Patent ruling leaves lingering questions on burden of proof

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The U.S. Supreme Court’s ruling in Medtronic, Inc. v. Mirowski Family Ventures, LLC, No. 12-1128, clarified the burden shifting framework for certain types of claims stemming from patent licensing agreements.

But patent attorneys remain unsure whether patent licensors and licensees can agree to set their own ground rules for handling disputes in the terms of such agreements.

The court held that when the licensor of a patent seeks a declaratory judgment of non-infringement, the burden of proof lies with the holder of the patent despite the fact that in the declaratory judgment action, the patent holder is the defendant.

“It is now clear that, whatever the procedural posture, the patentee retains the burden of proving that accused products practice the claims of an asserted patent,” said Mark Fleming, a partner in the Boston office of WilmerHale and part of Medtronic’s appellate team.

But the ruling left many patent attorneys wanting more guidance on how to help their clients avoid landing in the courtroom in the first place.

“The question is still open as to whether a license can be drafted to prevent a declarative judgment action,” said John Lingl, an attorney in the Ann Arbor, Mich., office of Brinks Gilson & Lione. “The court’s ruling makes drafting a good license a little bit difficult.”

The burden of proving a negative

The license agreement at issue in the instant case was between Minneapolis-based medical device company Medtronic Inc. and Mirowski Family Ventures LLC, a Bethesda, Md.-based company that owns patents for implantable cardiac devices. The agreement allows Medtronic to use Mirowski’s patented products in exchange for the payment of licensing fees.

Under the terms of the contract, Mirowski was required to notify Medtronic if the company believed any of Medtronic’s devices used Mirowski’s patented technology. The agreement also allowed Medtronic to seek a declaratory judgment of non-infringement without breaching the licensing agreement so long as it continued to pay royalties.

This type of agreement became commonplace after the 2007 Supreme Court case MedImmune Inc. v. Genentech Inc. authorized its use.

After Mirowski informed Medtronic of alleged patent violations, Medtronic filed a declaratory judgment action challenging the validity of the allegedly infringed patents and denying violation of the patents.

The parties disagreed over who bore the burden of proof in the declaratory action: Medtronic maintained that because Mirowski held the patents, it bore the burden of proving infringement, while Mirowski argued that Medtronic, as the party seeking a declaratory judgment, had to prove non-infringement.

The district court ruled in Medtronic’s favor, finding that Mirowski had failed to meet its burden of proof of infringement. The U.S. Circuit Court of Appeals for the Federal Circuit reversed, holding that Medtronic had the burden of proving non-infringement. The court found that the MedImmune decision shifted the burden because under a licensing agreement, only the alleged infringer has the ability to seek relief from the court without breaking the terms of the contract.

But Supreme Court disagreed, reversing in a unanimous decision and placing the burden of persuasion on the patent holder, just as it is in infringement claims.

The court reasoned that placing the burden on a licensee to prove non-infringement would essentially make the kind of agreements sanctioned in MedImmune unworkable by creating “post-litigation uncertainty about the scope of the patent.”

“Suppose the evidence is inconclusive, and an alleged infringer loses his declaratory judgment action because he failed to prove noninfringement,” Justice Stephen G. Breyer wrote for the court. “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.”

Attorneys say that as a practical matter, giving a party the burden of disproving something is a lot more difficult that requiring the opposing party to prove it.

“It’s always tougher when you are not the patent holder,” Lingl said. “When you are not the patent holder, you are the one proving what you didn’t do. You don’t always have all the information that the patent holder has. …The patent holder knows the most about the patent and is in the best position to prove patent infringement.”

Maintaining the ‘balance of power’

The ruling in Medtronic prevents what some lawyers say would have been a major sea change in the way patent license agreements are used.

By allowing the licensor of a patent to seek a ruling from a court to settle an allegation of patent infringement without breaking the terms of the licensing agreement, MedImmune “significantly altered the balance of power in the playing field between patent licensors and licensees,” said Blas Arroyo, a partner in the Charlotte, N.C., office of Alston & Bird LLP.

Not only could the licensee avoid terminating the contract, but it could obtain a declaratory ruling that would save it from costly future claims of infringement, Arroyo said.

If the Supreme Court had affirmed the Federal Circuit, licensees would have lost some of that power by being placed in the tough position of proving that they did not infringe the licensor’s patent.

“The Supreme Court’s ruling maintains the balance of power that was created by the MedImmune decision,” Arroyo said.

But whether the parties themselves can shift that balance in the terms of the contract remains unclear.

“The default rule is now that the burden falls on the patent holder. The open question that is still out there is what to expect from a court dealing with a patent license provision that shifts that burden,” said David Beatty, a shareholder at Myers Bigel Sibley & Sajovec PA in Raleigh, N.C. “Can a patentee in a license agreement prevent the licensee from challenging the patent? Can they require the termination of the license if [the licensee] does challenge it? I don’t think there is any certainty there.”

It could be quite some time before that question gets resolved, as few lower courts have taken up it up — although that could quickly begin to change in the wake of the ruling in Medtronic.

While the issue plays out, attorneys are doing what they can to protect their clients’ interests, particularly those who believe the ruling may encourage licensees to bring more declaratory actions.

“If I have a client who is a patent owner … I’d advise them to get their royalties as front-loaded a possible,” said Beatty. Follow @dcdicta