July 2012

Prohibitions on patent validity challenges are unenforceable even in patent settlement agreements

Imagine if you will a not uncommon scenario: ABC Corporation accuses XYZ Inc. of infringing ABC's patents. After some investigation, XYZ's lawyers determine that the likelihood of successfully defending an infringement lawsuit that ABC may bring against XYZ is low, and that the patents in question appear valid. As a consequence, the parties enter into an agreement settling their dispute, in which XYZ agrees to pay a one-time fee to ABC  in exchange for ABC's promise to never sue XYZ for patent infringement. As part of this settlement, XYZ agrees that it will never challenge the validity of the patents in question or assist any other party to do so.

A few years later, XYZ is acquired by a competitor to ABC, Newco Inc. Newco, flush with cash and eager to challenge XYZ's market power, decides that XYZ's patents are an impediment to Newco's plans for global domination. Newco files a lawsuit in federal court seeking a declaration that the ABC patents are invalid.

Naturally, ABC files a motion to dismiss the suit, based on the settlement agreement signed between ABC and XYZ. Newco inherited the agreement and is now forbidden from challenging the validity of the patents in question, ABC asserts.

Seems rather straightforward - XYZ promised in a signed writing, in an arms-length negotiation between well-represented parties of equal bargaining power, never to challenge ABC's patents or assist others to do so. This promise was an integral part of a settlement agreement intended to fully and finally resolve the dispute between the two companies. Case closed, correct?

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