It is common for patent licence agreements and settlement agreements to include so called "no-challenge" clauses, in which parties agree not to attack the validity of the other's patent. However, the enforceability of such clauses has been questioned.
In Loops LLC v Maxill Inc., 2020 ONSC 5438, the Ontario Superior Court enforced a no-challenge clause in a Canadian settlement agreement, in the face of ongoing litigation in the United States. The Court granted an injunction prohibiting Maxill Inc. (Maxill Canada) from attacking the validity of Loops L.L.C. and Loops Flexbrush L.L.C.'s (Loops) patent in proceedings in the United States.
As discussed below, this decision establishes a fresh precedent for the validity of no-challenge clauses, affirming that Canadian courts are likely to enforce such clauses where they are clear and unambiguous.
Procedural History
In 2012, Loops commenced an action against Maxill Canada, alleging that Maxill Canada infringed its patent by selling and distributing the Supermaxx toothbrush.
In 2014, the parties finalized a settlement agreement where Maxill Canada agreed not to import, export, make, have made, sell or offer for sale the Supermaxx toothbrush anywhere in the world. The settlement agreement also contained a no-challenge clause, which prevented Maxill Canada from directly or indirectly challenging the validity of Loops' Patent in the United States.
Despite the settlement agreement, Maxill Canada continued to sell the Supermaxx toothbrush. From 2015 to 2017, Loops commenced two actions against Maxill Canada in the United States, alleging that Maxill Canada breached the settlement agreement and infringed the U.S. patent.
In 2019, the U.S. Court denied Loops' request to stay the U.S. actions, finding that the no-challenge clause in the settlement agreement was unenforceable because these clauses in pre-litigation settlement effectively muzzle parties who seek to challenge the patentability of an inventor's discovery and force the public to continue "[paying] tribute to would-be monopolists without need or justification."
In 2020, the Ontario motions judge denied Loops' similar injunctive proceedings where Loops sought to prohibit Maxill Canada from challenging the U.S. patent's validity. In denying the injunction, the motions judge applied the well-known three-part test for injunctive relief, which includes the finding of a strong prima facie case, irreparable harm and a favourable balance of convenience.
Appeal of the Motions Judge's Decision
The Court overturned the motion judge's decision, finding that the no-challenge clause should be enforced. As not doing so would cause Loops irreparable harm, the Court prohibited Maxill Canada from attacking the validity of the U.S. patent in the U.S. Action. An analysis of the three-part test follows:
1. Was There a Strong Prima Facie Case?
The Court concluded there was a strong prime facie case that the no-challenge clause should be enforced in light of Maxill Canada's breach of the settlement agreement. The motions judge erred in determining Maxill Canada was not a party to the U.S. actions. The clause was clear and unambiguous and Maxill Canada had breached it by being a party in the U.S. actions. Both parties had freely accepted the no-challenge clause, recognizing that it intended to prevent Maxill Canada from challenging the U.S. patent's validity.
Notably, the Court further recognized that allowing parties to contractually preclude the subsequent use of an otherwise available defence simply for personal gain or protection would be an improper limit on the freedom to contract. Evidence would be required to weigh the implications of enforcing the no-challenge clause against not doing so.
2. Would Loops Suffer Irreparable Harm if the Injunction Was Not Granted?
If the injunction were not granted, Maxill Canada could continue attacking the validity of the U.S. patent in the U.S. actions, which directly—and negatively—impacts Loops' financial and litigation interests.
Enforcing the no-challenge clause would provide Loops a substantive argument in advancing its claim against Maxill Canada, as well as in defending Maxill Ohio's claim. Not enforcing the clause would cause irreparable harm because it would completely change Loops' case and litigation plan in the U.S. Action. Loops would need a new strategy and evidence, and would face different risks.
3. Did the Balance of Convenience Favour Granting or Denying the Injunction?
The balance of convenience favoured granting an injunction because it would be problematic if the trial proceeds and the U.S. patent were deemed invalid and if it were subsequently determined that Maxill Canada should have been estopped from using the invalidity defence.
Effect on Commercial Parties
This case emphasizes both the importance of properly drafting no-challenge clauses, as well as the importance of holding parties to their bargains, particularly in the context of settling litigation. Unlike courts in the United States, the Ontario Court enforced the settlement agreement and kept Maxill Canada to its promise. Public interest in free competition in ideas, alone, does not trump the enforceability of the no-challenge clause.
Importantly, in addressing these issues of public policy, the Court noted that the timing of acceptance of no-challenge clauses plays a key role. No-challenge clauses accepted during settling patent infringement litigation may be upheld given the importance of enforcing bargains. Conversely, no-challenge clauses contracted at the outset of the relationship may be void due to concerns of limiting the free use of ideas in the public domain.
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