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By Tony Dutra
Nov. 5 --The Supreme Court considered arguments on Nov. 5 on whether a licensee bringing a declaratory judgment action bears the burden of persuasion that its newly introduced products would not be covered by the claims of licensed patents. (Medtronic Inc. v. Boston Scientific Corp. ( U.S., No. 12-1128, argued 11/5/13).
Counsel for the alleged infringer and for the U.S. government as a friend of the court framed the argument such that the action seeking a declaration of noninfringement should be the mirror image of the patentee's potential infringement complaint, where the burden is always on the patentee.
Counsel for the patent holder relied on the “normal default rule”--when only one party is seeking relief, it has the burden--and the terms of the license at issue here which, for dispute resolution, required that the licensee only bring an action in court.
The justices briefly considered, in that context, whether the case arises under patent law at all, or whether it is a contract dispute that should not have been addressed by the U.S. Court of Appeals for the Federal Circuit.
The court's decision will have effects on the balance of negotiating power between future patent holders and willing licensees, and ways to create future license agreements to get around the concerns raised here were discussed during oral argument. However, that still leaves open the question of how the court's ruling would affect current agreements.
The government took the lead in citing the negative consequences of shifting the burden to the alleged infringer, with counsel for the patent owner arguing that the concerns are minor if not nonexistent.
Morton Mower and Mieczyslaw Mirowski developed the first implantable cardioverter defibrillators during the period between 1969 and 1980. Two reissue patents (RE38,119 and RE39,897) are assigned to Mirowski Family Ventures LLC (MFV), which in turn exclusively licensed the patents to a subsidiary of Boston Scientific Corp. The patents--the '897 patent is a continuation of the '119 patent--cover a type of cardiac pacemaker.
Medtronic is a sublicensee of the '119 patent. The license called for MFV to identify infringing Medtronic products as they were introduced into the market, and then for Medtronic, if it disagreed, to file a declaratory judgment action. Medtronic continued to pay royalties on the alleged infringing products into an escrow account, and in 2007, it filed the declaratory judgment action in the U.S. District Court for the District of Delaware. Under the agreement, MFV was prohibited from counterclaiming for infringement.
At trial, Medtronic argued that specific limitations of the patent claims did not cover the new products, and MFV rebutted only those arguments. The district court ruled in favor of Medtronic, concluding that the burden always falls on the patentee to show infringement, and thus that MFV failed to show that all the elements of the claims were met by the products at issue.
The Supreme Court held in 2007 that a licensee need not breach an agreement to have standing to file a declaratory judgment action seeking a declaration of invalidity, noninfringement or unenforceability. MedImmune Inc. v. Genentech Inc., 549 U.S. 118, 81 U.S.P.Q.2d 1225 (2007) (06 PTD, 1/10/07).
The Federal Circuit determined that the high court thus shifted the burdens in such cases, and it reversed the Delaware court's ruling here. It held that “in the post-MedImmune world,” the licensee seeking a declaratory judgment bears the burden of persuasion. 695 F.3d 1266, 104 U.S.P.Q.2d 1323 (Fed. Cir. 2012) (181 PTD, 9/19/12).
The high court granted Medtronic's petition for writ of certiorari on May 20 (98 PTD, 5/21/13). Seth P. Waxman of Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C., represents Medtronic and filed its merits brief. Arthur I. Neustadt of Oblon, Spivak, McClelland, Maier & Neustadt, Alexandria, Va., filed MFV's response brief and argued for the firm in court.
The U.S. government filed a brief in support of Medtronic and was granted leave to split argument time. Curtis E. Gannon, assistant to the Solicitor General, argued on behalf of the government.
Medtronic's principal argument is that the dispute in the case is whether its new products infringed the licensed patents, that if the case had been brought by MFV as a patent infringement action MFV would bear the burden of persuasion, and that the Declaratory Judgment Act is entirely procedural in nature and thus cannot change the substantive burdens of proof.
Justice Samuel A. Alito first questioned whether much was at stake at all in this case. “Now, this concerns just the risk of non-persuasion,” he said. “It doesn't concern the burden of production. Is that right?”
When Waxman agreed, Alito said then that “the only difference is who wins when the fact-finder thinks that it was exactly in equipoise.”
However, Waxman noted, that's not what happened here. And more generally, he said, the choice of who has the burden is often outcome-determinative. “What the jury is told about who has the burden of persuasion is surpassingly important in many cases, including many patent cases,” he said.
Perhaps most notable in Waxman's argument was a colloquy with Justice Elena Kagan, who was concerned--based on the IPO brief--that users of patented technology would agree to a license and then file a declaratory judgment action the next day. That spurred Waxman to list the options for future license agreements that would protect the patentee, putting Kagan in the position of a hypothetical licensor:
• “You could require me to pay a paid-up royalty for all use,” he said, citing the lump-sum payment often used in license agreements.
• “Or you could simply say: 'We don't care whether the patent infringes or not; you agree to pay me three dollars per unit sold,'” he said.
• “Or you could put a provision in that would say: 'If you sue for patent infringement, the royalty rate goes to 3 [times the license rate],'”
• Or finally, he said, that if you sue, “I can deem that a breach of the license agreement and recover the remedies that patent law allows, an injunction and treble damages and attorneys' fees in the context of a willful action.”
On behalf of the government, Gannon also addressed Kagan's concern. He said that “it seems like the problem there is either that [the licensee] should be estopped by what they already said in the agreement or Lear needs to be extended to keep them from being estopped in that way,” referring to Lear, Inc. v. Adkins, 395 U.S. 653, 162 U.S.P.Q. 1 (1969), which abolished the rule of licensee estoppel for patent licenses.
Justice Ruth Bader Ginsburg brought up the Tessera amicus brief, which argued that the Federal Circuit did not have jurisdiction over the case. Since MFV could not file an infringement action, Tessera--a prolific patent licensor--argued, the contractual framework dictated how it was to be adjudicated. It relied on the court's recent decision limiting the Federal Circuit's jurisdiction over typical state law concerns in Gunn v. Minton, 133 S. Ct. 1059, 2013 BL 43481, 105 U.S.P.Q.2d 1665 (2013) (35 PTD, 2/21/13).
Gannon rejected that argument. “I think that the way to conceptualize this is to look to what the well-pleaded complaint would be in the hypothetical coercive action that would be being brought against Medtronic if we didn't have the problem presented by the fact that they haven't actually breached the contract or infringed at this point.”
Since the recourse should Medtronic breach the agreement is for MFV to file an action for infringement under Section 271 of the Patent Act, 35 U.S.C. §271, that is the complaint to consider, he said. And that is clearly a complaint that arises under patent law.
Neustadt, on behalf of MFV, appeared to give credence to Tessera's argument, but he did not rely on it.
Neustadt instead focused on the normal default rule and argued that patent law should not be a reason to allow this case to be an exception to the rule.
He couched the dispute as something different from infringement, saying that the license agreement essentially required Medtronic to challenge claim coverage. Thus, he skirted the contention that Medtronic's action was the supposed mirror image of an infringement action. But Justice Stephen G. Breyer was skeptical, at least initially.
“So their point is, call it what you wish, but--where you have a claim which amounts to a claim that my product does not infringe his patent--the rule that should apply is the person who owns the patent should have to prove that the claims do cover the product,” Justice Stephen G. Breyer said. He cited Medtronic's brief for several reasons why that should be the case, such as, “It's easiest for the patentee to know in what respect it violates the claim.”
Neustadt countered from the perspective of what would be expected to happen in an actual case. He said, for example, that MFV would receive an interrogatory that asked, “why do you think this [new product] is covered?,” and the patent owner would thus be obligated to supply the same information it would have to supply if it had initiated an infringement action.
Ultimately, he said, the patent holder has to prove infringement under the “all elements” rule or the alleged infringer has to prove noninfringement by picking one of those elements and saying it doesn't cover his products.
That was one of two of a “parade of horribles,” according to Breyer, that Medtronic and its supporting friends had listed. The other was related, and it came up under questioning by Justice Antonin Scalia, related to res judicata.
The cited problem was that, if MFV wins here and then Medtronic breaches the agreement anyway, MFV has not shown infringement. Rather, Medtronic has only failed to show noninfringement. Scalia asked, “Is the prior decision res judicata or are you going to have to re-litigate the whole thing, but this time with the burden of proof on you?”
“But we can say, 'Your Honor, you've seen this entire case,'” Neustadt responded as if the infringement action had been initiated. “Now, where it was a preponderance of the evidence before, it's now preponderance of the evidence on the other side. It may be the difference between 49.9 and 50.5 [percent proof],” he said.
“Yes, but you are overlooking the elephant in the room, which is the relief they are seeking is protection against the relief that you would be seeking but for the declaratory judgment action,” Chief Justice John G. Roberts Jr. said.
Neustadt fell back on the terms of the license. MFV cannot file a counterclaim, he insisted.
But Scalia brought it back to the concern about the Declaratory Judgment Act. “The Declaratory Judgment Act is addressed to potential coercion, not actual coercion,” he said. “That's the whole point. [Medtronic] should be able to bring the suit before coercion is applied.”
Neustadt repeatedly rejected the idea that the policy underlying the Act has anything to do with burden shifting when the license agreement did not allow for the potential coercion.
Waxman had saved time for rebuttal, but when he got no response to a request for additional questions, he said only, “I would submit on the briefs.”
To contact the reporter on this story: Tony Dutra in Washington at firstname.lastname@example.org
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Transcript is available at http://pub.bna.com/ptcj/121128OAtranscript.pdf.
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