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Courts May Enforce Covenants Not to Challenge the Validity of Licensed Patents Contained in a License Agreement Settling Litigation When the Parties Clearly Waived Future Challenges to Validity

LES Insights
October 23, 2012

Paul, John C., Kacedon, D. Brian

Article

Authored by Scott A. Allen, D. Brian Kacedon, and John C. Paul

When drafting a patent license agreement, licensors often want to include provisions prohibiting the licensee from challenging the validity of the patents involved or shifting the burden of proof for infringement, requiring that the licensee prove noninfringement. The enforceability of these provisions often turns on whether clear and unambiguous language indicates the intent of the parties. This is particularly the case for provisions seeking to bar validity challenges as such provisions may run afoul of the Supreme Court's decision in Lear v. Adkins, which overruled the doctrine of "licensee estoppel." In Lotes Co. v. Hon Hai Precision Industry Co.,1 the Northern District of California addressed what constitutes clear and unambiguous language in the parties' agreement on these issues and discussed the proper scope of the products licensed under the agreement.

Background

Defendants Hon Hai and Foxconn own patents related to connecting electrical packaging to printed circuit boards. Lotes and the defendants had previously engaged in litigation over the patents, which ultimately ended in a settlement agreement and patent license agreement granting Lotes a license under the defendants' patents. The agreements also included a covenant by Lotes not to challenge the validity of the defendants' patents. The present litigation arose from a dispute regarding those agreements.

The parties filed motions for summary judgment on three specific issues: (1) whether the covenant-not-to-challenge provision of the license agreement is enforceable; (2) the proper scope of products licensed under the license agreement; and (3) whether the license agreement shifted the burden of proving noninfringement to Lotes.

The Lotes Decision

The district court addressed the enforceability issue first, holding enforceable the covenant not to challenge the validity of the patents. Relying on the Federal Circuit's analysis in Flex-Foot, Inc. v. CRP, Inc., the court found that Lotes could not challenge validity because the settlement agreement contained a "clear and unambiguous" waiver of future challenges. Despite Lotes's arguments to the contrary, the district court found the Supreme Court's decision in Lear, Inc. v. Adkins—which eliminated the doctrine of "licensee estoppel"—inapplicable because Lear did not involve licenses created as a result of a litigation-settlement agreement.

Lotes offered several additional arguments on why the covenant not to challenge should not be enforced, none of which the district court accepted. First, according to Lotes, the waiver was not "clear and unambiguous" because the settlement agreement provided for neutral third parties to opine on the validity of the patents. The court reasoned, however, that those separate provisions had no bearing on the clear language of the licensee's covenant not to challenge. Second, Lotes asked the court not to enforce the waiver under a theory of economic duress. But, according to the court, Lotes failed to submit any evidence of the defendants' "coercive acts"—an element required for economic duress.

Having declared the covenant enforceable, the court next addressed the scope of the licensed products covered under the license agreement. Finding the language on the scope of the accused products ambiguous, the court then turned to parole evidence—evidence outside the contract submitted to show what the parties intended at the time of agreement. The portion of the license agreement listing the licensed products included two different headings: "product categories" and a corresponding chart of "product numbers." The defendants argued that the agreement's "product categories" section (the broader group) defined the scope of covered products. Lotes, on the other hand, argued that the section listing specific "product numbers" (the narrower group) defined the scope. Because the parties submitted adequate evidence in favor of their respective interpretations, the court found a genuine issue of material fact, precluding summary judgment. The court did, however, proceed with its analysis of the facts since the parties had agreed to have the court resolve issues of fact if it found summary judgment inappropriate. Based on the evidence the parties submitted, the district court found in favor of Lotes's "product numbers" interpretation.

In doing so, the court focused on the fact that in one of the communications between the parties discussing an exhibit to the license agreement, the defendants wrote: "If Lotes won't agree to [listing by product name instead of product number], we would need its help in listing each product number." The court reasoned that because Lotes never agreed to define the accused products by name, it followed that the parties settled on listing specific product numbers. Also, in an earlier draft of the agreement, placeholder language stated: "We need to agree on a list of products that include those accused and exclude those not addressed by this agreement." That placeholder language was ultimately replaced with a chart containing product numbers, which the court found indicative of intending a product scope defined by "product numbers."

Finally, the district court addressed whether the license agreement shifted the burden of proof to Lotes to prove noninfringement. Finding for Lotes, the court found no evidence of "language that clearly alters" the default rule that a patent holder bears the burden of proof on infringement. While parties are free to contract around this default rule, their intent to do so must be "clear and unambiguous." Here, the question was whether the phrase "Licensee establishes . . . that a given Licensed Product . . . no longer infringes" and shifted the burden of proving noninfringement to Lotes. It did not because, as the district court explained, even if the term "establish" means "prove," or even "ultimately succeed," that did not mean that Lotes would bear the burden of proving noninfringement.

Strategy and Conclusion
  1. Importance of Careful Drafting. This order reinforces the importance of using clear and explicit language when drafting settlement agreements and license agreements. Covenants not to challenge the validity of the patents may be held enforceable if they arise from a litigation settlement and the parties express a clear and unambiguous intent to preclude validity challenges, notwithstanding the Supreme Court's elimination of the doctrine of licensee estoppel.
  2. Considering Extrinsic Evidence. Generally, courts look only at the language of a license agreement in determining the scope of that agreement. When faced with ambiguity, however, courts will look to extrinsic evidence to resolve that ambiguity. This again highlights the importance of careful drafting to ensure that the agreement is not ambiguous on its face.
  3. Considering the Effect of Negotiation Discussions. Courts looking at extrinsic evidence to determine the intent of the parties to an agreement will consider negotiation discussions. Unresolved points often end up being less clearly and less explicitly presented in the resulting written agreement. As a result, during the negotiations and when drafting an agreement, the parties should consider the effect of the discussions on how the resulting agreement will be interpreted.

Endnotes
1 The Lotes decision may be found here.

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