Dethroning Lear - Incentives to Innovate after MedImmune

Abstract

The Supreme Court’s 2007 decision in MedImmune v. Genentech reversed prior case law and allowed a licensee in good standing to challenge the validity of the licensed patent. In some ways, the decision was unsurprising. It made patent law more consistent with general rules on justiciability and with the Court’s recent concerns about the strength and prevalence of patents. Still, the decision is, in significant ways, astonishing. By apparently shifting all of the risk of invalidation to patentees and putting them into inferior bargaining positions relative to licensees, it arguably undermines patent value, reduces incentives to invest, and endangers the public interest in scientific progress. It is especially detrimental to patent holders in emerging sectors, where licensing income is key to funding research and technology transfer operations. Yet, there is virtually nothing in the opinion that rationalizes the result in terms of innovation policy.This article suggests that this dire view of MedImmune is wrong: that the decision leaves patentees free to share the risks of invalidation with their licensees, so long as they do so expressly, thereby giving potential licensees strong incentives to vet validity at the start of a relationship - and early in the life of the patent. After setting out the arguments for reading MedImmune as promoting private ordering, the article discusses five general approaches to contracting in its light. It concludes with a look at the limits of party autonomy, suggesting that MedImmune also casts doubt on a line of cases upholding agreements between branded pharmaceutical companies and generic manufacturers that eliminate competition in the name of reducing litigation costs.