“NO CHALLENGE” clauses called into question in Canada

“No challenge” clauses called into question in Canada –

Ontario Superior Court finds such clauses are not in the public interest, and should not be enforced

An interlocutory decision from the Ontario Superior Court could have far-reaching implications for IP licensing and the settlement of IP disputes in Canada.

Earlier this year, the Ontario Superior Court declined to issue an interlocutory injunction in Loops, LLC v. Maxill Inc., 2020 ONSC 971. The Court’s reasons for doing so could have a substantial impact in the area of “no challenge” clauses, contractual clauses often included in IP license agreements and in settlements of IP disputes.

“No challenge” clauses purport to bind one party to an agreement not to challenge the validity of the other party’s intellectual property rights. The clauses appear routinely in IP license agreements, (preventing the licensee from challenging the validity of the rights they are licensing), trademark co-existence agreements (preventing each party from challenging the validity of the other’s trademark registrations), and in many other contexts within the IP world. These clauses have received judicial consideration in other jurisdictions, particularly the United States, but to date the issue of whether “no challenge” clauses are enforceable has not been considered by the courts in Canada.

The history between the parties in this case is long, and rather complex. The parties, who are both in the business of toothbrushes, had previously settled a patent infringement dispute between them. As part of that settlement, Maxill agreed to a “no challenge” clause, namely, that it would not directly or indirectly assist any person in attacking the validity of Loops’ patents for the relevant invention, in any country.

After finalizing the agreement, Maxill set out to “design around” Loops’ patent, and released a new toothbrush product that it believed did not infringe. Loops disagreed, and commenced an action to enforce its settlement agreement with Maxill before the Ontario Superior Court. Loops also sued Maxill in the United States for infringement of its equivalent patent in that country.

In response to the US infringement action, Maxill denied that it infringes Loops’ US patent, and denied the patent’s validity. Importantly, Maxill did not seek an order cancelling Loops’ patent because of the alleged invalidity. It simply denied that it was infringing Loops’ patent, and denied that the patent was valid in any event. However, since Maxill had agreed to a “no challenge” clause in its settlement agreement with Loops, Loops sought an injunction from the Ontario Superior Court to prevent Maxill from denying the patent’s validity before the American courts.

The Court declined to issue the injunction for several reasons. The most significant of these was the Court’s finding that the “no challenge” clause in the Loops / Maxill settlement agreement is not reasonable in the public interest, and is not enforceable. The Court found that, to preclude a defence to patent infringement for the personal gain, profit or protection of one party to an agreement would run counter to the proper administration of justice, regardless of the consent of the other party to that agreement. In contracts that contain “no challenge” clauses, the price paid by one party is access to a potentially valid legal position that has potential to affect the public at large, since the patent claims can be enforced against any infringer so long as they are deemed valid. The Court found that this price was simply too high if public trust and confidence in the administration of justice are to be maintained.

Accordingly, the Court’s view appears to be that “no challenge” clauses should not be enforceable as a matter of law. This is a significant development in Canadian contract law, as no Canadian court had previously found such provisions to be unenforceable, and in practice, IP-related agreements such as settlements and licenses routinely include such clauses.

It is significant that Maxill only asserted invalidity as a “shield”, in defence of an infringement action, and not as a “sword”, seeking an order that the patent be cancelled. It means that the door may still be open for “no challenge” clauses that prohibit the use of validity challenges as a “sword”.

But for the moment, the view of Ontario’s primary trial court is clear. Contractual provisions limiting a party’s ability to assert invalidity as a defence to IP infringement are not in the public interest, and should not be enforceable.

Written by Jaimie M. Bordman