Purchase a Declaratory Judgment Lawsuit for the Price of a Stamp

The recent Supreme Court decision in MedImmune Inc. v Genentech Inc., (January 9, 2007) lowered the hurdle a party must clear before filing a declaratory judgment lawsuit.  A declaratory judgment lawsuit allows a party to seek a determination of the rights among the parties without waiting for the opposing party to file a claim.  Additionally, a potential defendant can race an adversary to the courthouse by filing a declaratory judgment lawsuit in the erstwhile defendant’s choice of forum.

In MedImmune, the Supreme Court held that a patent licensee can bring a declaratory judgment lawsuit against a patent owner even though the licensee continues to make payments under the license agreement.  This resulted in a change to the prior rule that a licensee who continues to make payments under a license agreement cannot bring a declaratory judgment lawsuit because there is no “reasonable apprehension of suit.”

The Court struck down the “reasonable apprehension of suit” test in favor of an “adverse legal interest” test.  In other words, a declaratory judgment lawsuit is proper if under all the circumstances, it can be shown there is a substantial controversy between parties having adverse legal interests.  Following MedImmune, the Federal Circuit in SanDisk Corp. v. STMicroelectonics Inc., held that a patent owner’s statement that it “had absolutely no plan whatsoever to sue” coupled with a willingness to enter licensing agreements was insufficient to prevent a declaratory judgment lawsuit.  The court held a declaratory judgment lawsuit proper whenever “affirmative action” by the patentee forces the declaratory judgment plaintiff to either abandon its current actions, which may be legal, enter into a license agreement, or pursue arguably illegal behavior.

Affirmative action sufficient to warrant a declaratory judgment lawsuit includes sending cease and desist letters if the parties have “adverse legal interests,” as the Federal Circuit found in Sony Electronics, Inc. v Guardian Media Technologies, Ltd.  Taking any type of action to inform a competitor of alleged or possible infringing activity may give that party a right to file a declaratory judgment lawsuit.

MedImmune has changed the dynamics between patent owners and licensees, potential licensees, and alleged infringers.  If a patent owner attempts to enforce its rights by sending out cease and desist letters, the alleged infringer may file a declaratory judgment lawsuit in the venue of its choice.  A licensee also has the benefit of challenging the validity of a patent, in the venue of its choice, while continuing to comply with a license agreement.  However, creative drafting of license agreements going forward will likely make this a short term benefit.

Several tactics can be employed to ameliorate the effects of MedImmune and its progeny. First, because of the increased possibility of a declaratory judgment lawsuit, a forum selection clause can be added to license agreements.  Second, licenses can provide, if feasible, for larger lump sum payments, or at least front loaded payments at the beginning of a license term.  This tactic may decrease a licensee’s desire to file suit to invalidate a patent when substantial royalty payments have already been made.  Such a structure can provide the patent owner with capital to fund the defense of a declaratory judgment lawsuit.  The license agreement can also contain a promise by the licensee to continue royalty payments even if the patent is later held invalid, or it can contain a promise not to seek a declaration of invalidity.  Third, patent owners must now be more selective when deciding to whom they send cease and desist letters.  Because sending such letters will likely be sufficient to trigger a declaratory judgment lawsuit, patent owners must ensure the potential benefits of such a letter outweigh the downside.  When sending such letters or making licensing offers, one option is to first approach smaller entities that may be less likely to consider filing a declaratory judgment lawsuit. If a declaratory judgment lawsuit is considered a probable response to a cease and desist letter, a complaint can be filed against the alleged infringer before the letter is sent.  This allows the patent owner to choose the forum, while simultaneously providing a few months to negotiate before expiration of the deadline for serving the complaint.

MedImmune will generally make it easier to meet requirements for filing declaratory judgment lawsuits in cases outside the patent arena as well.  This includes, for example, trademark actions.  Trademarks, unlike patents, must be enforced to avoid abandonment.  Therefore, owners should continue to send cease and desist letters promptly upon learning of substantial infringing activity despite the risk of a declaratory judgment lawsuit.

In conclusion, while MedImmune has removed impediments for filing a declaratory judgment lawsuit, there are still many tactics that can be employed to protect intellectual property while minimizing your exposure to a declaratory judgment lawsuit.   MedImmune should be considered before sending a cease and desist letter to an alleged infringer; the stamp used to send the letter could be the price of admission to a declaratory judgment lawsuit.

Bobby Braxton is an intellectual property attorney at Carstens & Cahoon, LLP. He prosecutes patents and trademarks and litigates intellectual property disputes. 

This blog is maintained by Carstens & Cahoon, LLP to inform readers of recent developments in intellectual property. Solely informational in nature, this blog is not intended to create an attorney-client relationship or to be used as a substitute for legal advice or opinions. For more information, please visit www.cclaw.com

By Bobby W. Braxton

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