Less than two weeks ago, the U.S. Supreme Court held that a licensee could "pay and sue," i.e., continue to pay royalties, and nevertheless, challenge the validity, infringement or enforceability of the licensed patent in a declaratory judgment (DJ) action.
The ability to pursue this option changes the licensing calculus in our patent system which is dominated by transaction costs associated with both patent prosecution and patent litigation. See, for example, my article on "Why 'Bad' Patents Survive in the Market and How Should We Change?--The Private and Social Costs of Patents," 55 Emory L.J. 61 (2006).
Licensees can be expected to balance the payments that they are expected to make under a license against the cost of pursuing a declaratory judgment before deciding whether to sue. Perhaps licensors may respond by sweetening the pie with better licensing terms to forestall a DJ action. Alternatively, the calculus will also be affected by the enactment of a low-cost opposition system in the PTO such as the one being contemplated by the proponents of patent reform in Congress.
On the patentees' side (i.e., licensors), especially with small inventors, we are likely to see a greater push for one-time payments and paid-up licenses, a "take-and-run" strategy, to avoid uncertainty and re-negotiation of existing licensing terms.
It is also likely that licensees seeking to challenge patent validity might attempt to analyze the competitive posture of the market for the patented good or service before initiating a validity challenge for, should they succeed, the situation may start looking like a market for pencils. Again, there is room here in this new post-MedImmune world to work out a deal that confines the supra-competitive benefits to just a couple of players in the market.
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