Supreme Court Reverses Federal Circuit in Patent Licensee Case

Supreme Court Reverses Federal Circuit in Patent Licensee Case

 WASHINGTON, D.C. — (Mealey’s) A Federal Circuit U.S. Court of Appeals holding that a patent licensee bears the burden of proving noninfringement under the Declaratory Judgment Act was reversed by a unanimous Supreme Court today (Medtronic Inc. v. Mirowski Family Ventures LLC et al., No. 12-1128, U.S. Sup.; See 11/18/13, Page 13).

Not only does petitioner Medtronic Inc.’s declaratory judgment action “arise under” federal patent law, thus giving the Federal Circuit subject matter jurisdiction in the dispute, “when a licensee seeks a declaratory judgment against a patentee that its products do not infringe the licensed patent, the patentee bears the burden of persuasion on the issue of infringement,” Justice Stephen Breyer wrote for the court.

Tolling Agreement

Respondent Mirowski Family Ventures LLC is the owner by assignment of U.S. reissue patents RE38,119 and RE39,897, which MFV licensed to co-respondents Boston Scientific Corp. and Guidant Corp. (MFV, collectively). The patents are directed to a cardiac resynchronization therapy (CRT) device that increases the heart’s effectiveness by causing the patient’s left and right ventricles to contract simultaneously as the heart beats. Medtronic is a manufacturer of medical devices and equipment that in 1991 entered into a sublicense agreement covering the RE’119 patent with Eli Lilly & Co., Guidant's predecessor. The agreement allowed Medtronic to challenge the patent’s validity, enforceability and scope in a declaratory judgment action.

In 2003, pursuant to its sublicense, Medtronic began paying royalties into escrow while challenging the validity of the RE’119 patent. The parties then entered into an agreement that tolled their litigation and obligated MFV to inform Medtronic which Medtronic products MFV believed made use of the RE’119 patent, or subsequent reissue patents that claim priority from the RE’119 patent such as the RE’897 patent. If Medtronic disagreed, the tolling agreement gave Medtronic the right to retain its license and obligated Medtronic to seek a declaratory judgment of noninfringement in the U.S. District Court for the District of Delaware.

Limited Circumstance

In 2007, MFV identified several Medtronic products that MFV thought practiced its patents. Accordingly, pursuant to the tolling agreement, Medtronic filed a declaratory judgment action. After conducting a bench trial in 2010, Judge Sue L. Robinson found that MFV, as the patent owner, bore the burden of proving infringement and that MFV was unable to meet its burden. MFV appealed the ruling to the Federal Circuit, which in September 2012 reversed after finding that “it is Medtronic and not MFV that is asking the court to disturb the status quo ante and to relieve it from a royalty obligation it believes it does not bear.”  Accordingly, the Federal Circuit found that Medtronic bears the burden of establishing that it is entitled to a finding of noninfringement and that “in the limited circumstance when an infringement counterclaim by a patentee is foreclosed by the continued existence of a license, a licensee seeking a declaratory judgment of noninfringement and of no consequent liability under the license bears the burden of persuasion.”

Medtronic filed a petition for writ of certiorari, which presents the following question:  “In MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 137 (2007) [an enhanced version of this opinion is available to subscribers], this Court ruled that a patent licensee that believes that its products do not infringe the patent and accordingly are not subject to royalty payments is ‘not required . . . to break or terminate its . . . license agreement before seeking a declaratory judgment in federal court that the underlying patent is . . . not infringed.’  The question presented is whether, in such a declaratory judgment action brought by a licensee under MedImmune, the licensee has the burden to prove that its products do not infringe the patent, or whether (as is the case in all other patent litigation, including other declaratory judgment actions), the patentee must prove infringement.”

‘Arise Under’ Jurisdiction

The Supreme Court granted the petition in May 2013 and heard oral arguments in November.

As an initial matter, the high court found that the Federal Circuit did not lack subject matter jurisdiction in the dispute because Title 28 U.S. Code Section 1338(a) gives federal district courts exclusive jurisdiction over any civil action arising under any act of Congress relating to patents, and the Federal Circuit possesses appellate jurisdiction over any case which was based in whole or in part on Section 1338. Federal courts presiding over declaratory judgment actions “often look to the ‘character’ of the defendant’s ‘threatened action,’” the court noted, citing Comm’n of Utah v. Wycoff Co., 344 U.S. 237, 248 (1952) [enhanced version].

“Here, if Medtronic had acted consistent with the understanding of its rights that it seeks to establish through the declaratory judgment suit (by ceasing to pay royalties), Mirowski could terminate the license and bring a suit for infringement,” Justice Breyer wrote. Such an action would clearly arise under federal patent law, and the instant lawsuit, “which avoids that hypothetical threatened action,” also necessarily “arises under” federal patent law, according to the Supreme Court.

3 Legal Propositions

Turning to the question presented in Medtronic’s petition, the high court found that “simple legal logic, resting upon settled case law” supports reversal of the Federal Circuit. “It is well established that the burden of proving infringement generally rests upon the patentee,” it noted. The Supreme Court has “long considered the operation of the Declaratory Judgment Act to be only ‘procedural,’ leaving ‘substantive rights unchanged,’” it added, citing Aetna Life Insurance Co. v. Haworth, 300 U.S. 227, 240 1937) [enhanced version] and Beacon Theatres Inc. v. Westover, 359 U.S. 500, 509 (1959) [enhanced version]. Finally, pursuant to Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20-21 (2000) [enhanced version] and Garrett v. Moore-McCormack Co., 317 U.S. 239, 249 (1942) [enhanced version], the Supreme Court has held that the burden of proof is a “substantive” aspect of a claim.

“Taken together these three legal propositions indicate that, in a licensee’s declaratory judgment action, the burden of proving infringement should remain with the patentee,” the court held.

Furthermore, practical considerations favor such a result, according to the Supreme Court, which cited “post-litigation uncertainty about the scope of the patent” should the burden of proving infringement be shifted depending upon the form of the action. “Suppose the evidence is inconclusive, and an alleged infringer loses his declaratory judgment action because he failed to prove noninfringement,” it mused.

“The alleged infringer, or others, might continue to engage in the same allegedly infringing behavior, leaving it to the patentee to bring an infringement action. If the burden shifts, the patentee might lose that action because, the evidence being inconclusive, he failed to prove infringement. So, both sides might lose as to infringement, leaving the infringement question undecided, creating uncertainty among the parties and others who seek to know just what products and processes they are free to use,” the court continued.

Dilemma Recreated

Allowing a burden shift could also “create unnecessary complexity” by making it difficult for licensees to “understand upon just what theory the patentee’s infringement claim rests,” the high court said. Finally, burden shifting in the underlying dispute “is difficult to reconcile with a basic purpose of the Declaratory Judgment Act.”

“In MedImmune, Inc. v. Genentech, Inc., a case that similarly concerned a patent licensee that brought a declaratory judgment action after the patentee accused it of infringement, we wrote that the ‘very purpose’ of that Act is to ‘ameliorate’ the ‘dilemma’ posed by ‘putting’ one who challenges a patent’s scope ‘to the choice between abandoning his rights or risking’ suit. In the absence of the declaratory judgment procedure, Medtronic would face the precise dilemma that MedImmune describes. Either Medtronic would have to abandon its right to challenge the scope of Mirowski’s patents, or it would have to stop paying royalties, risk losing an ordinary patent infringement lawsuit, and thereby risk liability for treble damages and attorney’s fees as well as injunctive relief. As in MedImmune, the declaratory judgment action rescues Medtronic from this dilemma. The Federal Circuit’s burden shifting rule does not deprive Medtronic of the right to seek a declaratory judgment. But it does create a significant obstacle to use of that action. It makes the declaratory judgment procedure — compared to, say, just refusing to pay royalties — disadvantageous. To that extent it recreates the dilemma that the Declaratory Judgment Act sought to avoid. As we have made clear . . . we are unaware of any strong reason for creating that obstacle,” the Supreme Court concluded.

Medtronic is represented by Martin R. Lueck, Jan M. Conlin and Stacie E. Oberts of Robins, Kaplan, Miller & Ciresi in Minneapolis, Seth P. Waxman, Paul R.Q. Wolfson, Brian H. Fletcher, Carolyn Jacobs Chachkin and Weili J. Shaw of Wilmer Cutler in Washington and Mark C. Fleming of Wilmer Cutler in Boston. Arthur I. Neustadt, Thomas J. Fisher and John F. Presper of Oblon Spivak and Sidney J. Silver of Silver, Freedman & Taff in Washington represent the respondents.

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