Licensees moved to stay a patent infringement lawsuit pending resolution of a dispute over the license's covenant not to sue. The court granted the motion, concluding that a stay would not impose an undue burden on licensor and that resolving the covenant's enforceability could reduce the issues and burden of litigation.
This case stems from an agreement in which Laser Band granted Ward Kraft a license to make and sell certain patented products. The agreement included a mutual covenant not to sue and a forum selection clause which provided that "any action by any party to enforce any provision of this Agreement shall be brought exclusively in the United States District Court for the Eastern District of Missouri, Eastern Division." While most terms of the agreement expired with the patent, certain provisions, including the covenant not to sue and the forum selection agreement survived expiration.
Zebra subsequently acquired Laser Band and sued Typenex Medical and Ward Kraft in Illinois for patent and trademark infringement, unfair competition and violation of the Illinois Uniform Deceptive Trade Practices Act. The complaint asserted 199 patent claims and 182 pages of infringement contentions.
In response, both Ward Kraft and Typenex asserted the covenant not to sue as an affirmative defense in the Illinois action. In addition, Ward Kraft and Typenex filed their own lawsuit in Missouri for breach of contract and sought a declaratory judgment that all claims between the parties fell within the scope of the license agreement. Ward Kraft also asked the Illinois court to stay the litigation filed by Zebra until the Missouri court decided Ward Kraft's lawsuit.
Opposing the stay, Zebra argued that the covenant not to sue did not apply to the products at issue, and that even if it did, the covenant only applied to the original contacting party, Laser Band, and not Zebra. Typenex and Ward Kraft on the other hand, argued that the products were subject to the covenant not to sue and that the forum selection clause in the agreement required the dispute to be decided by the court in the Eastern District of Missouri.
The Zebra Decision
In determining whether to stay the case, the court considered whether a stay would (1) unduly prejudice or disadvantage Zebra, (2) simplify the issues and streamline the case, and (3) reduce the burden of litigation on the parties and the Court.
Turning to the first inquiry, the Court determined that Zebra would not be unduly prejudiced by a decision to stay the case. First, it reasoned, the fact that a stay would delay litigation is insufficient to establish undue prejudice. Secondly, Zebra's failure to pursue a preliminary injunction, enjoining defendants from producing and selling the alleged infringing products, undermined any argument that continued infringement would be unduly prejudicial. Thirdly, Zebra was aware of the alleged infringement for two years before filing suit. Finally, if Zebra prevailed, they would be able to collect damages for any infringement that occurred during the stay. Accordingly, granting the stay would not impose an undue burden on Zebra.
Turning to the second inquiry of whether the stay would simplify the issues and streamline the case, the court addressed Zebra's argument that the court was permitted to rule on the applicability of the covenant not to sue, so long as it applied Missouri law. Citing the license agreement, Zebra argued that the forum selection clause and choice of law provision were distinct in that the forum selection clause applied to "any action by any party to enforce any provision of this Agreement" while the choice of law provision provided that the agreement "shall be construed, interpreted and applied" in accordance with Missouri law. Since the covenant not to sue was raised as an affirmative defense, Zebra argued, resolving the issue would not equate to enforcing the license agreement; thus, the court was free to address the issue so long as it applied Missouri law.
The court was unpersuaded. Noting that Zebra did not argue that the forum selection clause was invalid, the court determined that the alleged distinctions between the forum selection clause and choice of law clause were insufficient and unsupported by any of the case law cited by Zebra. And by raising the covenant as an affirmative defense, the defendants were asking the court to enforce it against Zebra—a question to be resolved in the Eastern District of Missouri. This argument aside, the court concluded that a stay was proper because if the court in the Eastern District of Missouri first determined whether the covenant not to sue applied, it would narrow the scope of the case, if not resolve it entirely.
As to the final inquiry, the Court concluded that a stay would reduce the burden of litigation on the parties and the Court. Noting the breadth of Zebra's infringement contentions, the court determined that the cost of litigation might be significantly reduced if the covenant not to sue applied. Such a reduction of cost would undoubtedly reduce the burden on all parties.
Accordingly, the court ordered a stay.
Strategy and Conclusion
Understanding the impact of clauses that can survive the termination of an agreement is important, as these will continue to affect the parties' conduct. Clauses addressing forum selection and choice of law, may not seem as important at the time of negotiation, however, these clauses can dramatically affect litigation. Courts may invoke their discretion to stay the case until questions related to agreement interpretation are resolved in a forum other than where the case is pending. Parties opposing a potential stay must be ready to provide evidence showing that a stay would result in undue prejudice, including arguments showing how monetary damages alone would be insufficient to cure the negative impact of such delay.
The Zebra decision can be found here.
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