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A Proposed Effect of Medimmune v. Genentech on Licensee’s Risk Analysis

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What will be the effect of the Supreme Court’s decision in ? I propose that Medimmune will lead to more lawsuits by licensees due to decreased risk on the licensee, but only under certain economic conditions-when the license fee savings from litigating the invalidity and/or noninfringement issues is greater than the attorneys’ fees the licensee must expend to litigate the suit. To explain this proposition, let us examine a licensee’s options before and after Medimmune.

Before:

The licensee has only two choices: 1) continue paying the license fee or 2) repudiate the license agreement by stopping payment and then sue. If the licensee decides to sue, the licensee must take a significant risk�if they lose, they may end up paying more in damages (including treble damages and attorneys� fees) than they would have paid under the license, or they may be enjoined from practicing the invention (although the chances of an injunction are not what they used to be). If the licensee wins, however, they most likely will have forfeited their attorneys� fees in litigating the suit, but can practice (and have been practicing) the invention free of charge.

After:

The licensee now has three possible courses of action: 1) continue paying the license fee, 2) repudiate the license agreement by stopping payment and then sue, or 3) continue making license payments, but proceed with a declaratory judgment suit for invalidity and noninfringement.
Choices 1 and 2 are analytically the same as before Medimmune. Choice 3, however, is new and different. The following equation sets forth the main economic risks in play, other than the risk of losing the invalidity or noninfringement suit (presumably a low risk or the licensee should keep paying the royalties under the license), when deciding how to proceed:

Choice 1: (remaining patent term in years)(yearly license fee) + (other competitive considerations)

Choice 2: (damages, including treble damages)(chance of losing) + (monetary and competitive cost of an injunction)(chance of an injunction) +(your attorneys� fees)(percentage chance of NOT recovering your attorneys� fees) + (other side�s attorney�s fees)(percentage chance of other side recovering their fees) + (your costs and other side�s costs)(chance you are NOT the prevailing party)

Choice 3: (your attorneys� fees)(percentage chance of NOT recovering your attorneys� fees) + (other side�s attorney�s fees)(percentage chance of other side recovering their fees) + (your costs and other side�s costs)(chance you are NOT the prevailing party) + (average time to verdict)(yearly license fee) [Note that the Medimmune Court expressed �no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent�s validity.� Thus, it is possible that a licensee could recover the royalties paid during litigation]

Under Choice 3, the licensee may keep paying the license fee, but sue as well. In most situations, the licensee�s largest risk when suing will be losing its attorneys� fees. If the licensee wins, then it can practice the invention free of charge. If the licensee loses, it simply keeps paying the contractually agreed upon license payments, thus limiting the licensee�s potential exposure. To come out on top in this scenario, the licensee generally must 1) successfully prevail on either the invalidity or noninfringement issues and 2) realize a license fee savings in excess of its attorneys� fees (unless the licensee is fortunate enough to recover its attorneys� fees). Thus, it only makes economic sense for the licensee to continue paying the license fee and sue the patentee if the license fee is relatively large. That is, the license fee savings from prevailing in court must be sufficiently large so as to justify the uncertainty associated with attempting to invalidate a patent or prove noninfringement.

Notice what risks are NOT associated with Choice 3, but would be associated with repudiating a license and suing or being sued (the only method available prior to Medimmune, other than taking a license). In a declaratory judgment suit brought while continuing to pay royalties, the licensee has no risk of damages (treble or otherwise) and no risk of an injunction. While the Supreme Court has recently reduced the likelihood of obtaining an injunction, an injunction is still possible in most cases. Notice, however, that Choice 3 includes the added expense of paying the license fee during litigation. Thus, Medimmune has created a new way to attack the questions of whether to take a license and whether to continue under a license, and this new choice eliminates the risk of damages and an injunction that licensees previously had when forced to repudiate a license before suing. A licensee�s decision on whether to continue under a license or bring suit against the patentee, however, in general, will be guided by the amount of the license fee payments in comparison to the potential attorneys� fees.

For example, take the situation where a licensee has entered into a license that pays the patentee an average of $3 million a year and make the following assumptions: the time to decision is 2 years, the attorneys� fees to litigate the case are $4 million, and the patent term has 10 years remaining. Under Choice 2 above (pre-Medimmune), the licensee would only need to pay the $4 million in attorneys� fees up front and would save $30 million in license fees if it prevails, which would result in a total savings of $26 million ($30 million minus $4 million). Under Choice 3 above (post-Medimmune), the licensee would need to pay $4 million in attorneys� fees and $6 million in license fees during litigation and would save only $24 million in license fees if it prevails, which would result in a total savings of $14 million ($24 million minus $10 million). Thus, Choice 2 would provide a greater savings to the licensee in this scenario, but that greater savings comes with greater risk�the licensee could lose the case and end up paying damages and/or subject to a permanent injunction.

I make many assumptions in this analysis that may or may not be true in a majority of situations. I welcome anyone�s comments on the validity of this analysis, or any other ideas.

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