The U.S. Supreme Court recently issued a decision in the licensing dispute case of Medtronic Inc. v. Mirowski Family Ventures, LLC, where the Court held that the patent owner had the burden of proving infringement when the licensee files a declaratory judgment action in a patent licensing dispute.
What are the facts in this case?
Medtronic was a sublicensee of a patent license between Mirowski and Eli Lilly. The original sublicense agreement provided that, upon receipt of a notice from Mirowski that a new Medtronic product infringed a Mirowski patent, Medtronic would have the choice of either accepting Mirowski's claims and curing the nonpayment of royalties or challenging Mirowski's claims by filing a declaratory judgment action while still paying the disputed royalties. A subsequent agreement amended this procedure, enabling Medtronic to accumulate disputed royalties in an escrow account in the event that it decided to challenge Mirowski's claims and file a declaratory judgment action.
In 2007, Mirowski notified Medtronic that seven of its products violated two of its patents. Medtronic disputed the claims and filed for declaratory judgment in the Federal District Court in Delaware while continuing to pay the disputed royalties in an escrow account in accordance with the terms of the sublicense agreement.
The District Court found that Mirowski had not proved infringement but had the burden of proof to prove infringement. The case was appealed to the Court of Appeals for the Federal Circuit, which concluded that a different rule applied, and that the party seeking the declaratory judgment of noninfringement bore the burden of persuasion.
The Supreme Court held that the same rule applied whether the patent owner filed an infringement suit against the sublicensee or the sublicensee seeks a declaratory judgment after being accused of patent infringement by the patent owner: the patent owner must prove that the infringement exists.
From my perspective, the Supreme Court reached the right conclusion: the declaratory judgment procedure and escrow option was put in place to allow the sublicensee to challenge the patent owner's claims while continuing to otherwise meet the terms of the license. The fact that the sublicensee disputed the patent owner's claims should not have shifted the burden to the sublicensee to prove that it had not infringed--it is logical to expect that the patent owner should have to prove its claims of infringement.
What is the significance of this case? The Supreme Court has now resolved the uncertainty that existed over who bears the burden of proof in a declaratory judgment action in a patent licensing dispute. The elimination of uncertainty on this issue may prompt more patent licensees and sublicensees to take the step of challenging licensors' interpretation of their patent licenses in lieu of paying the royalties demanded of them. In light of this development, licensors who become aware of royalty dispute with a patent licensee or sublicensee should consider the merits of taking a more proactive approach to seeking a commercial resolution of such a dispute with their licensee before the licensee decides to escalate the issue to filing for declaratory judgment. Moreover, this decision may impact the negotiating dynamic in situations where a patent owners seek to enforce its patent rights on a less than enthusiastic licensee, since a heavy-handed negotiating approach by the patent owner may be more likely now to prompt the licensee to file for declaratory judgment after the ink dries on a newly executed license agreement. Patent owners engaging in such licensing negotiations should perhaps give more consideration to reaching an agreement with the reluctant licensee that is not so one-sided that the licensee will feel compelled to challenge the agreement after its execution.