Medtronic v. Boston Scientific: A Cautionary Tale for Patent Licensees

September 18, 2012

Overview

On September 18, 2012, the U.S. Court of Appeals for the Federal Circuit decided Medtronic v. Boston Scientific1 – a decision having a potentially significant effect on the patent licensing landscape because of its holding that in some situations the potential infringer bears the burden of proving non-infringement. In that case, the Federal Circuit identified specific circumstances in which a licensee seeking declaratory judgment of non-infringement bears the burden of proof. Specifically, the court held that in the limited circumstance when an infringement counterclaim by a patentee is foreclosed by the continued existence of a valid license, a licensee seeking a declaratory judgment of non-infringement bears the burden of proof. In doing so, the Federal Circuit deviated from the generally settled principle that the burden of proof of infringement rests with the patentee.

The Medtronic decision arose as a result of the Supreme Court’s decision in MedImmune v. Genentech.2 In MedImmune, the Supreme Court held that a patent licensee in good standing may challenge the validity of a patent via a declaratory judgment suit. The Supreme Court reasoned that a patent licensee should be allowed to challenge the scope of a license without terminating royalty fees under the license and risking infringement liability. In other words, a licensee in compliance with the terms of a license may nevertheless seek declaratory judgment relief to clarify the extent of the license.

Courts have generally agreed that in the absence of a license agreement, a counterclaim for patent infringement is compulsory in a declaratory judgment suit, whether the declaratory judgment suit is based on non-infringement or invalidity. Thus, infringement counterclaims are considered waived if not asserted in an associated declaratory judgment suit. Not surprisingly, the result of this rule is that nearly every non-infringement declaratory judgment suit is met with an infringement counterclaim. MedImmune, however, left unresolved the issue of proper allocation of the burden of proof when the patentee cannot bring an infringement counterclaim because the declaratory judgment plaintiff is legally acting under a license and thus not infringing.

For decades, courts have placed the burden of proof of infringement on a patent holder asserting a counterclaim for patent infringement. However, in the situation of a fully compliant licensee, the licensor is barred from asserting an infringement counterclaim due to the continued existence of the license. This poses the unavoidable question – who bears the burden of proof on the issue of infringement when a patent licensor is precluded from bringing an infringement counterclaim and, instead, it is the potential infringer seeking declaratory judgment of noninfringement? The Federal Circuit answered this question in Medtronic.

The facts of the Medtronic case are as follows. Mirowski Family Ventures LLC (“MFV”) was the owner of two patents (RE38,119 and RE39,897). Boston Scientific was an exclusive licensee of the two patents and entered into a sub-licensing agreement with Medtronic. Based on the agreement, Medtronic was free to challenge the license agreement via a declaratory judgment suit provided that it continued to pay royalties. Medtronic then sought declaratory judgment that the patents were invalid. The parties stayed litigation and entered into a Litigation Tolling Agreement (“LTA”) in which MFV identified Medtronic products that MFV believed infringed RE38,119. Under the LTA, if Medtronic disputed any identification, it was permitted to contest the assertion via a non-infringement declaratory judgment suit. Ultimately, Medtronic filed a declaratory judgment suit for non-infringement in the United States District Court for the District of Delaware. MFV, however, was barred from bringing an infringement counterclaim due to the existence of a valid licensing agreement.

In an opinion vacating and remanding the District of Delaware’s decision, the Medtronic court found that, because Medtronic was the party seeking relief in an action where MFV was barred from asserting an infringement counterclaim due to the presence of a valid license, Medtronic assumed the burden of proving non-infringement. The Federal Circuit noted that any “contrary result would allow licensees to use MedImmune’s shield as a sword – haling licensors into court and forcing them to assert and prove what had already been resolved by license.”3 In what appears to be a potentially far-reaching assertion, the Court noted that the party seeking disruption of the status quo should shoulder the burden of proof.4

Though the impact of the decision remains to be seen, Medtronic may have sweeping consequences. Following MedImmune, several commentators criticized the Federal Circuit decision as incentivizing litigation against patent licensors. As a consequence of the Medtronic decision, companies may now feel compelled to seek more favorable terms prior to entering licensing agreements with patent holders because of the higher standard to challenge infringement under the license agreement. Patent licensees seeking to dispute infringement are faced with three unsatisfying options: (1) bring a declaratory judgment suit and bear a higher burden of proving non-infringement; (2) bring a declaratory judgment suit and terminate the license agreement, thereby risking infringement liability; or (3) not bring a declaratory judgment suit and instead continue to pay the disputed royalty fees.

Authored by Nisha N. Patel of Merchant & Gould, P.C.

 


 

1Medtronic, Inc. v. Boston Scientific Corp., No. 2011-1313, 2012 U.S. App. LEXIS 19602 (Fed. Cir. Sept. 18, 2012).
2MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).
3Medtronic, 2012 U.S. App. LEXIS 19602 at *17.
4Id. at *15 (noting “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”).