A promise not to challenge the validity or enforceability of a patent in a pre-litigation settlement agreement may not be sufficient to prevent a party from asserting invalidity and unenforceability defenses when sued for patent infringement. The court found that the no-challenge clause in the pre-litigation settlement agreement was unenforceable because the parties had not actually litigated the patent, nor had they engaged in discovery concerning the patent's validity or enforceability.
Gyro-Trac Corporation and King Kong Tools, LLC entered into a pre-litigation settlement agreement, resolving patent infringement allegations that Gyro-Trac raised in a cease-and-desist letter. As part of the agreement, King Kong Tools acknowledged that Gyro-Trac's patents were valid and enforceable and agreed not to challenge the validity or enforceability of the patents.
Two years later, Gyro-Trac sued King Kong Tools, alleging that despite the settlement agreement, King Kong Tools continued to infringe its patents. In its defense, King Kong Tools asserted that Gyro-Trac's patents were invalid and unenforceable.
Gyro-Trac moved to strike King Kong Tools' invalidity and unenforceability defenses considering the parties' preexisting agreement. King Kong Tools opposed, relying on the Supreme Court precedent from Lear, Inc. v. Adkins. The district court agreed with King Kong Tools and denied Gyro-Trac's motion.
The Gyro-Trac–King Kong Tools Decision
The district court first considered Lear. In Lear, the Supreme Court rejected the doctrine of licensee estoppel, explaining that "important public policy interest in permitting full and free competition in the use of ideas" can outweigh "the technical requirements of contract doctrine." Thus, under Lear, a licensee is not prohibited from challenging the validity of the patent by virtue of the license agreement. The district court's analysis, however, did not stop there. It then considered subsequent appellate decisions interpreting and distinguishing Lear to determine whether King Kong Tools was barred from challenging the patent.
Because Federal Circuit law governed the issue, the district court first reviewed Federal Circuit precedent starting with Flex-Foot Inc. v. CRP, Inc. In that case, the Federal Circuit distinguished Lear because the agreement in Lear did not contain an express agreement not to challenge the validity of the licensed patent. Relying on res judicata and judicial economy, the Federal Circuit held that an express promise not to challenge a patent's validity in a settlement agreement would be enforceable under certain circumstances—notably, where the challenger has had an opportunity to conduct discovery on validity issues and has elected to voluntarily dismiss the litigation through an agreement containing a clear and unambiguous no-challenge clause.
The district court then analyzed a subsequent Federal Circuit case, Baseload Energy, Inc. v. Roberts, which held that a settlement agreement did not bar an entity from challenging patent validity because it lacked the "clear and unambiguous" language necessary to release invalidity defenses. In reaching its decision, however, the Federal Circuit rejected the argument that for a settlement agreement to bar validity challenges the exact circumstances in Flex-Foot must be present. Instead, the Federal Circuit stated that clear and unambiguous language in an agreement barring a patent challenge may be sufficient even if invalidity claims had not previously been at issue and had not been actually litigated. Finally, the district court noted that since Baseload, the Federal Circuit has not ruled definitively on the enforceability of no-challenge clauses in pre-litigation agreements.
With no precedent squarely on point from the Federal Circuit, the district court next looked to a decision of the Second Circuit relied on by King Kong Tools—Rates Technology, Inc. v. Speakeasy, Inc. In Rates, the Second Circuit held that a no-challenge clause in a pre-litigation settlement agreement was unenforceable under Lear. The Second Circuit held that enforcing a no-challenge provision in such an agreement would make it easy for parties to circumvent Lear by crafting license agreements as "settlement" agreements.
In rendering its decision, the court noted that before entering into the agreement, the parties did not engage in any patent litigation and the agreement did not operate to end any other litigation. The court further noted that while Baseload held that the circumstances present in Flex-Foot are not determinative as to the enforceability of a no-challenge clause, the Federal Circuit did not address the enforceability of such a clause in a context where there was no patent infringement litigation between the parties, there was no discovery between the parties, and there was no litigation between the parties at the time they entered the Agreement. Since Baseload was not "directly instructive" to the facts of this case, the district court found the Second Circuit's reasoning in Rates to be persuasive. While King Kong Tools agreed not to make future validity or enforceability challenges, the parties had not litigated the alleged patent infringement and had not conducted discovery concerning the validity or enforceability of the patent. Thus, the court found the agreement did not bar King Kong Tools' claims and denied Gyro-Trac's motions.
Strategy and Conclusion
The decision here is in line with other decisions refusing to enforce no-challenge clauses in agreements that did not settle actual litigation. Parties should be mindful of the limitation of such clauses outside of litigation and consider whether other alternatives are available to address future validity challenges. For example, clauses providing that validity challenges must be brought in a particular forum might benefit a patent owner.
The Gyro-Trac decision can be found here.
Originally published 06 June 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.