MedImmune and Quanta

1. MedImmune and Quanta FRANKLIN PIERCE LAW CENTER 17th ANNUAL ADVANCED LICENSING INSTITUTE Concord, New Hampshire Thursday, January 8, 2009 By Jeff Hawley Of counsel Nixon Peabody LLP Patent Law Professor FPLC jhawley@piercelaw.edu

2. Sup Ct Changes the Landscape • MedImmune: • Declaratory Judgment Jurisdiction • SanDisk v. ST Microelectronics • Teva v. Novartis • Cat Tech v. Tubemaster • Caraco v. Forest • Quanta: • Patent Exhaustion of a Method

3. Prior to Medimune • Gen-Probe Inc. v. Vysis Inc. 259 F.3d 1376 (CAFC 2004)‏ • DJ Jurisdiction appropriate only if: “reasonable apprehension of imminent suit” • A patentee in good standing cannot establish an Article III case or controversy with regard to validity, enforceability, or scope of the patent because the license agreement “obliterates any reasonable apprehension” • A material breach can result in a “reasonable apprehension of suit” Bard v. Schwartz 716 F. 2d 874

4. Prior to Medimune • “..prior to MedImmune, this court articulated a two-part test that first considers whether conduct by the patentee creates a reasonable apprehension on the part of the declaratory judgment plaintiff that it will face an infringement suit, and second examines whether conduct by the declaratory judgment plaintiff amounts to infringing activity or demonstrates concrete steps taken with the intent to conduct such activity.”

5. MedImmune v. Genentech • Sup Ct 2007 Justice Scalia • “chimeric antibodies”: DJ available • Can a non-repudiating licensee bring a DJ action? • Article III Case or Controversy? • Licensee should not have to “bet the farm”

6. MedImmune v. Genentech • The agreement defined “Licensed Products” as a specified antibody, “the manufacture, use or sale of which. . . would, if not licensed under th[e] Agreement, infringe one or more claims of either or both of [the covered patents,] which have neither expired nor been held invalid by a court or other body of competent jurisdiction from which no appeal has been or may be taken.”

7. MedImmune v. Genentech • If respondents were to prevail in a patent infringement action, petitioner [MedImmune] could be ordered to pay treble damages and attorney’s fees, and could be enjoined from selling Synagis, a product that has accounted for more than 80% of its revenue from sales since 1999. Unwilling to risk such serious consequences, petitioner paid the demanded royalties “under protest and with reservation of all of [its] rights.”

8. MedImmune v. Genentech • Treble damages after Seagate? • Injunction after eBay?

9. MedImmune v. Genentech • The Declaratory Judgment Act provides that, “[i]n a case of actual controversy within its jurisdiction . . . any court of the United States . . . may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.”28 U. S. C. §2201(a).

10. MedImmune v. Genentech • Even if Altvater could be distinguished as an “injunction” case, it would still contradict the Federal Circuit's “reasonable apprehension of suit” test (or, in its evolved form, the “reasonable apprehension of imminent suit” test, ..A licensee who pays royalties under compulsion of an injunction has no more apprehension of imminent harm than a licensee who pays royalties for fear of treble damages and an injunction fatal to his business. [Footnote 11]

11. MedImmune v. Genentech • (FN 11 Cont.) The reasonable-apprehension-of-suit test also conflicts with our decisions inMaryland Casualty Co..where jurisdiction obtained even though the collision-victim defendant could not have sued the declaratory-judgment plaintiff-insurer without first obtaining a judgment against the insured; and Aetna Life Ins. Co. v. Haworth, 300 U.S. 227, where jurisdiction obtained even though the very reason the insurer sought declaratory relief was that the insured had given no indication that he would file suit.

12. MedImmune v. Genentech • (FN 11 Cont.) It is also in tension withCardinal Chemical Co. v. Morton Int'l, Inc.,.., which held that appellate affirmance of a judgment of noninfringement, eliminating any apprehension of suit, does not moot a declaratory judgment counterclaim of patent invalidity.

13. MedImmune v. Genentech • Aetna and the cases following it do not draw the brightest of lines between those declaratory-judgment actions that satisfy the case-or-controversy requirement and those that do not.

14. MedImmune v. Genentech • Our decisions have required that the dispute be “definite and concrete, touching the legal relations of parties having adverse legal interests”; and that it be “real and substantial” and “admi[t] of specific relief through a decree of a conclusive character, as distinguished from an opinion advising what the law would be upon a hypothetical state of facts.”

15. MedImmune v. Genentech • “Basically, the question in each case is whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”

16. MedImmune v. Genentech • “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 legal rights finds no support in Article III.” • Terrace v. Thompson, 263 U. S. 197 (1923) • Willing v. Chicago Auditorium Association, 277 U. S. 274

17. SanDisk v. STMicroelectronics • CAFC 2007 Judge Linn • “flash memory storage”: DJ Available • “At the end of the meeting, Jorgenson [ST] handed Thompson [SD] a packet of materials containing, for each of ST's fourteen patents under discussion, a copy of the patent, reverse engineering reports for certain of SanDisk's products, and diagrams showing how elements of ST's patent claims cover SanDisk's products.”

18. SanDisk v. STMicroelectronics • But: “Jorgenson further told Thompson that “ST has absolutely no plan whatsoever to sue SanDisk.”” • CAFC applies MedImmune, particularly FN 11 • “Promise not to sue” did not save ST • Under the CAFC ruling, District Court does not have discretion: “we discern little basis for the district court's refusal to hear the case..”

19. SanDisk v. STMicroelectronics • Footnote 2: “In this case, we address only the first prong of this court’s two-part test. There is no dispute that the second prong is met. We therefore leave to another day the effect of MedImmune, if any, on the second prong.“

20. SanDisk v. STMicroelectronics • “..declaratory judgment jurisdiction generally will not arise merely on the basis that a party learns of the existence of a patent owned by another or even perceives such a patent to pose a risk of infringement, without some affirmative act by the patentee.” • “We need not define the outer boundaries of declaratory judgment jurisdiction ..”

21. SanDisk v. STMicroelectronics • “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.”

22. SanDisk v. STMicroelectronics • Bryson concurs: “In sum, the rule adopted by the court in this case will effect a sweeping change in our law regarding declaratory judgment jurisdiction. Despite the references in the court’s opinion to the particular facts of this case, I see no practical stopping point short of allowing declaratory judgment actions in virtually any case in which the recipient of an invitation to take a patent license elects to dispute the need for a license and then to sue the patentee.”

23. Teva v. Novartis • CAFC 2007 Judge Gajarsa • “Famvir®”: DJ Allowed • Novartis has an “NDA” including five patents • Teva filed an ANDA: Novartis filed an infringement suit on only one of the 5 patents • Teva seeks a DJ on the other four

24. Teva v. Novartis • In the ANDA context, Congress explicitly extended federal court declaratory judgment jurisdiction under 28 U.S.C. § 2201 to ANDA paragraph IV disputes such as Teva's and did so “to the extent consistent with the Constitution.” • “A “controversy” is “ripe” if the question presented is “fit for judicial review,” meaning it is entirely or substantially a question of law and postponing a decision would work a substantial hardship on the challenging party.”

25. Teva v. Novartis • Circumstances giving rise to the controversy: • Novartis listed its Famvir® patents in the Orange Book • Teva's submission of its ANDA certifying that it did not infringe Novartis' Famvir® Orange Book patents • combination of three statutory provisions • Novartis' pending infringement litigation • the possibility of future litigation

26. Cat Tech LLC v. TubeMaster, Inc. • CAFC 2008 Judge Mayer • “catalyst loading”: DJ appropriate • “There is, however, no facile, all-purpose standard to police the line between declaratory judgment actions which satisfy the case or controversy requirement and those that do not.”

27. Cat Tech LLC v. TubeMaster, Inc. • “..the issue of whether there has been meaningful preparation to conduct potentially infringing activity remains an important element in the totality of circumstances which must be considered in determining whether a declaratory judgment is appropriate.”

28. Cat Tech LLC v. TubeMaster, Inc. • Tubmaster has: • Developed two basic loading device designs • Developed four loading device configurations • Generated AutoCAD® drawings • Already successfully manufactured and delivered a loading device • Technology is substantially fixed

29. Caraco Pharm. Labs v. Forest Labs • CAFC 2008 Judge Friedman • “Lexapro®”: DJ allowed to proceed • “Forest unilaterally granted Caraco a covenant not to sue for infringement of the patent-in-suit” • “in the context of the Hatch-Waxman framework, Forest's covenant not to sue did not eliminate the controversy between the parties”

30. Quanta v. LG • Supreme Ct 2008 Justice Thomas • Method patent exhausted • LG purchased patents from WANG; licensed to Intel • Two Agreements • Licensing agreement • “Master Agreement”

31. Quanta v. LG • Licensing Agreement: • Authorizes Intel to manufacture and sell microprocessors and chipsets using the LGE Patents (Intel Products); does not purport to alter patent exhaustion rules • Master Agreement • Required Intel to give its customers written notice that the license does not extend to a product made by combining an Intel Product with a non-Intel product

32. Quanta v. LG • The doctrine of patent exhaustion applies to method patents • License Agreement authorizes the sale of components that substantially embody the patents in suit • “The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post sale use of the article.”

33. Quanta v. LG • Court concluded that the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent—even if it does not completely practice the patent—such that its only and intended use is to be finished under the terms of the patent. (United States v. Univis Lens Co., 316 U. S. 241 (1942)

34. Quanta v. LG • “Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Patentees seeking to avoid patent exhaustion could simply draft their patent claims to de­scribe a method rather than an apparatus.” • What does “substantially embodies” mean??

35. Quanta v. LG • “..the only apparent object of Intel’s sales to Quanta was to permit Quanta to incorporate the Intel Products intocomputers that would practice the patents.” • “..the Intel Products constitute a material part of the patented invention and all but completely practice the patent. Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts.”

36. Quanta v. LG • “Quanta was not required to make any creative or inventive decision when it added those parts.” • “Intel all but practiced the patent itself by designing its products to practice the patents, lacking only the addition of standard parts.”

37. Quanta v. LG • What does “authorized” mean?? • “Nothing in the License Agreement restricts Intel’s right to sell its microprocessors and chip-sets to purchasers who intend to combine them with non-Intel parts.”

38. Quanta v. LG • Footnote 7: • “We note that the authorized nature of the sale to Quanta does not necessarily limit LGE’s other contract rights. LGE’s complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages. See Keeler v. Standard Folding Bed Co., 157 U. S. 659, 666 (1895)

39. Quanta v. LG • Footnote 7 (continued): • “(“Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws”).”

40. Compare “Implied License” • An “implied license” is created when: • No noninfringing uses • “..the circumstances of the sale ... 'plainly indicate that the grant of a license should be inferred'” (Met-Coil Sys. Corp v. Komers Unlimited, 803 F. 2d 684 (CAFC 1986)‏

41. What to do next? • After MedImmune and SanDisk?? • If you are the patentee: • Be even more careful with language when attempting to put someone on notice – good luck! • Try to get a confidentiality agreement – good luck! • Mark more often • File first, negotiate second • If you are the target – get the patentee to use the “I” word • What happens to Non-Practicing Entity tactics??

42. What to do next? • Licensing provisions After MedImmune?? • Prohibit validity challenge (What about Lear v. Adkins?)? • Royalty rate increases upon challenge? • Predetermined forum for DJ action? • Agree that licensee will pay licensor's litigation costs for DJ action?

43. What to do next? • After Quanta: • If the patentee wants to control down-stream infringement, MAKE THE LICENSE AGREEMENT EXPLICIT!! • Some have suggested patent grouping into different categories (method, apparatus and systems) and license separately • Separately license down-stream users? How?