Supreme Court Lays Burden of Proof on Patentee, Even in Declaratory Judgment Action

22 January 2014 PharmaPatents Blog

In Medtronic, Inc. v. Mirowski Family Ventures, LLC, a unanimous Supreme Court held that the patent holder bears the burden of proving infringement, even in a declaratory judgment action brought by a licensee. In reaching its decision, the Court dismissed concerns that it would skew the balance of power between patent holder and licensee, noting that, at least in this case, the patent holder instigated the dispute by asserting that new products were covered by the license. The Court justified its decision as striking the right “balance” between patent holder rights and the public interest in limiting patents to their legitimate scope. 

The Backstory 

The case arose from a dispute between Medtronic, the licensee of the patents at issue, and Mirowski, the ultimate licensor. When Mirowski asserted that several new Medtronic products fell under the license (and thus should be royalty-bearing), Medtronic brought a declaratory judgment action seeking a declaration of non-infringement. In accordance with terms of the license agreement, Medtronic paid royalties on the disputed products into an escrow account, to be dispersed in accordance with the outcome of the litigation.

Even though Mirowski was the defendant in the declaratory judgment action, the district court determined that it bore the burden of proof as the patent owner, hewing to the principle that “The burden always is on the patentee to show infringement.” The district court found that Mirowski did not meet this burden, and so ruled in favor of Medtronic.

On appeal, the Federal Circuit determined that because Medtronic was the declaratory judgment plaintiff, it bore the burden of proof.

Medtronic petitioned for certiorari, which the Supreme Court granted “[i]n light of the importance of burdens of proof in patent litigation.

Federal Circuit Jurisdiction

Justice Breyer authored the unanimous Supreme Court opinion. The opinion first addressed whether the Federal Circuit had jurisdiction over the appeal, an issue which apparently was raised by an amicus, Tessera Technologies, Inc.

According to the Supreme Court:

[A]micus says, in determining whether this case is a “civil action arising under” an “Act of Congress relating to patents,” we must look to the nature of the action that the declaratory judgment defendant, namely the patentee, Mirowski, could have brought in the absence of a declaratory judgment. And that action, amicus adds (in its most significant argument against jurisdiction), would not be a patent infringement action but, rather, an action for damages for breach of contract, namely an action for breach of the Mirowski-Medtronic licensing contract, in which patent infringement is the central issue. See Brief for Tessera Technologies, Inc., as Amicus Curiae 2–3.

The Supreme Court agreed with some, but not all, of Tessera’s line of argument:

We agree with amicus that the Declaratory Judgment Act does not “extend” the “jurisdiction” of the federal courts. …. We also agree that federal courts, when determining declaratory judgment jurisdiction, often look to the “character of the threatened action.” …. But we do not agree with amicus’ characterization of the “threatened” or “coercive” action that Mirowski might have brought. The patent licensing agreement specifies that, if Medtronic stops paying royalties, Mirowski can terminate the contract and bring an ordinary patent infringement action. Such an action would arise under federal patent law because “federal patent law creates the cause of action.” … Consequently this declaratory judgment action, which avoids that threatened action, also “arises under” federal patent law.

Accordingly, the Supreme Court confirmed that the Federal Circuit had jurisdiction over the appeal in the declaratory judgment action.

Burden of Proof

The Supreme Court framed the issue before it and it’s resolution as follows:

A patent licensee paying royalties into an escrow account under a patent licensing agreement seeks a declaratory judgment that some of its products are not covered by or do not infringe the patent, and that it therefore does not owe royalties for those products. In that suit, who bears the burden of proof, or, to be more precise, the burden of persuasion? Must the patentee prove infringement or must the licensee prove noninfringement? In our view, the burden of persuasion is with the patentee, just as it would be had the patentee brought an infringement suit.

Justice Breyer cited “three legal propositions” in support of laying the burden of proof on the patent holder:

  • “[T]he burden of proving infringement generally rests upon the patentee.”
  • We have long considered ‘the operation of the Declaratory Judgment Act’ to be only ‘procedural,’ … leaving ‘substantive rights unchanged.’
  • “[W]e have held that ‘the burden of proof’ is a “substantive” aspect of a claim.’”

Justice Breyer also cited three “practical considerations” in support of laying the burden of proof on the patent holder.

First, the Court cited The Restatement (Second) of Judgments for the principle that “relitigation of an issue (say, infringement) decided in one suit ‘is not precluded’ in a subsequent suit where the burden of persuasion ‘has shifted’ from the ‘party against whom preclusion is sought . . . to his adversary.’” Thus, permitting the burden to shift “depending upon the form of the action could create post litigation uncertainty about the scope of the patent.”  Justice Breyer gave this example:

Suppose the evidence is inconclusive, and an alleged infringer loses his declaratory judgment action because he failed to prove noninfringement. The alleged infringer, or others, might continue to engage in the same allegedly infringing behavior, leaving it to the patentee to bring an infringement action. If the burden shifts, the patentee might lose that action because, the evidence being inconclusive, he failed to prove infringement. So, both sides might lose as to infringement, leaving the infringement question undecided, creating uncertainty among the parties and others who seek to know just what products and processes they are free to use.

The Court also noted that “the patent holder is in a better position than an alleged infringer to know, and to be able to point out, just where, how, and why a product (or process) infringes a claim of that patent.” Placing the burden of proof on the alleged infringer would require the alleged infringer “to work in the dark, seeking, in his declaratory judgment complaint, to negate every conceivable infringement theory.”

The Court also found that “burden shifting here is difficult to reconcile with a basic purpose of the Declaratory Judgment Act,” which it characterized as being to “rescue” licensees like Medtronic from the dilemma of having to choose between “abandon[ing] its right to challenge the scope of Mirowski’s patents, or … risk losing an ordinary patent infringement lawsuit, and thereby risk liability for treble damages and attorney’s fees as well as injunctive relief.”

Because “[t]he Federal Circuit’s burden shifting rule …create[s] a significant obstacle to use of [a declaratory judgment] action,” and because the Court could not identify “any strong reason for creating that obstacle,” the Court reversed the Federal Circuit.

Impact on Patent Holders 

In its amicus brief, Intellectual Property Owners Association  raised concerns that a reversal of the Federal Circuit decision would “’burden . . . patent owners’ by permitting ‘a licensee . . . —at its sole discretion—[to] force the patentee into full-blown patent infringement litigation.’” The Court’s response to this concern is less than satisfactory:

The short answer to this argument … is that litigation can occur only in the presence of a genuine dispute, “‘of sufficient immediacy and reality,’” about the patent’s validity or its application.

The Court also noted that, in this case, “it was Mirowski that set the present dispute in motion by accusing Medtronic of infringement,” but the Court’s rule would seem to apply even if a licensee spontaneously and unilaterally decided to challenge the scope or validity of a licensed patent.

Striking a Balance?

Justive Breyer closed the opinion with what is becoming a recurring theme in Supreme Court patent decisions:

The public interest, of course, favors the maintenance of a well-functioning patent system. But the “public” also has a “paramount interest in seeing that patent monopolies . . . are kept within their legitimate scope.” …. A patentee “should not be . . . allowed to exact royalties for the use of an idea. . . that is beyond the scope of the patent monopoly granted.” …. And “[l]icensees may often be the only individuals with enough economic incentive” to litigate questions of a patent’s scope. …. The general public interest considerations are, at most, in balance. They do not favor a change in the ordinary rule imposing the burden of proving infringement upon the patentee.

The Court expressed similar concerns for ”balancing” the rights of patent holders and the incentives provided by the patent system against “the public interest” in limiting the reach of patents in Prometheus, Myriad, and Actavis.

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