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A Settlement Agreement May Prevent Infringement and Validity Challenges in Subsequent Litigation

Friday, February 1, 2019   (0 Comments)
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A Settlement Agreement May Prevent Infringement and Validity Challenges in Subsequent Litigation

By Max Mauldin

Edited by  Clara N. Jimenez, John Paul, Brian Kacedon

Abstract: A "No Challenge Clause" in a settlement agreement can be used to preclude a party from bringing specific affirmative defenses in an infringement claim.

Background

Kenall Manufacturing sued Cooper Lighting for infringing a patent related to modular lighting fixtures, eventually settling the case and entering into a license agreement. Kenall waived its claims for past infringement and granted Cooper a nonexclusive license to the patent and any patents stemming from the original patent. Cooper also agreed to label its products with a patent notice, to pay Kenall a one-time fee, to make quarterly royalty payments based on sales of the infringing products, and to redesign one of its products to avoid infringement.

The license included a "No Challenge Clause" that stated: "Cooper does not admit infringement, validity or enforceability of the Subject Patents, and reserves all defense to any [related] allegation of infringement, . . . however, Cooper shall refrain from contesting the validity, enforceability, or infringement of the Subject Patents in any court of law or other forum unless Kenall asserts the Subject Patents against Cooper products other than the Subject Products."

Kenall's relevant patent family eventually grew to five patents: the original patent, two continuations, and two reissued patents. Kenall notified Cooper in 2015 that since the beginning of 2008, (1) Cooper had not made royalty payments, (2) Cooper had not labeled its products per the License, and (3) Cooper had not redesigned one of its products per the Agreement. 
Ultimately, in 2017, Kenall sued Cooper for infringing the five patents and breaching the settlement and license agreement. In response, Cooper asserted that the patents were not infringed and were invalid. Kenall then moved to strike these defenses based on the parties' prior agreement.

Kenall's Motion to Strike Cooper's Patent Defenses
The court found that the No Challenge Clause precluded Cooper from alleging affirmative defenses of noninfringement, invalidity, and intervening rights against the patents subject to the settlement agreement and license. In analyzing the No Challenge Clause, the court noted an apparent incongruity. The clause states that Cooper admits no infringement or invalidity and that Cooper reserves all defenses to infringement. The clause then states, however, that Cooper shall refrain from contesting validity, enforceability, or infringement.

To resolve the apparent conflict in the language, the court held that infringement can broadly mean a cause of action that a patent owner might bring. Or, infringement can narrowly mean an element of an infringement claim requiring that one or more of a patent's claims cover an accused product. The court interpreted the first use of "infringement" narrowly: Cooper does not admit that the Subject Products are covered by the Subject Patents. The court interpreted the second use of "infringement," however, broadly: Cooper reserves the right to defend itself against Kenall in an infringement suit. The court interpreted the third use of "infringement" narrowly and as an exclusion to the second term: Cooper may defend itself in an infringement litigation, but it may not bring specific defenses of validity, enforceability, or infringement. The court held that this meant that Cooper cannot argue that the Subject Products are not covered by the Subject Patents, generally known as a defense of noninfringement. According to the court, Cooper contracted to not bring a defense of noninfringement in an infringement suit that asserted the Subject Patents against the Subject Products.

Strategy and Conclusion
A No Challenge Clause can be used in a litigation settlement agreement to preclude a defendant's use of affirmative defenses including invalidity and noninfringement. This case shows that the wording of such a clause can matter and be subject to differing interpretations.

Editors and Authors
The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.

This article is for informational purposes and does not constitute legal advice.
The views expressed do not necessarily reflect the views of LES or Finnegan.


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