Courts Split on Legality of Patent Holders’ and Licensees’ Covenants Not to Sue

Guest Commentary

By Lauren Murphree, a 2012 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

Covenants not to challenge patent validity, often entered into as a means of settling patent disputes, are being called into question in the wake of a new appellate court decision that invalidated such an agreement for the good of “the public interest.” But courts shouldn’t be actively voiding such agreements, at least not without balancing both the (often sophisticated) parties’ voluntary choices to enter into these agreements, and the immeasurable public interest in contract security and confidence.

The U.S. Court of Appeals for the Second Circuit’s unanimous decision in Rates Technology Inc. v. Speakeasy, Inc. creates what appears to be a clear circuit split regarding parties’ ability to challenge the validity of patents after entering into licensing agreements—even when those agreements are structured as covenants not to sue or legal settlements. The Second Circuit relied on the 1969 Supreme Court case Lear v. Adkins, but interpretations of that seminal case have been muddied for decades. As a result, the issue has been teed up nicely for further Supreme Court review.

In 1969, the Supreme Court did away with the doctrine of licensee estoppel in the context of patent licensing, holding that the policy implications surrounding patent validity and “permitting full and free competition in the use of ideas” outweighed any arguments in support of the common law of contracts. While the facts at issue in Lear dealt with a patent license and ongoing royalty payments, the Second Circuit interpreted the decision to require courts to balance intellectual property policy against any contractual provisions and invalidate agreements that would “undermine the public interest.” Idaho Potato Comm’n v. M & M Produce Farm & Sales, 335 F.3d 130, 137 (2d Cir. 2003). The Ninth Circuit has similarly found that an agreement not to contest the validity of a patent was facially void and unenforceable. Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., 444 F.2d 425, 427 (9th Cir. 1971).

Conversely, the Federal Circuit has barred a patent validity challenge where a settlement agreement existed, finding that there was a similarly strong public policy in favor of enforcing settlement agreements. Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1370 (Fed. Cir. 2001). Both the Federal Circuit and the Petitioners in Speakeasy point out that the Lear court was not dealing with a settlement agreement, a fact that presents equally compelling policy implications as the patent issue. In a Seventh Circuit decision pre-dating both cases, the court enforced a settlement agreement that barred a patent infringement suit while noting the obvious point that “such [federal patent] policy must occupy a subsidiary position to the fundamental policy favoring the expedient and orderly settlement of disputes and the fostering of judicial economy. To allow a subversion of the deeply instilled policy of settlement of legitimate disputes . . . would effectively strip good faith settlements of any meaning.” The court then declined to extend Lear any further. Ransburg Electro-coating Corp. v. Spiller and Spiller, Inc., 489 F.2d 974 (7th Cir. 1973).

The critical issue in Speakeasy is not, as the Second Circuit asserts, that the no-contest provision was entered into prior to litigation. Instead, the issue should turn on the distinction that Lear dealt decisively with the right of a licensee to challenge the validity of a patent, not with the enforcement of settlement agreement as was the situation in Speakeasy and many other cases wrongly decided under the guise of Lear. Licensees not wanting to abide by these agreements undoubtedly use Lear as a crutch, but their reliance is misplaced. Should the High Court take the case, the question will become whether it wants to extend Lear’s holding to settlement agreements, or limit the holding to its language: that licensee’s may challenge the validity of a patent under which they are licensed only.

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