The Supreme Court continued to reassert its oversight of patent law yesterday with a ruling that weakens intellectual-property protections by making it easier for legal challenges to patents.
The 8-1 decision put the justices on the side of those who have complained that existing rules stifle innovation, and it is their latest rebuke to the specialized panel that hears patent appeals, the U.S. Court of Appeals for the Federal Circuit, for rulings skewing property rights in favor of patent holders. The high court this term has also heard a separate case appealing obstacles imposed by the Federal Circuit against challenges to a patent on grounds that the invention is "obvious." A decision on that is pending.
Yesterday's opinion, by Justice Antonin Scalia, reversed the Federal Circuit's rule that if a company pays royalties for a patent, it forfeits the right to challenge the patent's validity. That has deterred companies from filing challenges because they would be at risk for treble damages for infringement if the patent were found to be valid.
The decision is a victory for MedImmune Inc., a Gaithersburg, Md., pharmaceuticals company that derives about 80% of its revenue from the respiratory-tract drug at issue, Synagis. Under protest, MedImmune paid a royalty to Genentech Inc., of South San Francisco, Calif., to avoid a patent-infringement suit over a component antibody.
Under a 2004 Federal Circuit ruling, the act of paying a royalty precluded challenging the patent's validity. The Federal Circuit reasoned that since the license payment obviated an infringement suit, there was no controversy between the companies. In general, federal courts may only decide cases and controversies, not rule on theoretical disputes or issue advisory opinions.
Justice Scalia wrote that a party shouldn't have to "bet the farm" to challenge a patent. He cited several prior cases where the court allowed parties to challenge laws as unconstitutional without breaking them -- and thus exposing themselves to criminal punishment. Moreover, he wrote, the Supreme Court in 1943 had decided a similar patent case by ruling that "the fact that royalties were being paid did not" make the dispute "hypothetical or abstract."
The Bush administration supported MedImmune, contending that allowing challenges would help weed out invalid patents that stifle innovation. "Public policy strongly favors ridding the economy of invalid patents, which impede efficient licensing, hinder competition, and undermine incentives for innovation," the government said in a friend-of-the-court brief.
The implications could be greatest for the biotechnology industry, where huge profits can turn on a relatively small number of patents, according to Pamela Samuelson, co-director of the Center for Law and Technology at the University of California, Berkeley. Prof. Samuelson said the Supreme Court is telling the Federal Circuit to be "more balanced and less patent-owner friendly."
"Everybody knows there are a lot of weak patents out there," she said. "A lot of inventors take very substantial risks going out into a field of technology, and sometimes they get their foot blown off when some patent is out there like a land mine."
However, some predicted a chilling effect. "This decision allows companies that have taken out licenses to challenge the validity of a patent while also enjoying the benefits of that very same patent," said Charles Barquist, a patent litigator in Morrison & Foerster LLP's Los Angeles office. "MedImmune turns all fundamental assumptions about the stability and finality of a patent license completely on their head," he added in a statement late yesterday. "The Court has upset the risk/benefit calculation that underlies virtually every patent license."
Genentech issued as statement downplaying the significance of the ruling, saying the Supreme Court "only addressed the threshold jurisdictional issue of whether there need to be further proceedings to finally decide this case. It does not express an opinion concerning the merits of MedImmune's claims against Genentech . . ."
Indeed, MedImmune General Counsel William Bertrand said the victory won't have an immediate impact on his company's bottom line, as it has been paying royalties all along and the ruling doesn't nullify the patent at issue, but it does enable resumption of the challenge.
Eric Schmidt, a biotech analyst at Cowen and Co., sees modest potential impact on Genentech's future earnings from the decision. An adverse decision, should MedImmune prevail at trial, could have an impact of four cents a share on earnings, he said. Genentech receives royalties from licensees as well as paying some royalties to the City of Hope Hospital, in Duarte, Calif., under the patent, Mr. Schmidt said. The company's annual income from all royalties is approaching $1 billion a year.
MedImmune's Synagis, which racked up $1.24 billion in 2005 sales, is an injectable product containing protective antibodies that help guard infants and young children against respiratory syncytial virus, or RSV, a common childhood infection responsible for about 125,000 hospitalizations a year in the U.S. alone, a spokeswoman said.
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