Amicus Curiae Brief — MedImmune, Inc. v. Genentech, Inc.

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| Supreme Coun. US.

FILED

JUL 2 6 2006

No. 05-608

—---——

IN THE

Supreme Court of the Hnited States

MEDIMMUNE, INC.,

Petitioner,

GENENTECH, INC., ef al.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE FEDERAL CIRCUIT

BRIEF FOR THE AMERICAN BAR ASSOCIATION AS

AMICUS CURIAE SUPPORTING RESPONDENTS

_ Of Counsel: MICHAEL S. GRECO

Counsel of Record

RICHARD L. RAINEY President,

DAVID H. REMES American Bar Association

CHRISTIAN J. PISTILLI 321 North Clark Street

Chicago, IL 60610

(312) 988-5000

JULY 26, 2006

Counsel for Amicus Curiae

BEST AVAILABLE COPY

Amicus will address the following questions:

1. Whether the holding of Lear, Inc. v. Adkins, 395 U.S.

653 (1969), is limited to validity challenges by repudiating

patent licensees and therefore preserved licensee estoppel

in validity challenges by nonrepudiating patent licensees.

2. Whether Article III permits a patent licensee to ob-

tain a judicial determination of the merit of an invalidity

counterclaim that the licensee could assert if the licensee

(a) repudiated the license agreement, (b) infringed the

patent, and (c) were sued for infringement by the licensor.

3. Whether, if licensee estoppel would bar a nonrepu-

diating patent licensee from suing to invalidate the li-

censed patent, a federal court should decline jurisdiction

over such a suit on equitable and prudential grounds.

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TABLE OF CONTENTS

i ec sminlaiae 1

SPRFEUOEPEEE TS GOW FAMPESIOIINU DE cocccscesscnsncscccccsasessosensccsscseeess 2

TGS PRET CE Ee MDE Y SOE TO PEP EN 3

1. LEAR SUPPORTS THE FEDERAL CIRCUITS

CRE EE Se CLONE eo Ned elle IOs EO OT 3

A. Lear Correctly Rejected Licensee Estoppel in

the Case of a Repudiating Licensee. ...................... 4

B. Lear Needlessly Rejected Licensee Estoppel in

the Case of a Nonrepudiating Licensee. ................ 7

1. The cases cited by Lear do not undermine

I ai iaclasacilestsundematsenasiions 8

2. Lear Properly Overruled Hazeltine.................. 9

C. Lear Should Be Limited To Similar Facts. .......... 10

Il. THIS CASE DOES NOT PRESENT A SUITABLE

Se EE IIIT S| cccicsdnccdninnsnpnissonerssenscses 14

Ill. THE FEDERAL CIRCUIT'S RULE FURTHERS

THE AIMS OF THE DECLARATORY

JUDGMENT ACT AND PATENT POLICY. ............. 18

aE asisnesiiccsoensnicntioninensiiensnnnbetioniantditnesiotntiine 20

TABLE OF AUTHORITIES

FEDERAL CASES

Aetna Life Insurance Co. v. Haworth, 300 U.S.

IE Ce co csrcisicsensiccvsstleusisietidadiedasatiianiemiaai: 14, 15

Altvater v. Freeman, 319 U.S. 359 (1943)...........0.0... 15 - 16

American Sterilizer Co. v. Sybron Corp., 614 F.2d

DG Gy Fi cnt icsitcntitisnibiilatsabidia atin 13

Automatic Radio Manufacturing Co. v. Hazeltine

Research, Inc., 339 U.S. 827 (1950) .........00.0.00.00.. 9-10

BP Chemicals Ltd. v. Union Carbide Corp.,

OF DE Se GR: TD sinvitenetitescinebistatanicbdiimiieaeats 18

Brillhart v. Excess Insurance Co., 316 U.S. 491

RIE sccnsescdncsiccicsidesiimadleieieseiiiclicddiseiabliateal alae ceana naan 18, 19

Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837

CB isscccicnnsecessscindnictidaiissiecebiininiidsesaiaiaaeline denen 19

Cohens v. Virginia, 19 U.S. (6 Wheat.) 264 (1821)....... 7-8

Crowley Co. v. United States, 849 F.2d 273

CE GS. GE nities inndeticciniticiiniiistiistii ae 17

Dale Tile Manufacturing Co. v. Hyatt, 125 U.S.

Op CD cicscoccrciscitisttindinisbinsniiasimmicmiaaiiaemie tae 5

Dawson Chemical Co. v. Rohm & Haas Co., 448

EF As. WP ee svsscesdeasistensniiomannaiginiiicneanadiea ideas 11-12

Elk Grove Unified School District v. Newdow,

Ge er Tk Bh Ge cnvecsaccccdcovtnadtiantiodaitadidebbieiensin 19

Gen-Probe, Inc. v. Vysis, Inc., 359 F.3d 1376

CE, CP, Fc inenincstcccdectpasdecsdachanadeibisataatees 12, 19

Great Lakes Dredge & Dock Co. v. Huffman, 319

BEA. Te CID ccctscisonssnivasitiiidiideadnabiciet tee ee 19

Harris Trust and Savings Bank v. E-I1 Holdings,

Inc., 722 F. Supp. 429 (N.D. Hl. 1989)...........000000..... 16

ill

Harris Trust and Savings Bank v. E-1l Holdings,

Inc., 926 F.2d 636 (7th Cir. 1991)...........00...0 ee. 17

Hendrix v. Poonai, 662 F.2d 719 (11th Cir. 1981)........... 16

Hewitt v. Helms, 482 U.S. 755 (1987).....0....00...00.cccccceccuee 19

Hull v. Brunswick Corp., 704 F.2d 1195

i sspumundanions 13

J. E. Riley Investment Co. v. Commissioner, 311

ETE a a a ea 19

Kastigar v. United States, 406 U.S. 441 (1972)................. 7

Kerotest Manufacturing Co. v. C-O-Two Fire

Equipment Co., 342 U.S. 180 (1952).......................... 19

Kewanee Oil v. Bicron Corp., 416 U.S. 470 (1974).......... 11

Lear, Inc. v. Adkins, 395 U.S. 653 (1969)................. passim

Martin v. New Trinidad Lake Asphalt Co., 255

I sssitieennes 6

Mudgett v. Thomas, 55 F. 645 (C.C. S.D. Ohio

I sssidptnecsenteineions 6

PPG Industries, Inc. v. Westwood Chemicals,

Inc., 530 F.2d 700 (6th Cir. 1976)....................... 13-14

Pope Manufacturing Co. v. Gormully, 144 U.S.

EEE SE ET RR I 2 8

Public Affairs Associates, Inc. v. Rickover, 369

EE 19

Rite-Natl Packaging Corp. v. Berryfast, Inc., 706

EEE ne ee 13

Scott Paper Co. v. Marcalus Manufacturing Co.,

EE A 8-9

Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S.

RR Sa a Li Te 15

Sola Electric Co. v. Jefferson Electric Co., 317

ee, See eT siitivasiciesicncinesheitinaescntininsntiiniineiibitadiacnitaninasiasatnipiinatiald 9

St. Paul Plow Works v. Starling, 140 U.S. 184

SETI hascisuenhesiniteseuedicbanedhinbelchbsenclabientesdiiitasnamnithescdetcaeadliibicabchiiapuinhiaeitael 8

Studiengesellschaft Kohle, m.b.H. v. Shelli Oil

Co., , 112 F.3d 1661 (Fed. Cir. 1997) ......................... 13

Universal Rim Co. v. Scott, 21 F.2d 346 (i).

SD GE cnndociinintecnisinindmetieeneeddibasematiinmduetinn 5-6,8

Wilton v. Seven Falls Co., 515 U.S. 277 (1995) ... 15, 18, 19

STATE CASES

Adkins v. Lear, Inc., 67 Cal. 2d 882 (1967) ................0...... 4

Crew v. Flanagan, 242 Minn. 549 (1954)...................... 6,7

Marston v. Swett, 82 N.Y. 526 (1880)......................00008. 6,7

FEDERAL STATUTES

CL 8 RRS ae ne ate Soa ee een eee a" 12

EY eI TTP OTT 12

INTEREST OF AMICUS'

The American Bar Association is the voluntary, nation-

al membership organization of the legal profession. Its

more than 407,000 members, from every State and terrn-

tory and the District of Columbia, include prosecutors,

public defenders, private lawyers, legislators, law profes-

sors, law enforcement and corrections personnel, law stu-

dents, and non-lawyer associates in allied fields. Since its

inception in 1878, the ABA has promoted improvement of

the administration of justice.

At its June 2006 meeting, the ABA’s Board of Gover-

nors adopted as policy the Federal Circuit's rule that a

nonbreaching patent licensee should not be allowed to

challenge the validity of the licensed patent. The Board

adopted this policy on the recommendation of the Section

of Intellectual Property Law, the world’s largest intellec-

tual property organization, whose 19,000 members reflect

a broad cross-section of the patent bar.’

The ABA submits this brief to advise the Court of equi-

table and prudential considerations that support the Fed-

eral Circuit’s rule. The ABA submits that a district court,

on the basis of these considerations, should decline juris-

diction over validity challenges by nonbreaching licensees,

' The parties have consented to the filing of this brief.

No party authored the brief in whole or in part or con-

tributed monetarily to its preparation or submission.

”

* Neither this brief nor the decision to file it reflects the

views of any judicial member of the ABA. The brief was

not circulated to any member of the Judicial Division

Council before filing, and no member of the Council par-

ticipated in the adoption or endorsement of the positions

taken in the brief.

and that the Court therefore need not decide in this case

whether Article II] compels that result.

SUMMARY OF ARGUMENT

The Court granted review to decide whether a chal-

lenge by a nonbreaching patent licensee to the validity of

the hcensed patent meets the case-or-controversy require-

ment of Article III, as implemented by the Declaratory

Judgment Act. The ABA respectfully submits that such a

challenge does not meet that requirement, but also that

the Court need not decide that constitutional question

here. As an equitable and prudential matter, a federal

district court should decline jurisdiction over such chal-

lenges based on the doctrine of licensee estoppel, whether

or not an Article III case-or-controversy exists.

I. Although the Court in Lear, Inc. v. Adkins, 395 U.S.

653 (1969), broadly rejected the doctrine of licensee estop-

pel, the facts of the case did not require the Court to do so,

and the Court's broad rejection of the doctrine produces

unfortunate, if unintended, consequences. The Court's

holding was correct on the facts of the case; this case pre-

sents an appropriate opportunity to limit the reasoning of

the decision. On its facts, Lear properly stands for the

proposition that a patent licensee may, upon repudiation

of the license, contest the validity of the licensed patent.

As the Federal Circuit's decision suggests, Lear should

not be read to permit a non-repudiating licensee, like Pe-

titioner, to contest the patent’s validity.

Il. The Federal Circuit's conclusion that this case does

not present an Article [1] case-or-controversy is consistent

with Lear. First, whether under the doctrine of licensee

estoppel, or for the other reasons stated by Respondents,

Petitioner is not entitled to challenge the licensed patent.

As long as Petitioner complies with the license agree-

ment, it has no judicially cognizable right to assert. Sec-

ond, Petitioner is not suffering injury. Petitioner was not

compelled to enter into the license agreement and is not

compelled to continue to perform under the agreement.

Petitioner's only “injury” is its uncertainty about its po-

tential legal exposure if it repudiates the license agree-

ment but continues to practice the licensed invention.

That is an everyday question for which businesses seek

the advice of attorneys, not Article III courts.

III]. Considerations of practicality and the wise ad-

ministration of justice counsel that a district court, as an

equitable and prudential matter, should decline jurisdic-

tion in a case like this. A rule allowing a non-repudiating

licensee to challenge the licensed patent would be con-

trary to the aims of the Declaratory Judgment Act, fed-

eral patent law and policy, and prudential standing prin-

ciples. Such a rule would permit the licensee to challenge

the patent while simultaneously enjoying its benefits, pro-

tected by the license from an infringement action by the

licensor and competition by non-licensees. Moreover, such

a rule would discourage, not promote, challenges to inva-

lid patents. Licensors would insist that licensees agree in

the license not to challenge the patent during the term of

the license or while the licensee remains in good standing,

or require licensees to make front-loaded, non-refundable

royalty payments. At worst, such a rule would undermine

the statutory goal of encouraging innovation and inven-

tion by discouraging patent licensing.

ARGUMENT

I. LEAR SUPPORTS THE FEDERAL CIRCUIT'S

RULE.

In Lear, Inc. v. Adkins, 395 U.S. 653 (1969), the Court

held that a licensee that had repudiated its licensing

agreement was free to contest the validity of the licensor’s

patent. In doing so, however, the Court rejected, as “in-

consistent with the aims of federal patent policy,” the doc-

trine of licensee estoppel itself. /d. at 673. But the facts of

the case did not require the Court to reject the doctrine.

Accordingly, although Petitioner argues that Lear cannot

be reconciled with the Federal Circuit's rule in this case,

see Pet. Br. 36-38, a review of the doctrine of licensee es-

toppel and a careful understanding of the true holding of

Lear demonstrate that Petitioner is mistaken.’

At common law, the doctrine of licensee estoppel pre-

vented a licensee from simultaneously challenging a pat-

ent’s validity and practicing the invention under the pro-

tection of the license. A licensee who repudiated the li-

censing agreement, however, was free to defend an action

for post-repudiation royalties or infringement on invalid-

ity grounds. Thus, even in the absence of a valid termina-

tion of the licensing agieement, a licensee could set up a

validity challenge.

A. Lear Correctly Rejected Licensee Estoppel in

the Case of a Repudiating Licensee.

Lear involved a suit for royalties by licensor Adkins af-

ter licensee Lear refused to pay royalties under the terms

of the parties’ licensing agreement. See 395 U.S. at 659.

Lear defended based, in part, on the asserted invalidity of

Adkins’ patent. /d. at 660. The California Supreme Court

held that, “[u]nder the doctrine of licensee estoppel, Lear

[is] prohibited from challenging the validity of Adkins’

patent” because, although Lear had stopped paying royal-

ties, he had not “validly terminated” the agreement pur-

suant to its terms. Adkins v. Lear, Inc., 67 Cal. 2d 882,

> The development of the common law doctrine of licen-

see estoppel, and the doctrine’s relation to Lear, are re-

viewed in William C. Rooklidge, Licensee Validity

Challenges and the Obligation to Pay Accrued Royalties:

Lear v. Adkins Revisited, reprinted in ROGER M. MILGRIM,

MILGRIM ON LICENSING app. 8D.

899 (1967). It was this ruling, and only this ruling, that

the Court reviewed and reversed in Lear.

Although the Court broadly articulated its holding, ap-

pearing to reject the doctrine of licensee estoppel in toto,

what the Court necessarily rejected in Lear was only the

version of the doctrine applied by the California Supreme

Court on the facts of the case. Accordingly, the true hold-

ing of Lear does not foreclose application of the doctrine to

markedly different facts, including those here.

The doctrine that a patent licensee may not challenge

the validity of the licensed patent was established in this

country by the middle of the nineteenth century. See Lear,

395 U.S. at 662. In Dale Tile Manufacturing Co. v. Hyatt,

125 U.S. 46 (1888), for example, the Court held federal

question jurisdiction was lacking where a licensee, who

was sued for royalties under the license agreement, de-

fended by challenging the patent. The Court explained

that, in “this action to recover royalties due under the

agreement, the defendant, while continuing to enjoy the

privileges of the license, was estopped to deny the validity

of the patent or of any reissue thereof.” /d. at 54 (citing,

inter alia, Kinsman v. Parkhurst, 59 U.S. (18 How.) 289

(1855)) (emphasis added).

The italicized portion of the Court’s holding was inte-

gral to the doctrine of licensee estoppel that the Court de-

scribed. The application of the doctrine as described in

Hyatt depended on the fact that the licensee continued to

enjoy the privileges of the license. The doctrine would not

prevent a licensee who repudiated the licensing agree-

ment from contesting the validity of the license in a suit

by the licensor for future royalties or for infringement.

Lower courts elaborated but did not extend the doctrine

as described by the Court.

In Universal Rim Co. v. Scott, 21 F.2d 346 (D.N.D.

Ohio 1922), for example, the district court considered

whether, absent a provision permitting the license agree-

ment to be terminated, a licensee could contest the valid-

ity of patents covered by the agreement after renunciation

and notice. /d. The court answered yes, stating that “the

licensee, whenever he ascertains that the patents covered

by the license agreement are invalid, may refuse to be

further bound thereby, and, upon repudiation and notice,

may thereafter defend against an action for royalties or

an infringement suit as freely as may a stranger.” Jd. at

348-49.

The district court's holding reflected the “weight of au-

thority” pre-Lear — “that the licensee may dispute the va-

lidity of the patent under which he is licensed after he has

repudiated the license.” Crew v. Flanagan, 242 Minn. 549,

558 (1954) (collecting cases).* Because the licensee in Lear

* Accord Martin v. New Trinidad Lake Asphalt Co., 255

F. 93, 94 (D.N.J. 1919) (“A licensee * * * may not set up

the supposed invalidity of the patent * * * unless, prior to

the period for which the royalties are sought to be recov-

ered, he has given to the licensor a distinct, definite, and

unequivocal notice to the effect that he no longer recog-

nizes the binding force of the agreement.”) (collecting

cases); Mudgett v. Thomas, 55 F. 645, 649 (C.C. S.D. Ohio

1893) (“[D]efenses involving the validity of the patent will

be available only for the period subsequent to the aban-

donment of the license by the defendants, and notice

thereof to the plaintiffs.”); Marston v. Swett, 82 N.Y. 526,

533 (1880) (“Where the patent is apparently valid and in

force the party using it, receiving the benefit of its sup-

posed validity, is liable for royalties agreed to be paid and

cannot set up as a defense the actual invalidity of the pat-

ent.* ** If the manufacturer does not so intend, and

chooses to make the patented article, not under the pat-

ent but in hostility to it, he must give notice of that inten-

tion, in order that the presumption may not attach or the

patentee be misled.”).

had repudiated the licensing agreement, the Court had no

need to address the issue presented here.

B. Lear Needlessly Rejected Licensee Estoppel

in the Case of a Nonrepudiating Licensee.

The Court decided Lear on the premise that, under the

doctrine of licensee estoppel, a patent licensee could avoid

estoppel only by terminating the agreement pursuant to

its terms, and that committing a material breach, or oth-

erwise repudiating the agreement, did not suffice. The

Court therefore reasoned that, to allow licensees to avoid

estoppel, it had to abolish the estoppei doctrine in foto.

Lear, 395 U.S. at 663 n.10.

The Court’s premise, however, appears to have been

mistaken. The justification for licensee estoppel at com-

mon law was that “it would be unreasonable for a licensee

to have the advantage of the patent in his commercial

dealings with the world at large and repudiate it in his

dealings with his licensor when it comes to paying royal-

ties. He must take a stand which is consistent for he can-

not be allowed to affirm and disaffirm the patent at one

and the same time.” Crew v. Flanagan, 242 Minn. at 558

(emphasis added). Accord Marston v. Swett, 82 N.Y. at

533 (“The reasons for the rule are that the party has got

what he bargained for; that he cannot be allowed at the

same time to affirm and disaffirm the patent.”). Thus, al-

lowing a licensee to set up an invalidity defense upon re-

pudiation of a licensing agreement would not, as the

Court evidently supposed, undermine the vitality of the

estoppel doctrine. See Lear, 395 U.S. at 663 n.10.

Because the facts of Lear did not require the Court to

reject licensee estoppel, the Court's rejection of the doc-

trine is not binding authority. See Kastigar v. United

States, 406 U.S. 441, 454-55 (1972) (“broad language * * *

unnecessary to the Court's decision * * * cannot be con-

sidered binding authority”): Cohens v. Virginia, 19 U.S. (6

Wheat.) 264, 399-400 (1821) (“It is a maxim not to be dis-

regarded, that general expressions, in every opinion, are

to be taken in connection with the case in which those ex-

pressions are used. If they go beyond the case, they may

be respected, but ought not to control the judgment in a

subsequent suit when the very point is presented for deci-

sion.”).

1. The cases cited by Lec r do not undermine

licensee estoppel.

The Court in Lear stated that St. Paul Plow Works v.

Starling, 140 U.S. 184 (1891), undermined the common

law doctrine of licensee estoppel. See Lear, 395 U.S. at

663. In Si. Paul, however, the licensee had “renounce|d]

its license” long before asserting the patents’ invalidity.

140 U.S. at 186. For this reason, the lower court admitted

invalidity evidence. Had it succeeded in proving invalid-

ity, the licensee would have been relieved of the obligation

to pay post-repudiation royalties. Thus, although incon-

sistent with the “strong-form” version of licensee estoppel

that the Court necessarily rejected in Lear, St. Paul was

consistent with the common law rule of licensee estoppel

and the Federal Circuit's rule in this case.

In Pope Manufacturing Co. v. Gormully, 144 U.S. 224

(1892), the Court was troubled primarily by the fact that

the licensing agreement purported to bind the licensee

even in the event that the licensor’s patent was eventu-

ally declared invalid. However, as the Universal Rim

court explained, “[a] licensee, if evicted from the use of the

patents by a judgment of a court of competent jurisdiction

declaring the patents invalid, may, after giving notice to

the licensor, defend against the payment of royalties sub-

sequently accruing.” 21 F.2d at 348. Under the common

law rule of licensee estoppel, such “eviction” ended the

estoppel. In short, the licensing agreement's infirmities in

Pope were unrelated to any legitimate application of the

licensee estoppel doctrine.

Nor did Scott Paper Co. v. Marcalus Manufacturing

Co., 326 U.S. 249 (1945), compel the Court's rejection of

licensee estoppel. Although the Court found the doctrine

of assignor estoppel “inconsistent with the patent laws” as

applied to the facts of the case, id. at 257-58, it is unclear

why licensee estoppel — a different doctrine developed for

different reasons — was undermined by the limitation that

the Court placed on assignor estoppel in that case. Fur-

ther, the Court’s concern in Scott Paper was with the pat-

ent assignee’s attempt to recapture by private agreement

an expired patent’s monopoly. /d. at 256. Such was not

the Court’s concern in Lear.

Finally, the antitrust cases on which Lear relied did

not compel the Court's rejection of licensee estoppel as

traditionally applied. The Court stated that cases such as

Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173

(1942), were “antithetic to the principles underlying [li-

censee] estoppel,” Lear, 395 U.S. at 666; but Sola and the

other cases cited by the Court dealt with the effect of the

validity of patents on price-fixing clauses in licensing

agreements, a question unrelated to the doctrine of licen-

see estoppel. Sola and similar cases recognize that such

licenses become per se illegal price-fixing agreements as a

matter of antitrust law if the patent is invalid. These

cases are simply exceptions to the antitrust law rule that

price fixing 1s acceptable if contained in a patent license.

In sum, none of the cases that Lear relied on compelled

rejection of the doctrine of licensee estoppel as tradition-

ally applied. The antitrust exception cases were afield;

Scott Paper, at most, expressed a federal policy in favor of

encouraging validity challenges in a different context; and

both St. Paul and Pope in fact were examples of the licen-

see estoppel doctrine at work.

2. Lear Properly Overruled Hazeltine.

In Lear, the Court stated that Automatic Radio Manu-

facturing Co. v. Hazeltine Research, Inc., 339 U.S. 827

(1950), in which it had most recently applied the doctrine

of licensee estoppel, “should no longer be regarded as

sound law with respect to its ‘estoppel’ holding.” 395 U.S.

at 671. The Court properly overruled Hazeltine because

the Court’s holding in that case was inconsistent with its

holding in Lear.

In Hazeltine, a licensor sought royalty payments under

the terms of a licensing agreement that provided for roy-

alty payments that would be required whether or not the

licensed invention was used. See 339 U.S. at 829-30. The

licensee defended, arguing that, “notwithstanding the li-

censing agreement, [it] may contest the validity of the

patents it is charged with using.” Jd. at 836. However, the

Court rejected this argument based on “[t}he general rule

** * that the licensee under a patent license agreement

may not challenge the validity of the licensed patent in a

suit for royalties due under the contract.” /d.

The holding of Hazeltine was too broad a statement of

the rule — broader than the holding of Lear itself. In Lear,

the licensee had voluntarily relinquished its claim to the

benefits of the licensing agreement before asserting the

patent's invalidity. At the very least, the Court in Ha-

zeltine applied estoppel to the licensee without regard to

whether the licensee had repudiated the benefit of the li-

cense. Thus, Hazeltine was an application of the “strong

form” licensee estoppel rejected in Lear.

C. Lear Should Be Limited To Similar Facts.

Lear was correctly decided because the “strong form”

version of licensee estoppel endorsed by the California Su-

preme Court was inequitable and did not serve the pur-

poses of the doctrine as traditionally understood. In

support of its holding in Lear, the Court relied on federal

policy in favor of encouraging patent validity challenges.

See 395 U.S. at 670. The “strong form” version of licensee

estoppel! rejected in Lear indeed disserved this policy. Un-

der that version of the doctrine, a licensee who became

convinced of the patent's invalidity would nevertheless —

absent a valid termination — be unable to challenge the

patent, even if he chose to repudiate the contract. Thus,

the licensee could never, after signing the license and not-

withstanding changed circumstances, opt out of the li-

cense and return to the position of a stranger to the

patent. The Court correctly concluded that a rule, in effect

requiring that licensees prospectively and irrevocably sign

away their rights to challenge the validity of a licensed

patent, is bad patent policy. Lear leveled the playing field

by allowing a licensee who repudiates based on its belief

that the patent is invalid (and thus that the license is un-

necessary and improper) to assert the patent’s invalidity

as a defense in an action by the licensor.

The traditional doctrine of licensee estoppel, as op-

posed to the “strong form” version at issue in Lear, was

equitable and well-supported. Traditional licensee estop-

pel imposes no irrevocable waiver of licensee challenges.

Instead, the traditional doctrine simply requires licensees

to choose between enjoying the benefits of the license and

asserting the invalidity of the licensed patent. Under the

doctrine, a licensee may choose either but not both, as the

Federal Circuit properly refused to permit Petitioner to do

here. Under the Federal Circuit's rule, the playing field

remains level: a licensee may assert the invalidity of the

licensor’s patent, but only after forgoing the benefits that

the patent license provides.

To be sure, encouraging patent invalidity challenges is

a goal of federal patent law. But it is neither the only goal

nor the overarching goal. “The stated objective of the Con-

stitution in granting the power to Congress to legislate in

the area of intellectual property is to ‘promote the Pro-

gress of Science and useful Arts.” Kewanee Oil v. Bicron

Corp., 416 U.S. 470, 480 (1974). Thus, for example, it is

federal patent policy to reward inventors and to foster in-

vention, including by encouraging the disclosure of inven-

tions. See id. at 480-81: see also Dawson Chem. Co. v.

Rohm & Haas Co., 448 U.S. 176, 221 (1980) (discussing

“the policy of stimulating invention that underlies the

patent system”). As the Federal Circuit has explained,

allowing licensees in good standing to challenge the pat-

ents under license “yields undesirable results” because it

“discourages patentees from granting licenses.” CGen-

Probe, Inc. v. Vysis, 359 F.3d 1376, 1382 (Fed. Cir. 2004).

Such a rule would skew federal patent policy away from

its overarching goal of encouraging invention and innova-

tion.

The policy of encouraging invalidity challenges does

not require that non-repudiating licensees be allowed to

challenge the validity of licensed patents. Other avenues

for challenging patent validity are available. First, the

patent might be challenged by a non-licensee. Second,

Congress in 1981 created a mechanism that allows indi-

viduals to request that the Patent and Trademark Office

reexamine a patent based on prior art. See 35 U.S.C.

§§ 302, 311(b). Thus, it is now substantially easier and

less expensive to challenge the validity of a patent than it

was when Lear was decided. Compared with the compet-

ing goal of encouraging innovation, the policy in favor of

encouraging validity challenges is less in need of protec-

tion now than it was when Lear was decided.

The Court stated in Lear that its task was to “balance

the claims of promisor and promisee in accordance with

the requirements of good faith.” See Lear, 395 U.S. at 670.

Applying Lear so broadly as to permit licensee challenges

without repudiation would not balance the interests of

licensees and licensors in accordance with the require-

ments of good faith. Doing so would permit licensees in

effect to inoculate themselves against infringement ac-

tions, and then, having limited their downside risk, im-

mediately to seek to avoid their obligations under the par-

ties’ agreement altogether. “In other words, in this situa-

tion, the licensor would bear all the risk, while the

licensee would benefit from the license’s effective cap on

damages or royalties in the event its challenge to the pat-

ent’s scope or validity fails.” Gen-Probe, 359 F.3d at 1382.

Equitable and policy considerations thus support rec-

ognition of the continued validity of “traditional” licensee

estoppel as a matter of federal patent law — and reading

Lear as limited to its core holding.® That is just what the

Federal Circuit did in stating that a licensee “cannot in-

voke the protection of the Lear doctrine until it (i) actually

ceases payment of royalties, and (ii) provides notice to the

licensor that the reason for ceasing payment of royalties

is because it has deemed the relevant claims to be inva-

lid.” Studiengesellschaft Kohle, m.b.H. v. Shell Oul Co.,

112 F.3d 1561, 1568 (Fed. Cir. 1997).®

5 The negative incentive effects of Lear's holding are sub-

stantial, and counsel strongly in favor of limiting it to

similar facts. See John W. Schlicher, Judicial Regulation

of Patent Licensing, Litigation and Settlement Under Ju-

dicial Policies Created in Lear v. Adkins, AM. INTELL.

Prop. L. ASS’N, SELECTED LEGAL PAPERS, Vol. III, No. 1

(June 1985). As this paper shows, Lear’s rule — especially

in its strong form — is economically inefficient, decreasing

the output of licensees and increasing the deadweight loss

of monopoly. While the rule increases patent invalidity

challenges, the economic benefits therefrom are more

than outweighed by the increased costs of the rule, includ-

ing costs associated with (1) increased litigation, (2) de-

creased licensee productivity, (3) decreased rate of

inventing, and (4) inefficient exploitation of inventions.

Id. at 8-13.

6 Other circuits have reached similar conclusions. See

Rite-Nail Packaging Corp. v. Berryfast, Inc., 706 F.2d 933,

936-37 (9th Cir. 1983); Hull v. Brunswick Corp., 704 F.2d

1195, 1203 (10th Cir. 1983); Am. Sterilizer Co. v. Sybron

Corp., 614 F.2d 890, 897-98 (3d Cir. 1980); PPG Indus.,

(continued...)

Il. THIS CASE DOES NOT PRESENT A SUITABLE

“CASE OR CONTROVERSY.”

Lear did not address the question of jurisdiction under

Article II] or the Declaratory Judgment Act. As the Fed-

eral Circuit noted, “[i]n Lear, the licensee stopped paying

royalties and the patentee sued for royalties; there was

clearly a justiciable controversy, and that aspect was not

an issue in Lear.” Pet. App. 5. The Federal Circuit's con-

clusion that this case does not present an actual case or

controversy is consistent with Lear.

In Aetna Life Insurance Co. v. Haworth, 300 U.S. 227

(1937), the Court first articulated the standards for a de-

claratory judgment action. The Court explained:

The Declaratory Judgment Act of 1934, in its limita-

tion to “cases of actual controversy,” manifestly has

regard to the constitutional provision and is opera-

tive only in respect to controversies which are such

in the constitutional sense. The word “actual” is one

of emphasis rather than of definition. Thus the op-

eration of the Declaratory Judgment Act is proce-

dural only. In providing remedies and defining

procedure in relation to cases and controversies in

the constitutional sense the Congress is acting

within its delegated power over the jurisdiction of

the federal courts which the Congress is authorized

to establish.

Id. at 239-40. “The Declaratory Judgment Act allowed re-

lief to be given by way of recognizing the plaintiff's right

even though no immediate enforcement of it was asked.”

Inc. v. Westwood Chems., Inc., 530 F.2d 700, 706, 708 (6th

Cir. 1976).

Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667,

671-72 (1950).

Petitioner seeks vindication of a substantive right that,

absent its repudiation of the license agreement, it does

not actually have. If Lear stands only for the proposition

that a repudiating licensee may assert invalidity as a de-

fense to an infringement action or a suit to recover royal-

ties, and a non-repudiating licensee such as Petitioner

has no such right, then Petitioner's “claim” is “foreclosed

under the applicable substantive law,” Wilton v. Seven

Falls Co., 515 U.S. 277, 282-90 (1995) (citation omitted),

and Petitioner may not assert invalidity. To allow licen-

sees to assert offensively in a declaratory judgment action

that which they could not assert defensively in an action

for royalties would impermissibly expand licensees’ sub-

stantive rights. This would directly violate the Court's

statement that the operation of the Declaratory Judgment

Act is “procedural only.” Aetna, 300 U.S. at 240.

Contrary to Petitioner's claim, the Court did not previ-

ously “decide| ] the same jurisdictional issue before this

Court today,” Pet. Br. 16, in Altvater v. Freeman, 319 U.S.

359 (1943). Altvater did not concern the right of a non-

repudiating licensee to assert invalidity claims. In Alt-

vater, the Court held that a licensee could assert a coun-

terclaim seeking a declaration relating to the validity of

certain reissue patents. See 319 U.S. at 365-66. However,

the reason the Court allowed the counterclaim was that

the licensee was only paying the royalties “under compul-

sion of an injunction” from a prior case. /d. at 365. Indeed,

the Court noted that the lover courts had found “that the

license agreement was terminated on the surrender of the

original patent and was not renewed and extended to

cover the reissue patents.” /d. at 364 (emphasis added).

Therefore, it is clear that the licensee's obligation to con-

tinue paying royalties did not stem from the licensing

agreement but from the injunction. As the Court made

clear, “[a] controversy was raging, even apart from the

continued existence of the license agreement.” Jd. Thus,

the Court's decision in Altvater did not touch on the ques-

tion presented in this case; a question which the Altvater

Court explicitly “put to one side” and declined to answer.

See id.

Petitioner is invoking the Declaratory Judgment Act

not to obtain an interpretation of the license agreement's

terms, but to obtain advice about its potential legal expo-

sure if it should repudiate the agreement and yet con-

tinue to practice the invention. That, however, is exactly

the sort of question that private parties face all the time

and for which they seek the advice of counsel. As the

Eleventh Circuit has explained:

Persons occupying positions of responsibility * * * of-

ten must make difficult decisions that can have ad-

verse consequences for others. * * * Needless to say,

the decisionmakers would benefit greatly by having

guidance as to the potential legal ramifications of

their decisions. Furnishing such guidance prior to~

the making of the decision, however, is the role of

counsel, not of the courts.

Hendrix v. Poonai, 662 F.2d 719, 722 (11th Cir. 1981). For

this reason, even if this case were thought to satisfy Arti-

cle Ill, as implemented by the Declaratory Judgment Act,

it would not be suitable for adjudication.

Harris Trust and Savings Bank vy. E-Il Holdings, Inc.,

926 F.2d 636 (7th Cir. 1991), is instructive. In that case,

the trustee plaintiffs sought a declaration as to whether

the appellee, a party to the indenture agreement at issue,

was in default of that agreement. However, the district

court held that it lacked Article III jurisdiction because

the trustees “declined to declare an event of default under

the terms of the Indentures,” as they were free to do, and

instead asked the court to determine whether a default

had occurred. 722 F. Supp. 429, 441 (N.D. Ill. 1989). The

district court held that, because the trustees, “in effect, at

all times ha[d] the power to create a controversy, but they

ha[d] not yet done so,” no actual controversy existed. /d.

The equities in favor of finding an actual controversy

in Harris Trust arguably were substantial. As the Sev-

enth Circuit explained, the decision whether to declare an

event of default, if incorrect, likely would have exposed

the trustees to suit. See Harris Trust, 926 F.2d at 638.

Nevertheless, the court held that unless and until the

trustees declared an event of default, the court lacked

subject matter jurisdiction over the question. See id. at

640 (“the Trustees have declined to express an opinion on

the merits|;}] * * * that failure evidences the lack of a case

or controversy’).

Petitioner has the power to create an actual contro-

versy but has not done so. In the same way that the trus-

tees’ failure to declare an event of default under the

parties’ agreement prevented the court from exercising its

jurisdiction, the Petitioner's failure to repudiate its h-

cense prevents the federal courts from hearing this case.

Of course, if Petitioner is wrong and Respondents’ patent

is valid, Petitioner would then be subject to an infringe-

ment suit (or a suit for royalties), but in this respect Peti-

tioner is in the same position as the trustees in Harris

Trust, who similarly would have faced substantial litiga-

tion exposure if they made the wrong choice. The mere

fact that a party faces a difficult business decision does

not confer jurisdiction on the federal courts. See, e.g..

Crowley Co. v. United States, 849 F.2d 273, 276 (7th Cir.

1988) (“You cannot go to a federal court for advice on the

legality of a proposed course of action.”).

{11. THE FEDERAL CIRCUIT’S RULE FURTHERS

THE AIMS OF THE DECLARATORY

JUDGMENT ACT AND PATENT POLICY.

From the earliest days of the Declaratory Judgment

Act, the Court has consistently affirmed that federal

courts are “under no compulsion to exercise thfeir] juris-

diction” in declaratory judgment actions. Brillhart v. Ex-

cess Ins. Co., 316 U.S. 491, 494 (1942). Rather, through

the Declaratory Judgment Act,

Congress sought to place a remedial arrow in the

district court’s quiver; it created an opportunity, ra-

ther than a duty, to grant a new form of relief to

qualifying litigants. Consistent with the nonobliga-

tory nature of the remedy, a district court is author-

ized, in the sound exercise of its discretion, to stay or

to dismiss an action seeking a declaratory judgment

before trial or after all arguments have drawn to a

close. * * * In the declaratory judgment context, the

normal principle that federal courts should adjudi-

cate claims within their jurisdiction vields to consid-

erations of practicality and wise judicial

administration.

Wilton, 515 U.S. at 288 (footnote omitted).

In the words of the Federal Circuit, the purpose of the

Declaratory Judgment Act is to

enable a person who is reasonably at legal risk be-

cause of an unresolved dispute, to obtain judicial

resolution of that dispute without having to await

the commencement of legal action by the other side.

It accommodates the practical situation wherein the

interests of one side to the dispute may be served by

delay in taking legal action.

BP Chems. Ltd. vy. Union Carbide Corp., 4 F.3d 975, 977

(Fed. Cir. 1993).

By entering into licensing agreements, licensors give

up a number of important rights, including the right to

exclude the licensee from using the claimed invention

and, in the case of use, to sue for treble damages, among

other things. If the licensee is nevertheless allowed to

seek to invalidate the patent, then the licensee has effec-

tively given up nothing. Under this regime, “the licensor

would bear all the risk, while licensee would benefit from

the license’s effective cap on damages or royalties in the

event its challenge to the patent’s scope or validity fails.”

Gen-Probe, 359 F.3d at 1382. Therefore, to allow the li-

censee to sue the licensor, even while retaining the pro-

tection of the license, would undermine rather than serve

the principle of equality that underlies the Declaratory

Judgment Act.

“The factors relevant to wise administration here are

equitable in nature.” Kerotest Mfg. Co. v. C-O-Two Fire

Equip. Co., 342 U.S. 180, 183 (1952). Those factors here

militate in favor of declining jurisdiction even if Article

II] and the Act permit a federal court to exercise jurisdic-

tion. See, e.g., Wilton, 515 U.S. at 288; Hewitt v. Helms,

482 U.S. 755, 762-63 (1987); Pub. Affairs Assocs., Inc. v.

Rickover, 369 U.S. 111, 112 (1962); Brillhart, 316 U.S. at

494 (Frankfurter, J.); Great Lakes Dredge & Dock Co. v.

Huffman, 319 U.S. 293, 300 (1943) (Stone, C.J.). Accord-

ingly, the Court could affirm the Federal Circuit's judg-

ment on equitable and prudential grounds and leave the

Article III question to the future. See Elk Grove Unified

Sch. Dist. v. Newdow, 542 U.S. 1, 11-18 (2004) (reversing

for lack of prudential standing and avoiding Article III

issue on which review had been granted); see generally J.

Ek. Riley Inv. Co. v. Comm'’r, 311 U.S. 55, 59 (1940)

(“Where the decision below is correct it must be affirmed

by the appellate court though the lower tribunal gave a

wrong reason for its action.”); Chevron U.S.A., Inc. v.

NRDC, Inc., 467 U.S. 837, 842 (1984) (“this Court reviews

judgments, not opinions’).

CONCLUSION

For the foregoing reasons, the judgment should be af-

firmed.

Respectfully submitted,

Of Counsel: MICHAEL S. GRECO