Supreme Court reversed� Because Microsoft did not supply actual copies

loaded on computers, no 271(f) liability

� Here �component� was copy of Windows, not Windows in abstract

� Ease of copying not relevant to analysis

� Presumption against extraterritoriality

� To prevent copying abroad, must pursue patents abroad

� Problem for software patents

38

KSR Int�l v. Teleflex Inc.

� Decided April 30, 2007 (Ginsburg)

� Patent on adjustable pedal assembly

with electronic pedal position sensor

attached to a fixed pivot point

� Prior art taught

� Pedal assembly with electronic sensor on

pivot point

� Sensors of type claimed

� Location of sensor on fixed portion of pedal

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� D. Ct. granted SJ of obviousness

� Fed. Cir. Reversed

� Said D.Ct. did not apply teaching,

suggestion, motivation (TSM) test

strictly enough

� References needed to address precise

problem facing inventors in order to be

combined

40


� Supreme Court reversed (again)

� Fed. Cir. applied TSM test in overly narrow, rigid manner

� Graham test is flexible

� Improvement must be more than predictable use of prior art elements

� Not limited to references dealing with precise problem addressed

� Any need or problem known in the field and addressed by patent can provide reason for combining elements

� �Obvious to try� could be enough in some instances

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� Impact of KSR

� TSM test not dead

� Still considered �helpful insight� but not overriding

consideration

� Return to flexible approach

� Less difficult to make out prima facie case were

combination of known elements

� Concern about increased use of hindsight at

PTO

� Licensing

� More leverage to licensees and potential infringers

� Particularly in view of MedImmune and eBay

42

Patent Licensing in the Wake of MedImmune,

eBay, KSR and Microsoft

Thank You

Timothy J. Shea, Jr.

Sterne, Kessler, Goldstein & Fox, P.L.L.C.

(202) 772-8679

[email protected]

skgf_presentation_patent licensing in the wake of medimmune, ebay, ksr and microsoft_2007

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