Creative License?

A portfolio licensing agreement between bio-tech companies MedImmune and Genentech was going well--that is, until it went bad.

When MedImmune took a patent dispute with Genentech to court, Genentech argued that MedImmune didn't have any legal footing to do so since it hadn't terminated its patent license. A lower court sided with Genentech, but the Supreme Court ruled that MedImmune didn't have to breach or terminate its patent license to take its complaint before a judge.

The Supreme Court's decision could have a chilling effect on innovation, since it effectively gives licensees more leeway to bring complaints against licensors. Instead of being an immutable and reliable revenue stream, licensing agreements could now result in unexpected and expensive patent litigation. "The decision will potentially inhibit companies from licensing their technology," says Charles Barquist, a patent litigator with Morrison & Foerster. "It's going to cause some people to say, 'It's just not worth it because I'm running the risk of more headaches in the future.'"

Patent attorneys are already finding ways to shift the risk back to licensees by adding provisions that let a licensor terminate a license or jack up royalty rates if the licensee files a lawsuit. "Whether those kinds of provisions will stand up is something we'll see litigation about in the next year or two," Barquist says. In the meantime, be very careful to pick the right licensing partner.

This article was originally published in the June 2007 print edition of Entrepreneur with the headline: Creative License?.