No-Challenge Clauses in the United States

Whether a no-challenge clause is enforceable depends on how the clause is drafted and where it is being enforced. In the United States, license agreements often contain no-challenge clauses that expressly prohibit licensees from challenging licensors’ patents or other intellectual property rights. A no-challenge clause might look like this:

Example 1:

Termination in the Event of a Patent Challenge. Licensor shall have the right to terminate this Agreement or any License granted hereunder, in the event Licensee directly or indirectly commences legal action or otherwise challenges the validity of licensor’s intellectual property rights.

Example 2:

No-Challenge. Licensee shall not challenge or cause any third party to challenge the validity or enforceability of licensor’s intellectual property rights.

Notably in MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 135 (2007), the US Supreme Court reasoned that the absence of a no-challenge clause in the parties’ license agreement was a basis for upholding the licensee’s right to challenge the licensor’s patent – “it is not clear where the prohibition against challenging the validity of the patents is to be found [and this] can hardly be implied from the mere promise to pay royalties on patents.” If there is one lesson to learn from MedImmune, it is that licensors should take care to negotiate and execute license agreements containing no-challenge clauses that either bar or otherwise deter a licensee from challenging a licensor’s intellectual property rights. Such clauses may provide for larger upfront license fees, increased royalty rates, or licensor’s right to terminate upon a licensee’s challenge of licensor’s intellectual property rights, as well as a right to receive advance notice of licensee’s claims.

Under EU law, no-challenge clauses pose a potential antitrust problem.

No-Challenge Clauses in the EU

Under EU law, however, no-challenge clauses pose a potential antitrust problem. Thus, when negotiating a license agreement that may be subject to EU law (e.g., license territory includes EU), it is helpful to be familiar with a few basic principles of EU competition law.

EU Competition Law and License Agreements

Article 101(1) of the Treaty on the Functioning of the European Union1 prohibits agreements that have an anticompetitive effect on trade between Member States within the EU.2 License agreements, because of their restrictive covenants and various limitations on the parties, can come under the purview of Article 101(1) unless the parties’ positions in the applicable market or industry are relatively insignificant.3 License agreements, however, may be exempt from Article 101(1) under the following two conditions: (1) by qualifying for a Technology Transfer Block Exemption; or (2) by meeting the requirements of Article 101(3) (see endnote 2). Since the latter option under Article 101(3) entails a complex, fact specific analysis that varies case by case, we will tackle only the Technology Transfer Block Exemption4 here.

Technology Transfer Block Exemption (TTBE)

In essence, the TTBE provides a safe harbor from antitrust challenge for certain types of license agreements5 and generally applies to:

  • Agreements effective after October 31, 2005;6
  • Agreements involving patents, know-how, software, design rights and the use of those rights to manufacture products or goods (e.g., license agreements);
  • Agreements between two parties; and
  • Parties who meet certain market share requirements7 – the combined market share of parties are above 10 percent (or 15 percent if parties are non-competitors) and the total market share of competitors must not exceed 20 percent (or for non-competitors neither exceeds 30 percent).8

Blacklisted Provisions

In addition to meeting the above criteria, license agreements seeking the TTBE safe harbor also cannot contain any “blacklisted” (also known as “hardcore”) provisions, which are deemed anticompetitive per se. Examples of “blacklisted” provisions include clauses that fix re-sale prices, place restrictions on licensee to use and employ its own technology, impose restrictions on research and development activities, or otherwise restrict output.9

Excluded Restrictions

Additionally, to the extent license agreements seeking TTBE protection contain any “excluded restrictions” (which are not necessarily per se prohibited), such provisions will be assessed on a case-by-case basis to determine their anticompetitive effect. Unlike blacklisted provisions, which disqualify the entire license agreement from the TTBE, excluded restrictions abrogate the TTBE safe harbor only with respect to the specific offending provision. Examples of excluded restrictions include no-challenge clauses (except provisions allowing termination upon challenge by the licensee); mandatory assignments by licensee to licensor for improvements or new application of the technology; and exclusive grant back clauses. For these reasons, a no-challenge clause of the type found in Example 1 (above) may be safe under the TTBE, whereas a clause of the type found in Example 210 may be subject to further scrutiny as an excluded restriction under the TTBE.

Conclusion

Reliance on boilerplate no-challenge clauses can potentially cause serious problems under EU law. If deemed anticompetitive, not only does the license agreement become void and unenforceable, but the parties may also be subject to civil damages, penalties, fines, and sanctions.11 A well crafted no-challenge clause drafted by parties cognizant of these issues can provide the expected benefits, while minimizing the risk of antitrust scrutiny.