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Licensing Law Alert: Patent Owners Retain Burden of Proof When Licensees Challenge Infringement

Friday, February 21, 2014
By Adrian Mollo

Adrian Mollo is a partner with the Intellectual Property Department of McKenna, Long & Aldridge LLP in Washington. His practice focuses on IP-centric business transactions and dispute resolution.

Medtronic, Inc. v. Mirowski Family Ventures, LLC is a U.S. Supreme Court case concerning a patent owner named Mirowski Family Ventures LLC (“Mirowski”), which owns a number of patents concerning implantable heart stimulators. No. 12-1128 (Jan. 22, 2014). Mirowski has a long-standing patent license with Medtronic, under which Medtronic pays a running royalty for products that practice the licensed patents. 1

One day, Medtronic introduced a new product. Mirowski notified Medtronic that it believed the product is covered by the patents, that the license extends to those new products, and that Medtronic owes a running royalty for their sale. Medtronic disagreed. Medtronic thought the product was outside the scope of the licensed patent claims and did not want to pay a royalty. When the parties were unable to reach agreement, Medtronic filed a declaratory judgment action, seeking a judicial declaration that the products do not infringe the licensed patents.2

Issue:    If a licensee in good standing files a declaratory judgment action, seeking a judicial declaration that its products do not infringe the licensed patents, which party bears the burden of proving infringement: the plaintiff licensee or the defendant patent owner?

Answer: Even though the licensee may commence the action, and even though the patent owner can't file a patent infringement action (because the licensee remains in good standing, meaning there is no infringement), the patent owner retains the burden of proving infringement, “just as it would be had the patentee brought an infringement suit.” Op. at 6.

As discussed below, this decision will impact a number of areas of patent licensing practice, including drafting of license provisions, negotiations regarding whether later-introduced products are royalty bearing, and subsequent litigation (or arbitration) proceedings concerning the same.

Discussion

Notably, this issue could not have arisen only a few years ago. Prior to 2007, a licensee in good standing did not have “standing” to challenge the patents. On January 9, 2007, however, the Supreme Court ruled that a licensee can continue to make royalty payments under the license agreement while challenging the validity of the underlying patent. MedImmune v. Genentech, 127 S. Ct. 764 (2007).

The MedImmune decision, however, concerned a licensee's challenge to the licensed patent's validity. As the challenger always bears the burden of demonstrating invalidity, there was no question of shifting burdens. Whether as a licensee or defendant, it is the patentee's adversary that seeks a declaration of invalidity. The present case, in contrast, presents the question of how the burden of proof on infringement may change, when a licensee in good standing seeks a declaration of non-infringement.

When Medtronic and Mirowski presented the issue to the district court, the district court believed that Mirowski, as the patent owner, bore the burden of proving infringement. Following a bench trial, the court concluded that Mirowski had not proven infringement, either directly or under the doctrine of equivalents.

On appeal, the Federal Circuit changed course. Given that the patentee was the defendant and was “foreclosed” from asserting an actual infringement claim (as the royalties were being paid into escrow), the Federal Circuit concluded that the declaratory judgment plaintiff “bears the burden of persuasion.” 695 F. 3d 1266, 1272 (2012).

When presented with the question, the Supreme Court rejected the Federal Circuit's decision, instead concluding that there is no compelling reason to change the default rule that a patent owner has the burden of proving infringement. Although the Declaratory Judgment Act does provide a cause of action, its operation is procedural in nature and does not change the underlying character of the issue. Op. at 6-7. Further, as the burden of proof is a “substantive aspect of a claim,” and the patentee traditionally bears the burden of proving infringement, the atypical styling of this case does not justify shifting the burden.

The Supreme Court also noted practical reasons for its conclusion. For example, siding with Mirowski would effectively force the licensee to prove the negative, which can create unnecessary complexity and difficulty. As the Court observed:

A complex patent can contain many pages of claims and limitations. A patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent. Until he does so, however, the alleged infringer may have to work in the dark, seeking, in his declaratory judgment complaint, to negate every conceivable infringement theory.

Op. at 8.

 

Rather than impose that obligation on the licensee, and run the risk of conflicting outcomes were the patentee to later sue for infringement and lose, Op. at 7-8, the Court elected to leave the burden of proving infringement with the patentee.

Significance for Patent Licensing Practice

Although good-standing challenges are uncommon,3 this decision does provide guidance for license drafting and related negotiations.

For example, the parties to a license agreement may provide guidance in the agreement regarding, inter alia, the patentee's access to designs and specifications for a licensee's new products, to permit the patentee to make an informed evaluation of whether the product is covered by the patent. If the parties are competitors and the designs and specifications proprietary, the parties might craft a forward-looking solution, such as identifying a neutral third-party to assist with later disputes regarding scope of coverage.

The parties might also consider submitting the issue to arbitration. The Patent Act was amended in 1983 to provide that ”[a] contract involving a patent or any right under a patent may contain a provision requiring arbitration of any dispute relating to patent validity or infringement arising under the contract.“ Further, any defenses to a patent infringement lawsuit as well as questions regarding the scope of the claims are likewise arbitrable.4 35 U.S.C. §§294(a), (b); Rhone-Poulenc Specialties Chimiques v. SCM Corp., 769 F.2d 1569 (Fed. Cir. 1985).

The parties might also craft the dispute resolution procedure to provide a framework for challenges by licensees in good standing. For example, the Medtronic license agreement was amended in 2006 to provide for the escrow solution used in this case. The parties might also provide specific guidance regarding fee shifting in the event of a good-standing challenge.

At the same time, the ability of parties to design or limit avenues for challenging patents remains a moving target. For example, the enforceability of “no challenge” clauses was recently before the Second Circuit Court of Appeals, Rates Tech.Inc. v. Speakeasy Inc., et al., No. 11-4462 (2nd Cir. Aug. 14, 2012), and the Supreme Court unfortunately declined to accept certiorari, cert denied568 U.S. ___ (Jan. 14, 2013).

Given MedImmune and now Medtronic have reduced the barriers to challenges by licensees in good standing, only time will tell whether licensees elect to take advantage of the opportunity to press their advantage on questioning the validity and infringement of the licensed patents.

1 The license to Medtronic was actually made through an intermediary sublicensor, but as the presence of the additional parties did not influence the Court's ruling, Op. at 2, we refer in this article to both the patentee and its sublicensors as “Mirowski.”

2 Under the license agreement (as amended), if Mirowski provides Medtronic with notice that a new product infringes a Mirowski patent, Medtronic may either (a) pay the royalties for the new products, or (b) pay the royalties into an escrow account and file a declaratory judgment action to challenge infringement. The prevailing party would receive the escrowed license fees. In 2007, Mirowski gave Medtronic notice that certain new products infringed the Mirowski patents. Medtronic disagreed, began to pay its royalties in escrow, and commenced a declaratory judgment action seeking a declaration of non-infringement and that the patents were invalid.

3 We may see more licensee challenges, given the Federal Circuit's December 5, 2012 decision in Cummins Inc. v. TAS Distributing Company Inc., 2010-1134, in which the Federal Circuit held that a licensee must assert any counterclaims it possesses regarding invalidity and non-infringement of licensed patents if the licensor asserts breach of contract and similar claims (e.g., failure to satisfy commercialization obligations, royalty calculation errors). E.g., Adrian Mollo, “Patent License Challenges As Compulsory,” Law 360 (April 25, 2013) (subscription access).

4 At the same time, if considering using an arbitration clause in a patent license, consider that a finding of invalidity in arbitration might not have preclusive effect against the patent holder. With respect to patent arbitrations, by statute, “[a]n award by an arbitrator shall be final and binding between the parties to the arbitration but shall have no force or effect on any other person.” 35 U.S.C. §294(c) (emphasis added).

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