The Second Circuit said, RATES TECHNOLOGY INC v. SPEAKEASY INC and others, Tuesday that patent licensing agreements reached before litigation cannot be used to bar a licensee from later challenging the validity of a patent, even if the deal is called a legal settlement. The court held that such an agreement, signed after accusations of infringement but before litigation, is void for public policy reasons under the Supreme Court’s decision in Lear, Inc. v. Adkins, 395 U.S. 653 (1969).
Rates Technology Inc. (RTI) notified Speakeasy that it believed Speakeasy was infringing its patents and offered to release Speakeasy from liability in exchange for a one-time payment. It used a standard tiered pricing structure based on the size of the accused infringer measured by its annual sales. RTI and Speakeasy entered into a Covenant Not to Sue, with a one-time payment of $475,000. In addition to acknowledging the validity of the patents in question, and agreeing not to challenge their validity, the Convenant also included a liquidated damages clause, which said that Speakeasy would pay $12M if they assisted in any such challenge.
Subsequently, Speakeasy, then owned by Best Buy, was somehow affiliated with Covad. When RTI asked Covad to license those same patents, Covad filed a Declaratory Judgment action. RTI countersued, for violation of the Convenant not to Sue based on an allegation that Speakeasy and Best Buy assisted Covad in filing the DJ action.
The court noted that consent decrees, agreed to after the commencement of litigation, would estop future challenges to a patent’s validity. Furthermore, they approvingly cite Flex–Foot, Inc. v. CRP in which the Federal Circuit held that a settlement, even without the entry of a consent decree, would likely not violate public policy.
Weighing for not holding the clause enforceable was that “neither side filed a lawsuit, and thus Speakeasy never had the opportunity to conduct discovery regarding the validity of RTI’s patent.” The court noted that this meant that the defendant did not have a full opportunity to assess the validity of the patent, and there is no evidence that they had a genuine dispute.
As RTI argued, this may lead to more “sham litigation” in which a patent holding company files a lawsuit, prior to allowing a consent decree/settlement agreement, to ensure that its questionable patents’ validity not be challenged. Given the enormous cost of patent litigation, defendants will have the incentive to settle, with a consent decree, to avoid the costs of litigation. Whether or not a settlement filed prior to discovery will be sufficient to block later validity challenges remains an open question.