Tuesday, December 1, 2009

Patent license "no challenge" clause can be enforceable, but this one was "clumsily and ineffectively constructed."

Alzheimer's Institute of America ("AIA") licensed certain patents to Mayo Clinic Jacksonville. Through this license, Mayo agreed "not to initiate or voluntarily participate in, or knowingly permit its Affiliates to initiate or voluntarily participate in, any action directed at undermining, invalidating, or declaring unenforceable any claims under" AIA's patents. A dispute erupted and AIA sued Mayo for patent infringement. In defense, Mayo asserted the affirmative defense of patent invalidity and counterclaimed for a declaration of patent invalidity. AIA amended its pleadings to assert a breach of contract claim, arguing that by challenging the validity of AIA's patents (via the affirmative defense and counterclaim), Mayo had breached the license. Mayo sought dismissal of this counterclaim.

The Court initially presented a thorough analysis concerning the enforceability of no-challenge clauses. After explaining that Courts must balance public policy interests in enforcing contracts, permitting full and free competition, and federal patent policy, the Court turned to the merits of this particular no-competition clause and held:
Even assuming for a moment that federal patent policy permits enforcement of the no-challenge clause, the no-challenge clause, which gravitates against patent policy in a manner reminiscent of Lear [Inc. v. Adkins, 395 U.S. 653 (1960)], receives the strict construction warranted by a provision that constrains a constitutional, statutory, or other legal right. Applying a strict construction to the no-challenge clause and confining the reach of the clause to that defined by its terms, count three fails to state a claim because the facts of this case present no event of breach of the no-challenge clause. In amended count three of AIA's counterclaims, AIA asserts (Doc. 130, ¶ 31) that Mayo breaches the no-challenge clause by counterclaiming—in Mayo's answer to AIA's counterclaim—for patent invalidity and thereby "initiating" an "action" in violation of the no-challenge clause. AIA's claim fails for several reasons. AIA—not Mayo— "initiated" the claim of patent invalidity by suing Mayo for patent infringement. Mayo has initiated nothing; Mayo merely defends itself. Neither is Mayo "voluntarily participating" in this action. In response to AIA's claim, Mayo asserts both an affirmative defense of invalidity and a defensive counterclaim seeking a declaration of patent invalidity. A counterclaim is a claim within an action, but not itself an action. Also, despite the meaning of the "no-challenge" clause, Mayo undoubtedly remains at liberty to challenge validity by the assertion of an affirmative defense (the traditional method of raising an assertion of invalidity). If intended to bar a challenge to AIA's patent validity, the no-challenge clause is clumsily and ineffectively constructed, omits to preclude even the typical challenge of invalidity by affirmative defense, and overlooks the potential for a counterclaim. If intended to prevent Mayo's aggressive attack on patent validity, the no-challenge clause perhaps persists, although subject to the vagaries of Lear.
AIA's counterclaim was dismissed with prejudice.

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