In July 2012, the U.S. Court of Appeals for the Second Circuit ruled in Rates Technology v. Speakeasy, 685 F.3d 163 (2012), that a provision in a pre-litigation settlement agreement precluding a party from challenging the validity of a patent was unenforceable as against the public policy announced in Lear v. Adkins, 395 U.S. 653 (1969). The opinion calls into question a number of standard clauses which patent owners have used to control validity challenges by licensees and settling parties. When the opinion is combined with the Supreme Court’s decision in MedImmune v. Genentech, 549 U.S. 118 (2007) (holding that licensees need not repudiate their license before challenging patent validity), licensees are now in a prime position to challenge patent validity. Patent owners are advised to factor in an increased risk of challenges to patent validity in their settlement positions.
Background
Rates Technology Inc. (RTI) owns a number of patents for telecommunications technology and is a frequent litigator. In 2007 it accused Speakeasy Inc., a telecommunications company, of infringing two patents. After some negotiations, the parties entered into a “covenant not to sue,” which included a provision barring Speakeasy from ever challenging or assisting others in challenging the validity of the licensed patents. The no-challenge clause was accompanied by a liquidated-damages provision that provided that in the event Speakeasy were to violate its terms, it would have to pay $12 million in liquidated damages, plus legal expenses to collect that amount. At the time, Speakeasy was in the process of being acquired by Best Buy Co. Inc.; Best Buy joined in the covenant not to sue.
