United States Court of Appeals for the Second Circuit, Decision of 10 July 2012, Rates Technology Inc. v. Speakeasy, Inc.

The U.S. Court of Appeals for the Second Circuit held that an agreement barring a patent licensee from challenging the validity of the licensed patents was void because it was made prior to the initiation of litigation.

The Second Circuit’s decision was based on the U.S. Supreme Court’s 1969 ruling in Lear, Inc. v. Adkins, which repudiated the doctrine of licensee estoppel in patent law. The U.S. Supreme Court held that the public’s interest in litigating patent validity outweighed the competing contract law principles. The Lear decision, however, neither involved a specific "no challenge" contract clause nor addressed the competing public policies of encouraging resolution of litigation and enforcing settlement agreements to encourage parties to enter into them.

Since Lear, courts have grappled with balancing the public interests in identifying invalid patents and encouraging resolution of litigation. The Second Circuit’s decision outlines situations where a "no challenge" clause may arise and the potential enforceability of such clause. Importantly, the focus in each situation is whether there was a meaningful opportunity in litigation for the patent to be examined for invalidity prior to the agreement. Indeed, the Second Circuit stated that "enforcing "no-challenge" clauses in pre-litigation settlements would too easily enable patent owners to ‘muzzle’ licensees – the ‘only individuals with enough economic incentive to challenge’ the patent’s validity.’"

  • "No challenge clause" in Consent Order or Stipulated Judgment: Likely Enforceable. The Second Circuit stated that consent decrees "estop future challenges to a patent’s validity." The court explained that "agreements are arrived at in settlement of adversary litigation with infringement as well as validity determined and with the discovery machinery of the courts available to the parties, and are subject to court scrutiny, in contrast to the purely private license agreements."
  • "No challenge clause" agreed to after initiation of litigation, but without Consent Order or Stipulated Judgment: Likely Enforceable. The Second Circuit cited to the Federal Circuit’s enforcement of a "no challenge" clause where the licensee had asserted invalidity, had an opportunity to conduct discovery on the issue and elected to voluntarily dismiss the litigation with prejudice subject to an agreement that included a "clear and unambiguous" "no challenge" clause.[1]
  • "No challenge" clause agreed to prior to initiation of litigation: Likely Unenforceable. The pivotal point for the Second Circuit was that "Speakeasy never had the opportunity to conduct discovery regarding the validity of RTI’s patent."Despite the above clarifications, there remain numerous open questions such as: (1) is the mere opportunity to conduct discovery during litigation enough to find that a patent’s validity was sufficiently examined; (2) if some discovery on validity is required, how much discovery is necessary; (3) would a prior proceeding finding a patent valid be sufficient to uphold a "no challenge" clause – whether in federal court or before the U.S. Patent and Trademark Office; (4) could a "no challenge" clause be enforced if drafted to include acknowledgements that the licensee received information as to validity, conducted a reasonable examination, and determined that the patent was likely valid; or (5) could an opinion from independent counsel (or licensee’s counsel) be relied upon to persuade a court that validity had been sufficiently examined to warrant enforcement of a "no challenge" clause.

Until the courts provide further guidance in this area, patent licensors should recognize that "no challenge" clauses may be unenforceable. Other contract provisions that could limit licensee invalidity challenges should be considered. Also, if a "no challenge" clause is agreed to, consideration should be given to specifying how the licensee had the opportunity to examine validity and the reasons why the clause should be enforced.