Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 1 of 11 USDC SDNY DOCUMENT UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ------------------------------------------------------------------X ELECTRONICALLY FILED DOC #: DATE FILED: October 14, 2011 ABBOTT LABROTORIES and : ABBOTT BIOTECHNOLOGY LIMITED : : Plaintiffs, : : - against - : 11 Civ. 2541 (PAC) : THE MATHILDA AND TERENCE KENNEDY : ORDER INSTITUTE OF RHEUMATOLOGY TRUST, : : Defendant. : ------------------------------------------------------------------X HONORABLE PAUL A. CROTTY, United States District Judge: Plaintiffs Abbott Laboratories and Abbott Biotechnology Ltd. ( Plaintiffs ) seek a declaratory judgment that the claims of U.S. Patent No. 7,846,442 (the 442 patent ) issued to Defendant The Mathilda and Terence Kennedy Institute of Rheumatology Trust ( Defendant ) are invalid. Defendant now moves to dismiss Plaintiffs complaint pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction. Defendant submits that there is no case or controversy because Defendant cannot sue Plaintiffs for patent infringement and because the dispute is subject to mandatory arbitration. Defendant s motion to dismiss is DENIED. BACKGROUND Plaintiffs market HUMIRA, an FDA approved drug used to treat rheumatoid arthritis and other diseases associated with an overabundance of Tumor Necrosis Factor α ( TNF-a ), a protein that plays a role in the human body s inflammatory response. (See Compl. 4, 29.) Plaintiffs have been marketing and selling HUMIRA since 2003, and have no plans to cease such activities. (Id. 10.)
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 2 of 11 Defendant is the owner of certain U.S. Patents, including Patent No. 6,270,766 (the 766 patent ). (Id. 5, 10.) On January 1, 1992, Defendant entered into a licensing agreement with Centocor, Inc. (now Centocor Ortho Biotech Inc., Centocor ), which gives Centocor the right to sublicense Defendant s patent rights. (Id. 20.) On December 23, 2002, Centocor entered into a sublicensing agreement with Plaintiffs for Defendant s 766 patent and related intellectual property. (Id.) On July 29, 2004, Centocor and Defendant amended their licensing agreement, so that Plaintiffs could pay royalties directly to Defendant. (Id. 21.) Plaintiffs have to pay royalties under Defendant s 766 patent whenever they market the use of HUMIRA with methotrexate. ( See id. 19.) Plaintiffs have paid royalties on Defendant s 766 patent for such marketing of HUMIRA for years. (Id. 8.) They anticipated that their obligations would end upon the expiration of the 766 patent in October 2012. (Id. 8.) On December 7, 2010, Defendant s 442 patent was issued. ( Id. 35.) Next month, on January 26, 2011, Defendant advised Plaintiffs of the issuance of its 442 patent and that Abbott will owe royalties to Kennedy under the 442 patent until August 21, 2018. (Id. 9.) Plaintiffs allege that the 442 patent is identical in all respects to the 766 patent, except for its claims, and therefore is invalid for failing to meet the requirements of patentability under the federal patent laws, including for obviousness-type double patenting over the 766 patent. ( Id. 33, 45.) The Defendant has previously enforced it patents by instituting suits against third parties for patent infringement. ( Id. 12.) Defendant also previously instituted an arbitration proceeding against Plaintiffs concerning their payment of royalties under the 766 patent. (Id. 22.) 2
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 3 of 11 On April 13, 2011, Plaintiffs filed this action against Defendant, seeking a declaratory judgment that Defendant s 442 patent is invalid and that Plaintiffs do not and will not owe royalties to Defendant for that patent. (Id. 1-2.) LEGAL STANDARD The Declaratory Judgment Act provides that, [i]n a case of actual controversy within its jurisdiction... any court of the United States... may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. 28. U.S.C. 2201(a). The availability of declaratory relief is limited to cases or controversies, as provided in Article III, Section 2 of the Constitution. Cat Tech LLC v. TubeMaster, Inc., 528 F.3d 871, 878-879 (Fed. Cir. 2008). A court has subject matter jurisdiction under the Declaratory Judgment Act only if the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment. MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007) (quoting Maryland Casualty Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941)). 1 In patent cases, declaratory judgment jurisdiction exists where a patentee asserts rights under a patent based on certain identified ongoing or planned activity of another party, and where that party contends that it has the right to engage in the accused activity without license. Sandisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372, 1381 (Fed. Cir. 2007). A plaintiff 1 Prior to MedImmune, a declaratory judgment plaintiff was required to demonstrate (1) conduct by the declaratory judgment defendant that created a reasonable apprehension of suit and (2) present activity by the declaratory judgment plaintiff that could constitute infringement or meaningful preparation to conduct potentially infringing activity. Prasco, LLC v. Medicis Pharmaceutical Corp., 537 F.3d 1329, 1336 (Fed. Cir. 2008). The Supreme Court rejected the first prong as unduly restrictive in MedImmune. MedImmune, 549 U.S. 118. Courts are now required to look at all the circumstances to determine whether a justiciable Article III controversy exists. Cat Tech LLC, 528 F.3d at 878-79. 3
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 4 of 11 must have taken significant, concrete steps towards conducting the infringing activity, such that the dispute is immediate and real. Cat Tech LLC, 528 F.3d at 879-80. Finally, the Declaratory Judgment Act has long been understood to confer on federal courts unique and substantial discretion in deciding whether to declare the rights of litigants. MedImmune, 549 U.S. at 136 (quoting Wilton v. Seven Falls Co., 515 U.S. 277, 286 (1995)). DISCUSSION A. An Actual Controversy Exists Plaintiffs rely primarily on the Supreme Court s recent decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). In MedImmune, a license holder sent a letter to its licensee stating that it believed the licensee would owe royalties on its new patent under their licensing agreement. Id. at 121. The licensee believed that the new patent was invalid and unenforceable; and interpreted the letter as a threat to enjoin sales if it did not pay royalties. Id. at 121-122. The licensee paid royalties under protest and instituted a declaratory judgment action. Id. The Supreme Court noted that but for petitioner s continuing to make royalty payments, nothing about the dispute would render it unfit for judicial resolution. Id. at 128. The Court considered whether a case or controversy, within the meaning of Article III, can arise where the licensee s own acts eliminate the imminent threat of harm. Id. The Court reasoned that one should not have to bet the farm, or... risk treble damages and the loss of... business before seeking a declaration of its actively contested legal rights. Id. at 134. The Supreme Court thus held that a patent licensee is not required, insofar as Article III is concerned, to break or terminate its [ ] licensing agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed. Id. at 137. 4
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 5 of 11 Plaintiffs argue that an actual controversy exists here. Defendant s letter to Plaintiffs states that they will owe royalties on Defendant s 442 patent until 2018, six years after the expiration of the 766 patent. (See Maldonado Decl. Ex. 4.) Plaintiffs believe that Defendant s 442 patent is invalid and unenforceable, but have not terminated or breached their sublicensing agreement and, thus, by their own acts (or lack thereof), have eliminated the risk that Defendant could sue Plaintiffs for patent infringement. Defendant argues that because it cannot sue Plaintiffs for patent infringement which it cannot do so long as Plaintiffs continue to pay royalties under their sublicense agreement that no actual controversy exists; the controversy is hypothetical. In MedImmune, however, the Supreme Court held that an actual controversy warranting declaratory judgment jurisdiction can exist, even though Plaintiffs do not terminate or breach their sublicensing agreement. MedImmune, 549 U.S. at 137. The Defendant raises a barrage of arguments, attempting to distinguish the present case from MedImmune and to argue that Defendant s January 26, 2011 letter does not mean what it says. The Court considers each in turn, but rejects all of them. There is an actual controversy arising out of the Defendant s January 2011 letter and Plaintiffs are well within their rights in seeking a declaratory judgment. First, Defendant contends that neither its letter bringing the 442 patent to Plaintiffs attention, nor its prior enforcement actions, create a reasonable apprehension of an infringement suit. (Def. Br. 8-9, 16-17.) 2 A defendant s objective words and actions that can be reasonably 2 In making its argument, Defendant cites Sirius Satellite Research Inc. v. Acacia Research Corp., No. 05 Civ. 7495(PAC), 2006 WL 238999, at *8 (S.D.N.Y. Jan. 30, 2006), where this Court dismissed a declaratory judgment suit because the declaratory judgment defendant s conduct did not create a reasonable apprehension of imminent litigation. This Court s analysis in Sirius Satellite, however, was governed by the old reasonable apprehension test see supra n.1; the Supreme Court subsequently held that this test was unduly restrictive. MedImmune, 549 U.S. at 118. The Court s prior opinion is not correct and cannot be applied here. 5
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 6 of 11 inferred as demonstrating intent to enforce a patent can create declaratory judgment jurisdiction. Hewlett-Packard v. Acceleron LLC, 587 F.3d 1358, 1360, 1362-63 (Fed. Cir. 2009) (reversing a decision granting a motion to dismiss because the patent owner s letter calling the plaintiff s attention to its patent and requesting an opportunity to discuss reflected an implicit assertion of the patent owner s rights since it is implausible... to expect that a competent lawyer drafting such a letter would explicitly allege infringement ). 3 Even an unequivocal statement that a party does not intend to sue does not moot the actual controversy created by the party s extrajudicial patent enforcement acts. Sandisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372, 1382-83 (Fed. Cir. 2007). Here, Defendant s letter definitively stated that Abbott will owe royalties to Kennedy on U.S. sales of Humira through August 21, 2018. (Maldonado Decl. Ex. 4 (emphasis added).) Defendant s letter puts Plaintiffs on notice that it intends to enforce its new patent and expects Plaintiffs to continue paying royalties on their existing sublicensing agreement for another six years. The Defendant s litigation history is also a factor to be considered. See Hewlett-Packard, 587 F.3d at 1364 n.1. Here, Defendant has a history of enforcing its patent rights against third parties. In light of the totality of the circumstances, it is objectively reasonable to believe that the Defendant intends to enforce its patent rights over its 442 patent. Second, the Defendant contends that there is no actual controversy because Plaintiffs hold an irrevocable sublicense, which Defendant cannot terminate. (Def. Br. 9-12; Def. Reply 4-5.) Defendant argues that the sublicense agreement provides, in effect, a covenant not to sue 3 While the Supreme Court rejected the reasonable apprehension of suit test as the sole test for jurisdiction,.... proving a reasonable apprehension of suit is one of multiple ways that a declaratory judgment plaintiff can satisfy the more general all-the-circumstances test to establish that an action presents a justiciable Article III controversy. Prasco, LLC, 537 F.3d at 1336. 6
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 7 of 11 Plaintiffs and notes that it cannot terminate Plaintiffs sublicensing agreement with Centocor. (Id. at 10 (citing Hilgraeve Corp. v. Symantec Corp., 265 F.3d 1336, 1346 (Fed Cir. 2001) (holding that licenses are considered as nothing more than a promise by the licensor not to sue the licensee )).) According to Defendant, this makes any controversy purely hypothetical. (Id. 9-12; Def. Reply 6-8.) Plaintiffs, however, have the ability to terminate their sublicense agreement with Centocor at-will, on thirty-day notice. (See Maldonado Decl. Ex. 2 6.2). If Plaintiffs were to terminate their sublicense agreement, they could challenge the validity of Defendant s 442 patent and Defendant could sue Plaintiffs for patent infringement for their marketing of the use of HUMIRA with methotrexate. 4 While the situation in MedImmune involved a licensor and a licensee and this case involves a patent owner and sublicense holders, the proposition that a declaratory plaintiff is not required to break or terminate its [ ] licensing agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed is just as applicable here. See MedImmune, 549 U.S. at 137. Third, the Defendant argues that any dispute is subject to the mandatory arbitration provision. (Def. Br. 12-14.) The mandatory arbitration provision governs disputes arising under or regarding the interpretation of [the sublicensing] Agreement (Maldonado Decl. Ex. 2 9.12), not patent validity. The sublicensing agreement contains a separate provision stating that the enforceability or validity of a patent is subject to a holding by a governmental agency or a 4 Even if the Plaintiffs were to breach their sublicensing agreement, rather than terminate their agreement, they could still face an enforcement action by Defendant. While Defendant is not in privity with Plaintiff, U.S. District Court Judge Chin has already determined that Defendant is the intended third-party beneficiary of the [2002] Centocor-Abbott Agreement. Centocor, Inc. v. The Kennedy Instit. Of Rheumatology, No. 08 cv. 8824, 2008 WL 4726036, at *3 (S.D.N.Y. Oct. 29, 2008). The Defendant, as the third-party beneficiary, can enforce the sublicensing agreement. See ConEd v. Northeast Utilities, 426 F.3d 524, 527 (2d Cir. 2005) ( Under New York law, a contractual promise can be enforced by a non-party who is an intended third-party beneficiary of that promise. ). 7
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 8 of 11 court of competent jurisdiction. (Id. 1.11.) 5 The sublicensing agreement here contemplates that challenges to a patent s validity will be raised before a governmental agency or a court of competent jurisdiction, not an arbitration panel. Arbitration assumes patent validity and resolves disputes concerning the interpretation of the sublicensing agreement. The Court finds that the arbitration provision does not weigh against the Court s exercise of jurisdiction in this action. Finally, Defendant contends that because Centocor cannot challenge the validity of Defendant s patents under the terms of the Defendant/Centocor agreement, that Plaintiffs do not have the right to do so. (Def. Reply 5.) As discussed above, however, the sublicensing agreement contemplates that patents can be found invalid and, in any event, public policy weighs in favor of allowing a party to challenge the validity of a patent, even if the party s contract is non-terminable or limits the party s ability to argue invalidity, because such challenges promote full and free competition in the use of ideas. See Rates Tech. Inc. v. Speakeasy, Inc., No. 10 Civ. 6482 (DLC), 2011 WL 1758621, at *5 (S.D.N.Y. May 9, 2011) ( Where, as here, an agreement purports to deprive a licensee of any opportunity to challenge validity, it directly contravenes the important public interest in permitting full and free competition in the use of ideas. ) (quoting Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969)). The balance of Defendant s arguments all bear the same deficiencies. In sum, the Court finds that an actual controversy exists between the parties. B. The Controversy Is Sufficiently Immediate and Real MedImmune did not change the bedrock rule that a case or controversy must be based on a real and immediate injury or threat of future injury that is caused by the defendants.... 5 The fact that Plaintiffs might be able to raise this challenge before a governmental agency, rather than in this declaratory judgment action, does not make it inappropriate for them to have done so. 8
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 9 of 11 Prasco, LLC v. Medicis Pharmaceutical Corp., 537 F.3d 1329, 1339 (Fed. Cir. 2008) (emphasis removed). 1. Immediacy [A]lthough a party need not have engaged in the actual manufacture or sale of a potentially infringing product to obtain a declaratory judgment of non-infringement, there must be a showing of meaningful preparation for making or using that product. Cat Tech LLC v. TubeMaster, Inc., 528 F.3d 871, 881-882 (Fed. Cir. 2008). In this case, Plaintiffs have been marketing the use of HUMIRA with methotrexate the potentially infringing activity for years. Plaintiffs declaratory judgment action, however, does not challenge its obligation to pay royalties under the 766 patent through October 2012. Defendant argues that since any controversy regarding Plaintiffs obligations under Defendant s 442 patent will not arise until October 2012, at the earliest, that the conflict is not sufficiently immediate. (See Def. Br. 14-15, 18-19.) The fact that Plaintiffs instituted this declaratory judgment action over a year before they would owe royalties on the 442 patent is not dispositive. It is probab[le], indeed virtually certain, that the [disputed patent] will apply to the plaintiffs in October 2012, if it is not found to be invalid. See Thomas More Law Ctr. v. Obama, No. 10-2388, 2011 WL 2556039, at *4-6 (6th Cir. June 29, 2011) (affirming a finding of immediacy to warrant declaratory judgment jurisdiction even though the action was raised three and one-half years before the effective date of the challenged law, which ensured that the federal judiciary would be able to reach a considered decision on the merits as opposed to [a] rushed interim decision). The Court finds that the immediacy requirement is satisfied. 9
Case 1:11-cv-02541-PAC Document 25 Filed 10/14/11 Page 10 of 11 2. Reality In the context of patent litigation, the reality requirement is often related to the extent to which the technology in question is substantially fixed as opposed to fluid and indeterminate at the time declaratory relief is sought. Cat Tech LLC, 528 F.3d at 882. The Defendant argues that Plaintiffs marketing of HUMIRA is not substantially fixed by referring to Wall Street Journal article that purportedly suggests that Plaintiffs are planning changes for HUMIRA. (Def. Br. 20-21.) Plaintiffs have been marketing the use of HUMIRA with methotrexate for years, and have stated that they have no plans to cease such activities. (Compl. 10.) The Court will not consider newspaper articles to rebut the complaint; the well pleaded allegations in the complaint control. The Court finds no reason to believe Plaintiffs will cease marketing the use of HUMIRA with methotrexate. Accordingly, the reality requirement is met. C. The Court s Discretion While a district court is given the discretion, in declaratory judgment actions, to dismiss the case, there are boundaries to that discretion. Sandisk Corp. v. STMicroelectronics, Inc., 480 F.3d 1372, 1383 (Fed. Cir. 2007). When there is an actual controversy and a declaratory judgment would settle the legal relations in dispute and afford relief from uncertainty or insecurity, in the usual circumstance the declaratory judgment is not subject to dismissal. Id. (quoting Genentech v. Eli Lilly & Co., 998 F.2d 931, 937 (Fed. Cir.1993).) Plaintiffs should not be required to terminate its sublicensing agreement or otherwise bet the farm, MedImmune, 549 U.S. at 134, before seeking a ruling on the validity of Defendant s 442 patent. In the circumstances presented here it would be an abuse of the Court s discretion to dismiss this case. 10
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