It is common for commercial parties to agree not to attack the validity of intellectual property held by one of the parties to the agreement. However, a recent decision from the Ontario Superior Court of Justice has raised questions about the enforceability of these types of restrictive covenants.
In Loops v. Maxill Inc., 2020 ONSC 971, the Court considered whether 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.
What the court said about “no challenge clauses”
After noting the absence of Canadian jurisprudence on the issue of “no challenge clauses”, the Court referred to American decisions, citing the “strong federal policy favouring the full and free use of ideas in the public domain”. The Court also quoted from the decision of the U.S. Supreme Court in Lear, Inc. v. Adkins, 395 U.S. 653 (1969), when it observed that “it is as important to the public that competition should not be repressed by worthless Patents as that the Patentee of a really valuable invention should be protected in his monopoly”.
The Court found that the restrictive covenant in this case, a so called “no challenge clause”, was not reasonable in the public interest and dismissed the motion. In doing so, the Court commented generally on such clauses, stating “to preclude a subsequent perhaps valid defence for the personal gain, profit or protection of one party to an agreement would run counter to the proper administration of justice”.
Impact on commercial parties
These “no challenge clauses” are common not only in settlement agreements in intellectual property litigation, but also in intellectual property licensing agreements. Although this decision was made in the context of a settlement agreement from a patent infringement action, it raises questions about the enforceability of these types of restrictive covenants, generally, and with other forms of intellectual property.