Court Refuses to Enforce No-Challenge Clause in Patent License

On June 14, 2017, Justice Kornreich of the New York County Commercial Division issued a decision in Island Intellectual Property LLC v. Reich & Tang Deposit Solutions, LLC, 2017 NY Slip Op. 27199, holding that the provision of a patent license prohibiting the licensee from challenging the validity of the licensed patents was unenforceable, explaining:

With respect to no-challenge clauses, such as section 6.4 of the ALA, plaintiffs note that the Second Circuit opined in dicta on their enforceability in Warner-Jenkinson, and has since recognized that the Federal Circuit has held that a no-challenge clause in a settlement of a patent dispute is valid under Lear.

This line of cases, however, is not controlling. Flex-Foot is not on point because it involved a settlement agreement. Flex-Foot held that:

Once an accused infringer has challenged patent validity, has had an opportunity to conduct discovery on validity issues, and has elected to voluntarily dismiss the litigation with prejudice under a settlement agreement containing a clear and unambiguous undertaking not to challenge validity and/or enforceability of the patent in suit, the accused infringer is contractually estopped from raising any such challenge in any subsequent proceeding.

As more recently explained by the Federal Circuit:

In Lear, the Supreme Court eliminated the doctrine of licensee estoppel, citing the important public interest in permitting full and free competition in the use of ideas. Under Lear, a licensee of a patent is not estopped from challenging the validity of the licensed patent by virtue of the license agreement. In subsequent cases, our court and our predecessor court have confronted the question of whether consent decrees and settlement agreements may at one and the same time provide for a patent license while barring challenges to patent invalidity and unenforceability. We have held that Lear does not render such agreements unenforceable, because of the strong policy in favor of settlement of litigation and, in the case of consent decrees, the policy in favor of res judicata.

These circumstances are not present in this case. Rates Tech. is somewhat more relevant, as it addressed how to apply Lear to pre-litigation patent disputes. There, the Second Circuit held that covenants barring future challenges to a patent's validity entered into prior to litigation are unenforceable, regardless of whether the agreements containing such covenants are styled as settlement agreements or simply as license agreements.

After weighing this authority, the court finds that this case is not sufficiently analogous to Flex-Foot, Rates Tech., or any of the cases cited by the parties, and, therefore, a clear justification to enforce section 6.4's no-challenge clause does not exist.

(Internal quotations and citations omitted).