MedImmune v. Genentech: a game-theoretic analysis of the Supreme Court's continued assault on the patentee.

• Author: Smith, Nicholas G.

Abstract Introduction I. Background A. The Federal Circuit's Reasonable Apprehension Standard B. MedImmune, Inc. v. Genentech, Inc C. Federal Circuit's Response to MedImmune 1. SanDisk Corp. v. ST Microelectronics, Inc 2. Teva Pharmaceuticals USA, Inc. v. Novartis Pharmaceutical Corp II. Model A. Introduction B. Assumptions C. The Players D. Strategies and Pay-Offs 1. Patentee a. Do Nothing b. Challenge 2. Licensee a. Do Nothing b. Challenge E. Bi-Matrix III. ANALYSIS A. Probability of Invalidity is Zero Percent B. Probability of Invalidity is Ten Percent C. Probability of Invalidity is Fifty Percent D. Probability of Invalidity is Seventy-five Percent E. Probability of Invalidity is One-hundred Percent F. Summary of the Model Conclusion INTRODUCTION

In 1982, with the Federal Courts Improvement Act, Congress created the Court of Appeals for the Federal Circuit. The Federal Circuit was created, in part, as a response to the Supreme Court's neglect of the patent field. (1) Thus, one can say it was designed to give life to patent law by serving as an expert, specialized court that provides competency and unity to national patent law. Initially, the Supreme Court's withdrawal became even more evident after the creation of the Federal Circuit. This caused one author to declare in 2001 that the "Federal Circuit ... has become the de facto supreme court of patents." (2)

Things changed in 2001. (3) The Supreme Court began to grant certiorari to an exceedingly larger amount of patent cases. In the nineteen years of the Federal Circuit's life before 2001, the Supreme Court granted certiorari to only eleven patent cases (an average of .58 cases per term), which addressed substantive issues of patent law. From 2001 to 2011, almost half the time, the Supreme Court will have decided twelve substantive patent cases (an average of 1.3 cases per term). (4) These decisions have been largely considered anti-patentee. (5) Therefore, one could say that if the Federal Circuit gives life to the patentee, the Supreme Court is where the patentee goes to die.

Part of this trend was the Supreme Court's decision in MedImmune Inc. v. Genentech, Inc., (6) which, in an eight-to-one decision, made it easier for patent licensees to challenge the validity of a patent it is licensing. (7) The Court held that a licensee does not have to break the license agreement and risk being assessed breach of contract damages before filing a declaratory judgment action. (8) It reasoned that an Article Ill controversy exists, with regards to a declaratory judgment action, when "the facts alleged, under all the circumstances, show there is a substantial controversy between the parties having adverse legal interest, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment." (9) Previously, the Court of Appeals for the Federal Circuit had articulated a more stringent standard for declaratory judgment actions involving patent claims: whether there was a reasonable apprehension of suit (RAS). (10) Under the RAS test, there must be (1) action(s) by the patent holder, which gives rise to a reasonable apprehension of an infringement suit against the declaratory judgment plaintiffs; and (2) action(s) by the declaratory judgment plaintiff that could constitute infringement. In sum, the Supreme Court stomped out the RAS doctrine in favor of a lesser standard.

The purpose of this Comment will be to examine the effects of MedImmune on both the patentee and licensee by deploying a game theoretic model. By doing so, this Comment seeks to shed light on when and how MedImmune affects the relationship of a licensee and a patentee by analyzing the landscape of the parties' respective strategic concerns.

1. BACKGROUND

   This Section will examine the necessary background case law to identify the strategic concerns that now affect both patentees and licensees. First, the Federal Circuit's Reasonable Apprehension standard will be cursorily discussed. Second, the Supreme Court's dismantling of this standard in MedImmune v. Genentech will be examined. Finally, the Federal Circuit's response to MedImmune will be analyzed.

   1. The Federal Circuit's Reasonable Apprehension Standard

      The Declaratory Judgment Act does not create federal jurisdiction. (11) Subject matter jurisdiction must exist first because of a federal question or diversity. (12) In addition to having subject matter jurisdiction, the courts have required an actual controversy to exist between the parties. (13)

      In a declaratory judgment action the plaintiff has the burden of proof in establishing that an actual controversy exists as a matter of law. (14) For patents, the plaintiff must meet a two-part standard by showing "(1) an explicit threat or other action by the patentee, which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit, and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity." (15) The first prong looks to the conduct of the plaintiff, the alleged infringer; while the second prong looks at the conduct of the defendant, the patentee. (16)

      The first prong is a safeguard against courts making advisory opinions. (17) It analyzes whether the plaintiff is either engaged in conduct that may amount to infringement or is taking meaningful and preparatory steps to what will likely constitute infringing actions. (18) To satisfy this standard, courts look to how imminent the infringing actions are, (19) and whether this infringing conduct is sufficiently definite to constitute infringement. (20)

      The second prong inquires whether the plaintiff, the accused infringer, reasonably believes the patentee will initiate suit. (21) This is an objective standard; the subjective belief of the plaintiff is insufficient. (22) Courts have relied on several factors when evaluating whether a plaintiff is in reasonable apprehension of a suit: the patentee's litigation history, (23) the relationship between the parties, (24) and the contact and negotiations between parties with regards to the patent at issue. (25) If express threats of suit are present, this is obviously a truncated analysis; however, absent explicit threats the court will evaluate the "totality of the circumstances" when deciding if the plaintiff was in reasonable apprehension of a suit. (26)

   2. MedImmune, Inc. v. Genentech, Inc.

      MedImmune, Inc. v. Genentech, Inc. was a battle among biotechnology titans. Genentech was one of the pioneers in the field and focused its development on upstream genetic information. (27) Medimmune, the licensee, was the developer of medicines used to treat a variety of diseases. (28)

      In 1997, the parties entered into license agreements involving two sets of advances by Genentech. (29) One agreement was for an advancement that was covered by a patent that had issued prior to the license; the other was the subject of a pending patent application. (30) When a patent issued on the pending application, Genentech sent Medimmune a letter claiming that the new patent covered Synagis, a drug that accounted for 80% of MedImmune's revenue. (31)

      MedImmune was in a tough position. To Medimmune, the letter was clearly a threat to terminate the license and sue for infringement unless a more beneficial agreement to Genentech could be reached. Medimmune, however, believed the patent was invalid and unenforceable, and thus, not infringed. (32) As a result, Medimmune was faced with either maintaining the status quo, which would result in Genentech terminating the license and suing for infringement thereby exposing Medimmune to treble damages, attorney's fees, and the loss of most of its business, or challenging the patent through a declaratory judgment action. (33) At the time, the latter required Medimmune to break the license agreement themselves and suffer breach of contract damages; otherwise, an Article Ill case or controversy would not be present. (34)

      Attempting to pave new ground, Medimmune chose a third option- paying the license fees and bringing a declaratory judgment action to determine the rights and legal relations of the parties. (35) This failed in the lower courts when, sticking to the Gen-Probe holding, dismissed the suit. The Federal Circuit affirmed. (36) It was concluded that Medimmune was a licensee in good standing, and accordingly, was not in reasonable apprehension of suit (RAS). (37) Thus, the matter was not justiciable. (38)

      Upon review, the U.S. Supreme Court reversed. (39) Justice Scalia, speaking for the majority, rejected the Federal Circuit's RAS test. (40) The Court reasoned that the purpose of the Declaratory Judgment Act was to prevent the plaintiff from having to "bet the farm." (41) In other words, the mere fact that Medimmune was faced with a choice-risk the business or abandon the rights under the license-was sufficient to create Article Ill jurisdiction. (42)

      Overturning the second prong to the reasonable apprehension of suit test changes the field patent litigants play on drastically. Now, the standard is whether there is a "substantial controversy." (43) When determining whether asubstantial controversy exists, a court should be guided by all the circumstances. (44) This seems analogous to the previous "totality of the circumstances" analysis. (45)

      The effects of this new, lowered standard are still somewhat unknown. The Federal Circuit is still getting its legs underneath it. However, there have been decisions since MedImmune, which do shed light on how the Federal Circuit will interpret the new standard. The next section of this Comment will briefly discuss these developments. This will allow for a more accurate framing of the strategic concerns to assist in the analysis.

   3. Federal Circuit's Response to MedImmune

      Since the Supreme Court's dismantling of the RAS test in MedImmune, the Federal Circuit has decided several cases interpreting MedImmune...