No-Challenge Clause in Settlement is Enforceable

Loops LLC v Maxill Inc 2020 ONSC 5438 Lederer J: Swinton, Penny, JJ revg 2020 ONSC 971 Templeton J

            2,577,109 / Toothbrush

This interlocutory motion concerns the enforceability of a “no-challenge” clause in a settlement agreement. It also indirectly raises the question of whether Canadian law should follow the decision of the US Supreme Court in Lear Inc v Adkins 395 US 653 (1969) and abolish the doctrine of “licensee estoppel,” which (more or less) prevents a licensee from challenging the validity of the licensed patent. At first instance Templeton J held that the no-challenge clause at issue was not enforceable (see here). In this appeal, Lederer J, for a unanimous panel of the Ontario Divisional Court, reversed, holding that a no-challenge clause in a settlement agreement is indeed enforceable according to its terms. At the same time, he left the door open to the possibility that Lear might be followed in a different context as part of the incremental evolution of the law; my sense is that he did not particularly favour such a development, but was simply concerned not to decide any more than was necessary to dispose of this motion.

In this post, I will summarize Lederer J’s decision. I agree entirely with his reasons, both in the substantive analysis and in his balanced approach to legal change. In two subsequent posts I will address issues that are raised by the decision, but which go beyond what was required by this appeal. My next post will review the Anglo-Canadian law and argue that there is no such thing as licensee estoppel; more precisely, “estoppel” is a very unhelpful label for a doctrine grounded entirely in contract law and not on any kind of equitable principle. In my third post I will argue that Lear is not sound as a matter of policy and should not be followed in any context, even as a part of a more incremental development of the law.

Facts

Loops and Maxill are in the toothbrush business. In 2012 Loops sued Maxill in Canada for infringement of Loops’ 109 patent. Two years later they reached a global settlement, which contained a “no-challenge” clause stating that Maxill would not “directly or indirectly assist any person attacking the validity” of either the Canadian 109 patent or the corresponding US Patent 8,448,285 [3]–[5], [ONSC 971/15]. Maxill then created another toothbrush to try to design around the 109 patent. In 2015 Loops sued Maxill in Canada over the new toothbrush, this time for breach of the Agreement [7], [ONSC 971/20]. In 2017 Loops also sued Maxill in the US, alleging the same new toothbrush infringed the US 285 patent [9]. Shortly thereafter, a US subsidiary of Maxill, Maxill (Ohio), brought an action seeking a declaratory order that the 285 patent was invalid [10]. The US actions were consolidated in Washington [11]. The result of the US consolidation is that Maxill itself was attacking the validity of the US patent, notwithstanding the no-challenge clause in the settlement agreement; under Lear, as interpreted in the US 9^th Circuit (which includes Washington), the no-challenge clause is unenforceable [ONSC 971/62]. Loops then brought this Canadian motion for an interlocutory injunction prohibiting Maxill from challenging the validity of the US 285 patent in the US litigation, on the basis that this was a breach of the no-challenge clause in the Agreement [ONSC 971/1]. In effect, Maxill is seeking a partial anti-suit injunction to enforce the no-challenge clause in the settlement agreement.

Because the injunction sought involved the enforcement of a restrictive covenant, this required Loops to make out a “strong prima facie case” on the merits [15]. In the decision under appeal, Templeton J held that Loops had failed to make out a strong prima facie case, for three reasons, the first two of which are largely peculiar to the case. The Divisional Court reversed on all points.

Enforceability of a No-Challenge Clause

Loops v Maxill Inc 2020 ONSC 971 (CanLII)
            2,577,109 / Toothbrush

This motion refusing to grant a partial anti-suit injunction, which would have prevented the alleged infringer from challenging the validity of a US patent in a US court, raises a question regarding the enforceability of a “no-challenge” clause in a settlement agreement. I don’t believe the point has been previously litigated in Canada, though it has been raised in a number of cases in the US. It also illustrates that if a no-challenge clause is to exclude challenges by the party to a settlement agreement, it is best to say so explicitly.

Loops and Maxill are in the toothbrush business [9]. Loops sued Maxill in Canada for infringement of Loops’ 109 patent. In 2014 the parties settled [14]. The Agreement contained a “no-challenge” clause stating that Maxill “would not directly or indirectly assist any person attacking the validity of either [the Canadian 109 patent or the corresponding US Patent 8,448,285" [15]. Maxill then created another toothbrush to try to design around the 109 patent [19]. Loops sued Maxill in Canada over the new toothbrush, this time for breach of the Agreement [20]. Loops also sued Maxill in the US, alleging the same new toothbrush infringed the US 285 patent. Maxill defended on the basis that the new toothbrush did not infringe the 285 patent — but it also attacked the validity of the 285 patent by way of counter-claim [22]. The US actions were consolidated in Washington [23].

Loops brought this motion for an interlocutory injunction barring Maxill from challenging the validity of the US 285 patent, on the basis that this is a breach of the Agreement [1]. Templeton J assessed the motion on the basis that Loops had to show a strong prima facie case on the merits in order to obtain its injunction [6], [32]. She held that Loops had failed to meet this requirement, for two reasons.

Continuing Disagreement over Unessential Settlement Terms Is Immaterial

Betser-Zilevitch v Nexen Inc 2019 FCA 230 de Montigny JA: Stratas, Webb JJA aff’g 2018 FC 735 Brown J
            2,584,627

The parties in this case were engaged in settlement negotiations and advised the Court that “a settlement has been reached, subject to formalization, review and execution by the parties of a formal settlement agreement” [FC 26]. The parties were not able to agree on the details and Betser-Zilevitch purported to withdraw its offer. Nexen moved for a declaration that a settlement had been reached. In the decision under appeal, Brown J found that the parties had indeed entered into a binding settlement agreement covering all essential terms, and he determined the non-essential terms upon which the parties disagreed: see here. The FCA has now affirmed in a brief decision holding that Brown J made no reviewable error [4]. The FCA noted that “The mere fact that the parties disagreed on some of the terms of the agreement when they undertook to formalize it does not make those terms any more essential than those terms over which they agreed. As this Court stated in Allergan [2016 FCA 155, the leading case on when a settlement has been reached], ‘continuing disagreement over unessential terms is immaterial’” [5].

“Make, Construct and Use” in Settlement Does Not Include “Sell”

Betser-Zilevitch v Nexen Inc 2018 FC 735 Brown J
            2,584,627 

This case is on the margins of what I normally blog about: the issue is whether a settlement agreement had been reached between the patentee Betser-Zilevitch, and the defendants, Nexen. The leading case on whether a settlement agreement has been reached is Apotex Inc v Allergan Inc 2016 FCA 155 Stratas JA; Trudel, Nadon JJA rev’g 2015 FC 367 Hughes J (which I did not blog about at the time). Here are a couple of the passages from Apotex Inc v Allergan Inc (citations omitted):

[32] The court is to view the specific facts of the case objectively in light of the practical circumstances of the case and ask whether the parties intended to be legally bound by what was already agreed or, in other words, whether an “honest, sensible business[person] when objectively considering the parties’ conduct would reasonably conclude that the parties intended to be bound or not” by the agreed-to terms. Put another way, looking not through the eyes of lawyers, but through the eyes of reasonable businesspeople stepping into the parties’ shoes, was there something essential left to be worked out? Another way of putting it is to ask how “a reasonable [person], versed in the business, would have understood the exchanges between the parties”.

[33] When courts find that there has been an agreement on essential terms, they will often imply non-essential terms into the agreement. The lack of agreement on non-essential terms will not stand in the way of a finding of an agreement. Put another way, “it is not necessary that the original contract include all the ancillary terms that are already implicit in its content”. “Even if certain terms of economic or other significance to the parties have not been finalized, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a pre-condition to a concluded and legally binding agreement”. For example, assuming an agreement on essential terms is otherwise in place, courts can imply terms concerning the granting of a release, the manner of payment and the timing of payment. Often these will be “mere formalities or routine language.”

In this case, Betser-Zilevitch had made a offer by letter dated January 25, 2017 [22], and Nexen replied that it “is prepared to agree in principle” to those terms  (all through counsel) [24]. Betser-Zilevitch’s counsel then wrote to the Court, with Nexen’s consent, stating that “We advise that a settlement has been reached, subject to formalization, review and execution by the parties of a formal settlement agreement” [26].

Further exchanges ensued as draft agreements were exchanged, with the parties objecting to various details. Ultimately Betser-Zilevitch advised that “there was no agreement regarding settlement, that all prior settlement offers were withdrawn, and that all offers made by the Defendants were refused” [11]. The Defendants filed a motion seeking a declaration that a settlement had been reached.

Brown J granted the motion. The letter to the Court, in particular, was “convincing evidence” of the intent of the parties to create legal relations, as it was “unequivocal” in stating that a binding settlement had been reached [35]. The reference in the acceptance to an agreement “in principle” did not affect this conclusion, as that phrase must be understood contextually [31].

It was then left for Brown J to resolve the disputed terms, which he did largely by holding the parties to the terms in the offer in the letter of January 25, 2017. He found that most of the contested points were efforts by one party or the other to use the drafting process to vary the terms that had already been agreed upon.

The point of most general interest is that the offer letter specified that “Mr. Betser will agree to provide Nexen an up-front, fully paid up license to make, construct and use the invention” [22, emphasis added]. Nexen proposed that the formal agreement include the right to “sell” in addition [60]. Brown J disagreed, holding that the right to sell was not an essential term, and should not be implied:

[63] The parties were represented by counsel. They would or should have known that section 42 of the Patent Act identifies four key rights afforded to patent holders like Betser-Zilevitch. The four rights granted by section 42 may be granted or withheld as the patent holder wishes; they are property of the patent holder. Nexen accepted a settlement agreement that did not contain the Right to Sell.

Pre-Amalgamation Settlement Agreement Does Not Bar Action by Amalgamated Entity

Pfizer Canada Inc v Teva Canada Ltd 2015 FCA 257 Gauthier JA: Webb, Near JJA
            2,163,446 / VIAGRA / sildenafil

In this decision the FCA held that a pre-amalgamation settlement agreement entered into by one of two subsequently amalgamated entities does not bar an action by the amalgamated entity based on pre-amalgamation events affecting the other entity.

In 2006-08, Teva (then Novopharm) and ratiopharm both filed ANDS for sildenafil. Pfizer sought orders of prohibition in respect of both under s 6 of the PM(NOC) Regulations. Pfizer and ratiopharm settled, and under the terms of the Agreement ratiopharm agreed not to launch until expiry of the patent. Teva and ratiopharm then amalgamated. The s 6 action against Teva proceeded, and Teva ultimately prevailed: Viagra 2012 SCC 60. The Minister granted an NOC in respect of Teva-sildenafil and Teva then brought a s 8 action for damages for having been keep out of the market by the NOC proceeding. Teva did not claim any damages relating to ratio-sildenafil, but only in respect of Teva-sildenafil. Pfizer brought a motion for summary judgment on the basis that Agreement entered into with ratiopharm barred the action by Teva. Pfizer acknowledged that when the Agreement was entered into, the parties did not intend to cover Teva’s product, but it argued that the scope of the Agreement changed as a result of the amalgamation [21]-[22]. Not very surprisingly, the FCA, affirming O’Keefe J, held that the Agreement only bars Teva from seeking s 8 damages in respect of ratio-sildenafil, and Teva's action in respect of Teva-sildenafil can proceed: [25].

“The reasonable person thinks in terms of economics, not principle"

Apotex Inc v Canada 2014 FC 1087 Hughes J
            Trazodone

This decision emerged from a test case in which Apotex and Health Canada battled over the question of whether a generic could apply for an NOC on the basis of a foreign reference product. The case settled on terms favourable to Apotex, but HPB did not live up to the settlement agreement. In this decision Hughes J held Canada liable for breaching that agreement (though because of quirks in the pleadings, the formal ground of liability was in tort rather than contract). In an interesting part of the decision, Hughes J held that Apotex was subject to a duty to mitigate, which would essentially have required it to abandon its test case and leave the question of legal principle unanswered. Hughes J held that the duty to mitigate was nonetheless applicable, because “the reasonable person thinks in terms of economics, not principle” [159].

In the late 1980s, the attitude of what was then the Health Protection Branch (HPB) of Health Canada towards the use of a foreign drug product as the reference product in a generic’s application for an NOC was uncertain. It was the usual practice to use a product approved in Canada as a reference product, but occasionally an NOC would be granted on the basis of a foreign reference product. Apotex wanted a test case to establish whether it was entitled to use a foreign reference product [105]. It picked trazodone, and in January 1988 Apotex filed a New Drug Submission comparing its Apo-Trazad product to the innovator’s US product. On the particular facts, the use of a foreign reference product was scientifically sound, but HPB was concerned that allowing the use of a foreign reference product might set a precedent for circumstances in which the comparison was not appropriate [39]. Consequently, HPB “insisted on a Canadian standard, unless the United States reference product could be ‘conclusively proven to be identical’ to the Canadian product” [44]. The requirement of identicality made it effectively impossible to use a foreign reference product [44]. In other words, both Apotex and HPB were treating this as a test case. In light of this impasse, in 1990 Apotex sought judicial review of the Minister’s position. That litigation was settled on terms favourable to Apotex by a Settlement Agreement in November of 1990 in which HPB agreed to assess the application on the basis of “equivalency” rather than identicality [51].

Ambiguity(?) in Scope of Settlement

Procter & Gamble Co v Brushpoint Innovations Inc 2013 ONSC 5747 Charbonneau J

The parties entered into a settlement agreement in which Brushpoint undertook to “not make, construct, use, or sell, or induce others to make, construct, use or sell the Products, in Canada, while any of the Patents are in force.” P&G submitted that Brushpoint or its agents, by acts in Canada, had induced parties in the US to make and sell the product in the US [13]. If, properly interpreted, the covenant restricted Brushpoint from carrying out acts in Canada which induced others to make or sell the Products anywhere, then there was a breach; on the other hand, if it only restricted Brushpoint from inducing (by acts anywhere?) others to make or sell the products in Canada, there was no breach.

Charbonneau J held that on the proper interpretation, there was no breach; the covenant restricted Brushpoint only from inducing others from infringing in Canada. He arrived at this conclusion primarily on the text of the covenant itself, which he found to be “clear and unambiguous” [11]. If he had found the clause ambiguous, he would have arrived at the same conclusion based on the context, as the settlement was presumably intended to prevent Brushpoint from infringing the Canadian patents [12].

John Golden has a very interesting article on the related issue of the scope of injunctions: Injunctions as More (or Less) than “Off Switches”: Patent Infringement Injunctions’ Scope , 90 Tex L Rev 1399 (SSRN here). Here is the abstract:

Injunctions have often been viewed as mere "off switches" that prevent future violations of rights protected by so-called property rules. But injunctions in fact come in a variety of forms having different objects, scopes, and degrees of effectiveness. In practical situations, an injunction might amount to little more than a threat of higher-than-normal monetary sanctions delivered at substantially higher-than-normal speed.

This article builds on these insights by investigating the potential and actual scopes of injunctions against patent infringement. An economic model for infringer incentives shows how concerns of injunction scope are substantially analogous to widely examined concerns of patent scope. A new taxonomy provides named classifications for different forms of injunctions. A systematic study of patent-infringement injunctions issued by U.S. district courts in 2010 indicates how often these different forms appear in practice. Startlingly, this study suggests that the majority of such patent-infringement injunctions take an "obey the law" form that violates the Federal Rules of Civil Procedure, at least as the U.S. Court of Appeals for the Federal Circuit has traditionally understood those rules. In another indication of patent law's technology specificity, only 12% of the injunctions directed to biomedical-substance technology feature such apparent error. Meanwhile, courts frequently issue specially tailored injunctions that protect patent rights more or less than a conventional "do-not-infringe" order would. Prophylactic injunctions and other specially tailored injunctions should be recognized as legitimate forms of relief that can enable better balancing of concerns of notice, rights protection, rights limitation, and administrability.

USSC in FTC v Actavis Holds Reverse Payment Settlements Subject to “Rule of Reason”

FTC v. Actavis, Inc. 2013 USSC

In FTC v Actavis, the USSC has held, by a 5-3 majority, that so-called reverse payment settlements are not presumptively unlawful as a matter of competition law, as the FTC had asked (M20), nor are they immune from antitrust scrutiny, as the 11^th Cir held, and the dissent would have affirmed. Instead, they are subject to competition law scrutiny on the basis of the “rule-of-reason” under which the agreements will be assessed for anti-competitive effects on a case-by-case basis. On the whole, the majority’s position strikes me as one which is reasonable as a matter of principle, but the specter of repeated, complex, and expensive litigation raised by the dissent is very real. In some ways either extreme position might have been preferable to the principled, but uncertain, position adopted by the majority.

In reverse payment settlements a patentee, normally a pharmaceutical patentee, makes a payment to an alleged infringer, normally a generic, in return for an agreement by the challenger to drop its challenge to the patent and stay out of the market until (closer to) the end of the patent term. The basic point made by Breyer J, for the majority, is that if the patent is in fact invalid, then, as compared with the scenario in which the patent is litigated to invalidity, this settlement will have the effect of keeping prices higher until the end of term. The patentee and challenger split the monopoly profit, and the consumer is the loser (M15). This is illegitimate and anti-competitive. Consequently, reverse payment settlements should be subject to antitrust scrutiny. On the other hand, a reverse payment settlement is a settlement, and it may have the same virtues as any other settlement, such as avoiding litigation expenses. The payment may also be compensation for ancillary services that the challenger agrees to provide under the agreement. Therefore, reverse payment settlements should not be presumptively unlawful. Instead, each settlement should be individually scrutinized to discern the true motivation (M19):

Although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.

Roberts CJ wrote for the dissent, and would have held that “If [the patentee’s] actions are within the scope of the patent, they are not subject to antitrust scrutiny” (D3). He acknowledged that there may be uncertainty as to the validity of the patent, but said that this does not justify subjecting the settlement to antitrust scrutiny:

The difficulty with such an approach is that a patent holder acting within the scope of its patent has an obvious defense to any antitrust suit: that its patent allows it to engage in conduct that would otherwise violate the antitrust laws. . . Its behavior would be unlawful only if its patent were invalid or not infringed. And the scope of the patent – i.e., what rights are conferred by the patent – should be determined by reference to patent law. (D4, D5, original emphasis)

I must admit that I am not sure whether I follow the point Roberts CJ is making. His argument seems to implicitly concede that the payments are unlawful if the patent is in fact invalid, and the point of the majority ‘s reasoning is that we will never make that determination as a matter of patent law if the reverse payments settlements are not subject to antitrust scrutiny. If Roberts CJ’s point is that it is somehow unprincipled to subject these settlements to antitrust scrutiny, then I am not persuaded.

But I think the point he is really making is that it is wrong to conduct a patent trial as part of an antitrust action. Settlements may make it more difficult to challenge invalid patents “but such a result – true of all patent settlements – is no reason to adjudicate questions of patent law under antitrust principles” (D11). The argument here appears to be pragmatic. If the patentee can raise validity of the patent as a defence in the antitrust action, then in those cases in which the settlement was a legitimate effort to avoid the costs of litigation, the whole point of the settlement will be defeated when the patentee is be forced to litigate validity as a defence (D11). The majority responds to this by saying that

it is normally not necessary to litigate patent validity to answer the antitrust question . . . An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. (M18)

But if this means that the patentee cannot raise the validity of the patent in the antitrust action, then the patentee may be found to violate antitrust law even though it has done nothing wrong (D12-13). There is also the practical problem that an inquiry into the patentee’s motivation will itself be uncertain (D13). Unless the majority is of the view that only settlements that are less than anticipated litigation costs are acceptable, which it nowhere states, then the majority implicitly accepts that uncertainty over validity may be a legitimate motivating factor; so, a settlement motivated by a 5% chance of invalidity of a valuable patent might pass antitrust scrutiny. And the majority clearly accepts that ancillary services “such as distributing the patented item or helping to develop a market for that item,” may form the basis for a legitimate settlement. This means that discerning the true motivation will be very difficult, the more so because ancillary services will no doubt start to feature prominently in such settlements.

Neither the majority nor the dissent addresses what seems to me to be the central issue in deciding whether a per se analysis is appropriate. If, as the FTC believes, reverse payment settlements are normally anticompetitive, then the dissent’s objections largely melt away. There will be no need to assess patent validity in the antitrust action, and while the result will be that patentees will sometimes be prevented from entering into legitimate settlements, this will be rare, and those rare errors are the price paid for the certainty and simplicity of a per se regime; it is better than the expensive errors of a rule of reason regime. By rejecting the per se rule, the majority implicitly acknowledges that legitimate settlements are reasonably common, and if that is so, then there is considerable force to the dissent’s complaint that the rule of reason scrutiny adds considerable complexity for little benefit. Overall then, my initial reaction is that the USSC should have directly addressed the central issue: are the reverse payments normally anti-competitive? If so, they should be per se unlawful, and if not, they should be immune from antitrust scrutiny. The rule of reason analysis may be sound in principle, but the litigation costs of that inquiry will defeat the point of legitimate settlements.

What does Actavis imply for Canadian law? The majority reasoning turned on, or at least adverted to, some features of the US system, such as the 180 day exclusivity for the first generic (M16), that make anti-competitive settlements attractive. As this paper by Ron Dimock & Geoff Mowatt explains, differences between the US and Canadian systems means that “there is a much greater incentive in the U.S. for the brand to bargain with the first generic.” This suggests that the argument for per se immunity is stronger in Canada than in the US. This implies that if Canadian law is influenced by Actavis, reverse payment settlements should not be considered presumptively illegal, and the argument for the dissenting position that they should be per se immune, is stronger here than in the US. Whether Canadian courts and policy makers will, or should, be influenced by Actavis is, of course, a different question.

Appealing a Finding of Invalidity after Settling

The recent decision of the English Court of Appeal in Apimed Medical Honey Ltd v Brightwake Ltd [2012] EWCA Civ 5 is substantively uninteresting (see my IPKat post), but it raises an interesting point of English procedure. The defendant had won at trial on both infringement and invalidity. The parties settled (the decision was very strong on infringement), but the patentee wished to appeal the finding of invalidity. Because of the settlement, the defendant had no interest in appearing, so following guidance provided in Halliburton Energy Services Inc v Smith International (North Sea) Ltd [2006] EWCA Civ 185, the Comptroller-General of the Patent Office appeared to argue the case for upholding the decision below that the patent was invalid.