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DJ Action Based on Claim of Invalidity Not Barred by Settlement Agreement

September 09, 2010

Decision icon Decision

Last Month at the Federal Circuit - October 2010

Judges: Lourie, Linn, Dyk (author)

[Appealed from: D.D.C., Judge Friedman]

In Baseload Energy, Inc. v. Roberts, No. 10-1053 (Fed. Cir. Sept. 9, 2010), the Federal Circuit reversed the district court’s SJ holding that the terms of a 2008 settlement agreement barred all claims between the parties.  The Federal Circuit reversed the district court’s SJ after concluding that the language of the settlement agreement did not release either claims of infringement or the accompanying defenses of invalidity or unenforceability.

After a breach of contract action between the founder and CEO of Baseload Energy, Inc. (“Baseload”), David Resnick, and Bryan W. Roberts, the parties entered into a settlement agreement that contained a release of claims by Baseload that could have been brought against Roberts.  Baseload subsequently sought DJ that U.S. Patent No. 6,781,254 (“the ’254 patent”) owned by Roberts was invalid and unenforceable.  Roberts moved for SJ on the ground that Baseload’s claims were barred by the settlement agreement and the district court granted the motion.

On appeal, the Federal Circuit first addressed the issue of whether consent decrees and settlement agreements may at the same time provide for a patent license while barring challenges to patent invalidity and unenforceability.  Baseload argued that the district court erred in granting SJ because the settlement agreement failed to meet the standard for a valid release of patent invalidity claims.  The Federal Circuit reaffirmed that release language must be clear and unambiguous to release patent invalidity claims, and reminded that “[o]nce 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.”  Slip op. at 11 (quoting Flex Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1370 (Fed. Cir. 2001)).

Baseload argued that the settlement agreement was inadequate to release its patent invalidity claims because the prior litigation between the parties did not involve patent invalidity issues or actual litigation on those issues.  The Court disagreed.  Although the absence of a prior dispute and litigation on invalidity is pertinent, the Court rejected the argument that a settlement agreement is ineffective to release invalidity claims unless the exact circumstances described in Flex Foot are present.  The Court held that each case must be examined on its own facts in light of the agreement between the parties.  Clear and unambiguous language barring the right to challenge patent validity in future infringement action is sufficient, even if invalidity claims had not been previously at issue and had not been actually litigated. 

The Federal Circuit found, however, no such clear language and thus no release of either patent claims or defenses.  There was no specific language in the settlement agreement making reference to invalidity issues.  There was also reason to question whether the general language of the agreement was intended to cover such disputes.  This is so because there was no issue in the breach-of-contract litigation concerning patent infringement or patent invalidity and unenforceability, and no prior dispute between the parties on such issues.  Most importantly, the parties could not possibly have intended to release all patent infringement claims, because the settlement agreement granted Baseload an option to acquire a nonexclusive license to use the technology claimed by the ’254 patent.  The license provision would be unnecessary if all infringement claims under the ’254 patent were released.  Thus, the Court concluded that the parties must have intended to exclude infringement from the scope of the settlement agreement.  Because the Court found nothing in the text of the settlement agreement to suggest that somehow infringement claims were preserved while patent invalidity defenses were released, the Court held that the clear and unambiguous language necessary to effect a release of patent invalidity defenses was not present.


Summary authored by Jin Zhang, Esq.