Ontario Law Presents an Opportunity for Patent Owners to Enforce No-Challenge Clauses

No-challenge clauses are contractual provisions where a party agrees not to attack the validity of a specified patent or patents.  Patent owners often include these clauses in patent license agreements to prevent licensees from attacking the validity of the licensed patents in the event of a dispute over the contract. The enforceability of these no-challenge clauses has been questioned, particularly by courts in the United States.

By contrast, Canadian courts have taken a different approach to no-challenge clauses. The general enforceability of no-challenge clauses in Ontario presents an opportunity for patent owners to use Ontario law as governing law in patent license agreements to prevent licensees from challenging the validity of their patents. The 2020 decision in Loops L.L.C. v. Maxill Inc., 2020 ONSC 5438 [Loops Decision] highlights how Ontario law may be more favorable to patent owners who wish to enforce no-challenge clauses in their licensing agreements.

Background

Loops L.L.C. (Loops) had sued Maxill Inc. (Maxill) alleging that Maxill had infringed Loops’ Canadian Patent No. 2,577,109. This lawsuit was ultimately settled with Loops and Maxill entering into a settlement agreement (the Settlement Agreement) that included a “no-challenge clause”. The “no-challenge clause” specified that Maxill Canada would not directly or indirectly assist any person in attacking the validity of numerous patents owned by Loops, including US Patent No. 8,448,285 (the ‘285 Patent). The settlement agreement was governed by the law of Canada and Ontario.

Loops later sued Maxill in the United States alleging that Maxill and its US subsidiary have infringed the ‘285 Patent. As part of its defence in the US lawsuit, Maxill argued that the ‘285 Patent was invalid. Loops also sued Maxill in Ontario on the basis that Maxill had breached the Settlement Agreement both by infringing on the ‘285 Patent and by challenging the validity of the ‘285 Patent.

The enforceability of the no-challenge clause was considered in both the US and Ontario lawsuits, with different results.

Treatment of the No-Challenge Clause in the US Lawsuit

In the US lawsuit, Loops filed a motion to pause litigation while the alleged breach of the settlement agreement was litigated in Ontario. However, the US court rejected the motion, partially on the basis that the no-challenge clause was not enforceable.

The US Court took the position that the no-challenge clause was not enforceable to prevent Maxill from attacking the ‘285 Patent because the Settlement Agreement was reached following litigation that did not involve the ‘285 Patent. The Settlement Agreement followed litigation that involved only Canadian Patent No. 2,577,109 where the validity of the ‘285 patent was not at issue. As a result, the US Court decided that enforcing the no-challenge clause would be contrary to policy concerns that had developed in US case law favoring the full and free use of ideas in the public domain.

As the US Court explained, the case law in the United States over the past half-century has trended towards no-challenge clauses being unenforceable except in limited circumstances. This approach has limited the ability of patent owners to prevent their licensees from attacking the validity of licensed patents.

Treatment of the No-Challenge Clause in the Ontario Action

Fortunately for patent owners, the trend in Canada has been notably different as highlighted by the Loops Decision.

After the motion to stay was refused in the US lawsuit, Loops filed a motion in the Ontario lawsuit to obtain an injunction to prevent Maxill from challenging the validity of the ‘285 Patent. The motion was initially rejected, and Loops appealed. On appeal, the Ontario Divisional Court granted an injunction prohibiting Maxill from challenging the validity of the ‘285 Patent either directly or indirectly.

In granting the injunction, the Divisional Court noted that the language of the no-challenge clause was clear and unambiguous—Maxill agreed not to challenge the validity of the ‘285 Patent. The Divisional Court held that Maxill breached the Settlement Agreement by challenging the validity of the ‘285 Patent in the US lawsuit.

The Ontario Divisional Court also considered whether it would be against the public interest to enforce the no-challenge clause. Contrary to the decision in the United States, the Divisional Court decided that the no-challenge clause should be enforced. The Divisional Court highlighted that the US case law regarding the enforceability of no-challenge clauses has previously been considered and rejected by courts in both Ontario and Quebec.

The Divisional Court also explained that Canadian jurisdictions, notably Ontario and Quebec, have upheld the enforceability of patent no-challenge clauses in contracts that establish a licensing relationship. The Divisional Court reasoned that a no-challenge clause agreed to by the parties to a settlement agreement in order to settle a patent infringement lawsuit should also be enforced. The Loops Decision provides patent owners with a helpful indication that no-challenge clauses should be enforceable under Ontario law in both settlement agreements and in- licensing agreements.

Takeaway

The treatment of no-challenge clauses in Ontario gives patent owners a useful contractual tool they can use to protect their patents against validity challenges. In light of the Loops Decision, patent owners may want to consider having patent license agreements governed by the law of a Canadian jurisdiction even if the agreement includes patents from other jurisdictions.