In late 2020, the Divisional Court decision in Loops L.L.C. v. Maxill Inc.[1] overturned an Ontario Superior Court of Justice decision that had held a patent “no-challenge” clause in a settlement agreement was unenforceable[2] and granted an interlocutory injunction to enforce the clause.
Case background
In Loops v. Maxill Inc., 2020 ONSC 971, the Ontario Superior Court of Justice declined to grant an interlocutory injunction based on a restrictive covenant in a settlement agreement to “not directly or indirectly assist any person attacking the validity of [the Patents]“. The parties had previously been involved in patent infringement litigation and the Ontario court was asked to enforce a clause in the settlement agreement arising out of that previous litigation.
The unsuccessful party, Loops L.L.C., appealed and the Divisional Court granted the injunction to uphold the no-challenge clause.
What the court said about “no challenge clauses”
In reversing the decision below, the Divisional Court cited jurisprudence from Ontario and Quebec, from the 1970’s and earlier, which had previously decided the issue in favour of upholding no-challenge clauses. The Court went on to hold that “the circumstances have not changed”[3].
The Court also analyzed the U.S. Supreme Court decision in Lear Inc. v. Adkins[4], which was relied upon by the Ontario Superior Court, and also referred to other U.S. decisions that distinguished Lear and upheld no-challenge clauses in the context of litigation settlements. These cases distinguished no-challenge clauses in settlement agreements from those in pre-litigation license agreements, based on competing policy goals of enforcing settlement agreements and res judicata[5].
No-challenge clauses moving forward
While the Court did not completely shut the door to adopting a different approach on the enforceability of no-challenge clauses, their enforceability appears to be firmly entrenched in Canadian jurisprudence.
There are a number of references to enforcing no-challenge clauses in the context of settlement, which suggests that different facts (i.e. a pre-litigation license agreement containing a no-challenge clause) may provide scope for argument that some no-challenge clauses may be unenforceable. However, the two cases relied upon by the Court in upholding the no-challenge clause were both concerned with pre-litigation license agreements.
The Court also emphasized that no evidence was presented that could support the high “price” relied on by the Court below to justify holding the no-challenge clause unenforceable[6]. Nonetheless, even if there were evidence presented to allow a court to weigh the implications of enforcing (or not) a no-challenge clause, it seems unlikely that a court would choose not enforce such a clause, particularly in the context of settlement agreements.
On the other hand, there are well understood harms caused by certain types of patent-related settlement agreements, such as reverse-payment settlements between branded and generic pharmaceutical manufacturers that delay the entry of the generic drug into the market. Some of these agreements have raised concerns over their potential anticompetitive and economic harm, despite the acknowledged policy objectives in favour of encouraging settlement[7].
In the context of the high cost of patent litigation, it is worth emphasizing the observation of the U.S. Supreme Court in Lear, that a licensee may be the only party with sufficient economic incentive to challenge an invalid patent and, as a result, barring them from doing so effectively forces the public to pay an unjustly inflated price for the patented good.
[1] Loops L.L.C. v. Maxill Inc., 2020 ONSC 5438.
[2] See Loops L.L.C. v. Maxill Inc., 2020 ONSC 971.
[3] Loops L.L.C. v. Maxill Inc., 2020 ONSC 5438, at para. [64].
[4] Lear, Inc. v. Adkins, 395 U.S. 653 (1969).
[5] Loops L.L.C. v. Maxill Inc., 2020 ONSC 5438, at para. [66], citing: Flex-Foot, Inc. v. CRP, Inc., 238 F. 3d. 1362 (Fed. Cir. 2001) (U.S.C.A., Fed. Cir.), at p. 6 of 8.
[6] Loops L.L.C. v. Maxill Inc., 2020 ONSC 5438, at para. [50].
[7] See Competition Bureau statement regarding its proactive monitoring of potentially anticompetitive patent litigation settlement agreements between branded and generic drug manufacturers, May 20, 2022, <https://ised-isde.canada.ca/site/competition-bureau-canada/en/how-we-foster-competition/education-and-outreach/position-statements/competition-bureau-statement-regarding-its-proactive-monitoring-potentially-anticompetitive-patent>