Licensee Estoppel: The Lear Doctrine,
Rates v. Speakeasy, and Other Applications
Andrew D. Kasnevich1 and Debodhonyaa Sengupta, Ph.D.2
I.
Overview and Historical Background of the Lear Doctrine
The Lear Doctrine stands for the principle that a licensee is not estopped from
challenging the validity of a licensed patent in response to allegations of infringement or breach
of contract. The doctrine takes its name from the Supreme Court’s decision in Lear v. Adkins,
395 U.S. 653 (1969), where the Supreme Court overruled Automatic Radio Manufacturing Co. v.
Hazeltine Research, Inc., 339 U.S. 827 (1950), and held that the federal policy and public
interest supporting the free competition in the use of ideas in the public domain and the
discovery of invalid patents outweighed the licensee’s contractual obligations.
A.
Licensee Estoppel at the Supreme Court, Pre-Lear
The concept of “licensee estoppel” is based on contract law, i.e., “the law of contracts
forbids a purchaser to repudiate his promises simply because he later becomes dissatisfied with
the bargain he has made.” Lear, 395 U.S. at 668, citing Corbin, Contracts § 127 (1963) and
Treece, Licensee Estoppel in Patent and Trademark Cases, 53 Iowa L. Rev. 525, 528-530 (1967).
In Hazeltine, the Supreme Court applied licensee estoppel as the default rule: “[t]he general rule
is that the licensee under a patent license agreement may not challenge the validity of the
licensed patent in a suit for royalties due under the contract.” Hazeltine, 339 U.S. at 836. While
the Court acknowledged that the “general principle of the invalidity of price-fixing agreements
may be invoked by the licensee of what purport to be valid patents to show in a suit for royalties
that the patents are invalid,” it found no showing of such misuse, and applied the general rule to
estop a challenge to the validity of the licensed patents.3 Id.
The Hazeltine Court relied on United States v. Harvey, 196 U.S. 310 (1905), which held
the United States was estopped from denying the validity of a patent for a process of treating
armor plate in a dispute over royalties. Harvey, 196 U.S. at 316-17. In Harvey, the U.S.
government argued first that the agreement did not prohibit a challenge to the patent’s validity,
and further argued that an estoppel should not apply because a licensee is not a vendor, but rather
merely a user, of the patented article and as such has not benefited from the patent’s monopoly.
Id. at 316. The Court was not persuaded by the latter argument, finding that, to the extent the
advantage of a monopoly is secured by the licensee, “it equally may be assumed that the thing
would not have been used or sold but for the license from the patentee.” Id. at 316. Measuring
the government’s rights by the language of the contract, the Court ruled that a clause releasing
1
Andrew Kasnevich is an associate in the Washington, D.C. office of Kenyon & Kenyon LLP. Mr. Kasnevich’s
practice focuses on patent litigation before federal courts and the International Trade Commission, and also includes patent
prosecution and post-grant proceedings before the U.S. Patent and Trademark Office.
2
Deb Sengupta is an associate in the Chemical/Biotech Practice Group in the Washington, D.C. office of Sughrue Mion,
PLLC. Dr. Sengupta’s practice includes patent prosecution, litigation support, and client counseling, primarily within the areas
of organic and materials chemistry, pharmaceuticals and nano-devices.
3
In doing so the Hazeltine Court distinguished Katzinger Co. v. Chicago Metallic Mfg. Co., 329 U.S. 394 (1947) and
MacGregor v. Westinghouse Elec. & Mfg. Co., 329 U.S. 402 (1947), two decisions allowing a licensee to challenge the validity
of patents used in price-fixing agreements. The relevance of these cases to the doctrine of licensee estoppel is discussed below.
1
the government of its obligation to pay royalties under the contract if “it should at any time be
judicially decided that the [licensor]... is not legally entitled... to own and control the exclusive
right to the use and employment of said process, and the decrementally hardened armor plates
produced thereunder” was inserted “on the assumption that a licensee, when sued for royalties, is
estopped to deny the validity of the patent which he has been using, and to give him the benefit
of litigation by or against third persons.” Id. at 315, 317. The Court thus ruled that the
government could not challenge the validity of the licensed patent.
Harvey was the last application of licensee estoppel by the Supreme Court until
Hazeltine was decided approximately 45 years later. The Supreme Court granted certiorari in
Lear “to reconsider the validity of the Hazeltine rule in the light of our recent decisions
emphasizing the strong federal policy favoring free competition in ideas which do not merit
patent protection.” See Lear, 395 U.S. at 656, 664, citing Sears, Roebuck v. Stiffel Co., 376 U.S.
225 (1964) and Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234 (1964).
B.
The Supreme Court’s Decision in Lear
The Lear Court began its analysis with several cases decided prior to Harvey, including
Kinsman v. Parkhurst, 18 How. 289 (1856), a pre-Sherman Act case that “made it clear that the
grant of monopoly power to a patent owner constituted a limited exception to the general federal
policy favoring free competition,” and St. Paul Plow Works v. Starling, 140 U.S. 184 (1891),
which “did not even question the right of the lower courts to admit the licensee’s evidence
showing that the patented device was not novel,” while affirming a lower court determination of
patent validity in view of conflicting evidence of the novelty of the claimed invention.4
Additionally, the Lear Court pointed to the “powerful argument” set forth in Pope
Manufacturing Co. v. Gormully, where the Supreme Court declined to enforce a licensee’s
promise not to contest the licensed patent’s validity as inequitable, since “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.” Id. at 663-64, citing Pope, 144
U.S. 224, 234 (1892).
The Lear Court noted that following the decision in Harvey to invoke an estoppel, the
doctrine of licensee estoppel was not considered again until Hazeltine approximately 45 years
later. See 395 U.S. at 664. In the interim before Hazeltine was decided, the Supreme Court
created an exception allowing the validity of a licensed patent to be challenged each time the
question of licensee estoppel came before it, and consequently the doctrine “had been so eroded
that it could no longer be considered the ‘general rule,’ but was only to be invoked in an evernarrowing set of circumstances.” Id.
The first of these decisions was Westhinghouse Electric & Manufacturing Co. v. Formica
Insulation Co., where the Court ruled that an assignor could not directly challenge the validity of
a patent but could, conceding that the patent is valid, submit evidence to narrow the patent’s
claims and deny infringement. 266 U.S. 342, 351 (1924). The Westinghouse Court found that
4
Two other early cases enforcing license agreements were discussed in Lear: Eureka Co. v. Bailey Co., 11 Wall. 488
(1871) (holding that a licensee must overcome a “very strong presumption” of patent validity); and Dale Tile Manufacturing Co.
v. Hyatt, 125 U.S. 46 (1888) (affirming a New York state court’s decision applying licensee estoppel based solely on state law).
Although these cases enforced license agreements, the Lear Court determined they did so “without a thorough consideration of
the estoppel issues that were present.” Lear, 395 U.S. at 663, n. 11.
2
holding otherwise would deny a court “the most satisfactory means of measuring the extent of
the grant the government intended and which the assignor assigned.” Id. at 350-51. However,
the Lear Court noted this approach creates a strange result: “if a patent had some novelty
Formica permitted the old owner to defend an infringement action by showing that the
invention’s novel aspects did not extend to the inclusion of the old owner’s products; on the
other hand, if a patent had no novelty at all, the old owner could not defend successfully since he
would be obliged to launch the direct attack on the patent that Formica seemed to forbid.” Lear,
395 U.S. at 665 (emphasis in original).5
The second decision weakening the licensee estoppel doctrine is Scott Paper Co. v.
Marcalus Manufacturing Co., where the assignor of a patent sought to deny infringement of that
patent by arguing that the accused product was copied from an expired patent. 326 U.S. 249,
250 (1945). The Scott Court stated that “any attempted reservation or continuation in the
patentee or those claiming under him of the patent monopoly, after the patent expires, whatever
the legal device employed, runs counter to the policy and purpose of the patent laws” and ruled
that the assignor “has a complete defense to an action for infringement where the alleged
infringing device is that of an expired patent.” Id. at 256, 258. Although the decision in Scott
did not extend beyond the specific facts presented to it – copying an expired patent – the Lear
Court regarded the Scott precedent as viewing the concept of estoppel as the “general rule,”
asking:
If patent policy forbids estoppel when the old
owner attempts to show that he did no more than
copy an expired patent, why should not the old
owner also be permitted to show that the invention
lacked novelty because it could be found in a
technical journal or because it was obvious to one
knowledgeable in the art?
See Lear, 395 U.S. at 666.
In addition to these cases, decisions in antitrust cases also undermined the support for the
doctrine of licensee estoppel. Generally, price-fixing is per se illegal, but it is permissible if
based on a valid patent. In Sola Electric Co. v. Jefferson Electric Co., the Court found that when
a licensor seeks to enforce the price-fixing terms of a patent license agreement, a licensee can
challenge the legality of the agreement using any evidence, including evidence showing that the
underlying patent is invalid. See 317 U.S. 173, 175-77 (1942). Further, as noted in Lear, the
Sola Court also held that a licensee could avoid paying royalties under the agreement if the
patent is shown to be invalid. See Lear, 395 U.S. at 666. This “antitrust exception” to the
doctrine of licensee estoppel was expanded in Katzinger and MacGregor, which held that a
license could challenge the validity of a patent covered by a license agreement containing a
price-fixing clause. See Katzinger, 329 U.S. at 400-01; MacGregor, 329 U.S. at 407. Thus, “in
the large number of cases in which licensing agreements contained restrictions that were
arguably illegal under the antitrust laws, the doctrine of estoppel was a dead letter.” Lear, 395
5
This anomaly led the Seventh Circuit to extend the Formica exception in Casco Products Corp. v. Sinko Tool &
Manufacturing Co., 116 F.2d 119 (7th Cir. 1940), which found that a licensee in a royalties suit could present evidence of the
prior art to show that the patent’s claims were not novel. See Lear, 395 U.S. at 665.
3
U.S. at 667.6 Additional exceptions were created by both state and lower federal courts, which
further undermined the doctrine of licensing estoppel.7
Accordingly, the Lear Court concluded that the case law underlying licensee estoppel had
given the doctrine an “uncertain status,” due to attempts to accommodate both the common law
contract principle prohibiting a purchaser from renouncing a promise if he has become
unsatisfied, and the patent law requirement that all ideas not protected by valid patents are
available to the public. Lear, 395 U.S. at 668. In support of the latter, the Lear court cited the
prevention of restrictions, or the award of damages, on the copying of unpatented articles set
forth in Sears, and the ruling that no damages can be awarded for source confusion caused by the
selling of an unpatented article in Compco. Id.; see Sears, 376 U.S. at 230-33 and Compco, 376
U.S. at 237-38.
With respect to contract law, the Lear Court acknowledged the contract law standard of
contract enforcement based upon receipt of some benefit by a licensee, regardless of the validity
of the patent underlying the license agreement, but noted its failure to consider the equities of
allowing a licensor who obtains his patent through fraud on the patent office to avoid an
invalidity challenge, or the equities of a patent issuing from an ex parte proceeding between the
licensor and the patent office, without the input of persons interested in establishing the patent’s
invalidity. See Lear, 395 U.S. at 669-70. In view of these considerations, and noting that a
licensor’s position is supported by the presumption of validity accorded to an issued patent, the
Court found that despite the licensee estoppel doctrine’s consistency with the black letter
contract law, “we cannot say that it is compelled by the spirit of contract law, which seeks to
balance the claims of promisor and promisee in accord with the requirements of good faith.” Id.
at 670.
The Lear Court next compared the public interest in the use of ideas with the licensor’s
equities in the following:
Surely the equities of the licensor do not weigh
very heavily when they are balanced against the
important public interest in permitting full and
free competition in the use of ideas which are in
reality a part of the public domain. Licensees may
often be the only individuals with enough economic
incentive to challenge the patentability of an
inventor’s discovery. If they are muzzled, the
public may continually be required to pay tribute
to
would-be
monopolists
without
need
or
justification. We think it plain that the technical
requirements of contract doctrine must give way
before the demands of the public interest in the
typical situation involving the negotiation of a
license after a patent has issued.
6
In his dissenting opinion, Justice Frankfurter argued that the majority in MacGregor essentially eliminated the doctrine
of licensee estoppel, stating that “The Court’s essential reasoning would apply equally where the license never attempted to fix
prices. If a doctrine that was vital law for more than ninety years will be found to have now been deprived of life, we ought at
least to give it decent public burial.” 329 U.S. at 416.
7
See, e.g., Drackett Chemical Co. v. Chamberlain Co., 63 F.2d 853 (6th Cir. 1933), and discussion in Lear at 395 U.S. at
667-68.
4
395 U.S. at 670-71.
In view of this balancing, the Lear Court ruled that Hazeltine “should no longer be
regarded as sound law with respect to its ‘estoppel’ holding, and that holding is now overruled.”
Lear, 395 U.S. at 671.
The specific facts at bar were more complicated, however. In Lear, the inventor granted
a license to his employer several years prior to acquiring the underlying patent. Lear, 395 U.S.
at 671. The inventor argued that royalties were payable as consideration for disclosure and
license of his invention prior to issuance;8 however, the Court rejected this argument, finding it
would allow inventors to negotiate licenses while their applications were pending before the
Patent Office, “disabling entirely all those who have the strongest incentive to show that a patent
is worthless,” which would at least frustrate, if not override, the strong federal policy supporting
the full and free use of ideas in the public domain. Id. at 671-73. The Court also rejected the
inventor’s request for post-issuance royalties at least until the underlying patent was finally
determined to be invalid, again finding that this contract law standard would undermine the
aforementioned federal policy. Id. at 673-74. Notably, the Court declined to rule on the issue
of pre-issuance royalties, instead remanding to the state court for consideration of the contractual
rights of inventors having unpatented, secret ideas, and also did not reach the question of patent
validity, which was not included in the petition of certiorari, and which had not been addressed
by the state court. Id. at 674-76.
C.
Notable Post-Lear Decisions
The Lear Doctrine has been developed and extended by lower courts in several areas. A
few of these decisions will be discussed here; several more decisions, including Rates Tech., Inc.
v. Speakeasy, Inc., 685 F.3d 163 (2nd Cir. 2012), will be discussed in the following section.
The Lear Court did not consider a licensee’s express contractual promise not to challenge
the validity of the licensed patent, known as a “no-contest” or “no-challenge” clause, but other
courts have addressed the issue. Approximately two years after Lear was decided, the Ninth
Circuit ruled that the Lear Doctrine applied to no-challenge clauses. See Massillon-ClevelandAkron Sign v. Golden State Advertising, 444 F.2d 425, 427 (9th Cir. 1971). The court found an
express agreement not to contest validity in a settlement agreement was “in just as direct conflict
with the ‘strong federal policy’ referenced repeatedly in Lear, as was the estoppel doctrine and
the specific contractual provision struck down in that decision,” and determined that the nochallenge clause did not override the federal policy in favoring the full and free use of the ideas
in the public domain. Id., citing Katzinger, 329 U.S. at 402. As such, the court ruled that the nochallenge clause was void on its face and unenforceable. Id.
Shortly thereafter, in Panther Pumps & Equip. Co. v. Hydrocraft, Inc., 468 F.2d 225 (7th
Cir. 1972) the Seventh Circuit addressed the question of whether the inclusion of a no-challenge
clause in a patent license agreement constituted patent misuse. Noting that the patent misuse
doctrine is intended to prevent a patentee from extending a valid patent’s economic monopoly
beyond its legal monopoly, the court found no support in case law that the mere existence of a
no-challenge clause should be considered patent misuse. Id. at 231. The court noted that prior to
8
At the time Lear was decided, 35 U.S.C. § 122 required the Patent Office to keep pending patent applications in
confidence until issuance. See Lear, 395 U.S. at 671.
5
Lear the Supreme Court “has also recognized that a patentee has a right to a full monopoly return
on the invention which he has discovered and disclosed to the public.” Id. at 231-32, citing
Pope, 144 U.S. at 234 (stating it is “important to the public that competition should not be
repressed by worthless patents” but also “the patentee of a really valuable invention should be
protected in his monopoly”). Accordingly, the court determined that, although unenforceable
under Lear, a no-challenge clause was not “the kind of ‘misuse’ of the patent which forecloses
recovery of damages from an unlicensed infringer.” Id. at 232.
More recently, the Lear Doctrine impacted declaratory judgment case law. The Federal
Circuit noted in Gen-Probe, Inc. v. Vysis, Inc. that the Lear Doctrine “does not grant every
licensee in every circumstance the right to challenge the validity of the licensed patent” and held
that a licensee must breach the license agreement – cease paying royalties – prior to filing a
lawsuit to challenge the validity or scope of the licensed patent. 359 F.3d 1376, 1381 (Fed. Cir.
2004), citing Studiengesellschaft Kohle m.b.H. v. Shell Oil Co., 112 F.3d 1561, 1567-68 (Fed.
Cir. 1997). However, the Supreme Court later rejected this approach, and ruled that a licensee
was not required to refuse to pay royalties under the license prior to filing a declaratory judgment
action. See MedIummune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007).
II.
The Rates Decision – Contractual Obligations Versus Public Policy
As discussed above, the Lear Doctrine established a balancing test to weigh the federal
policy embodied in the patent laws versus the contract doctrine of licensee estoppel. Lear, 395
U.S. at 670-71. Essentially, the Court abandoned the doctrine of licensee estoppel, finding that
the concerns of patent law outweighed those of contract law. See id. (overruling Automatic
Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950)). In 2011, the Second
Circuit9 revisited the Lear Doctrine in Rates. 685 F.3d 163 (2nd Cir. 2012).
A.
Brief History of the Rates-Speakeasy Relationship
The Rates case begins back in April 2007, when Rates Technology, Inc. ("RTI") became
aware of the potential infringement of two RTI patents10 by Speakeasy, Inc. ("Speakeasy"). At
that time, and in accordance with standard business practices, RTI and Speakeasy entered into an
agreement that released Speakeasy from any past or future liability for infringement of the two
RTI patents in exchange for a one-time payment of $475,000.11 Id. at 165. The settlement
agreement also included two other provisions - the first prohibiting Speakeasy from challenging,
or assisting others in challenging the validity of the RTI patents12; and a second providing for
9
RTI appealed from the Southern District Court Decision in Rates Tech., Inc. v. Speakeasy, Inc., No. 10-cv-6482, 2011
WL 1758621 (S.D.N.Y. May 9, 2011) to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit determined that
the court lacked jurisdiction to hear an appeal from the district court, because "contract dispute does not require the resolution of
a related question of patent law, such as inventorship, infringement, validity or enforceability." Rates Tech., Inc. v. Speakeasy,
Inc.,, 437 F.App'x 940, 941 (Fed. Cir. 2011) (citing Lab Corp. of Am. Holdings v. Metabolite Labs, Inc., 599 F.3d 1277, 1283-84
(Fed. Cir. 2010); see also Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2nd Cir. 2012).
10
The two patents at issue are both directed to the automatic routing of telephone calls based on cost.
11
RTI alleged that it is well known in the telecommunications industry "for its policy of settling patent infringement
claims in accordance with a one-time payment tiered pricing structure based on the size of the accused infringer measured by its
annual sale."
12
“Speakeasy hereby warrants and represents to RTI that on and after the execution date of this Covenant Speakeasy will
not anywhere in the world challenge, or assist any other individual or entity to challenge, the validity of any of the claims of the
(continued…)
6
liquidated damages in the amount of $12 million and all legal expenses associated with
collecting this amount in case Speakeasy was in any way associated with a challenge to the RTI
patents.13 Id. Subsequent to the signing of the settlement agreement, Speakeasy was acquired by
Best Buy, Inc., and a few years later, Speakeasy was sold by Best Buy to Covad14. Id. at 166.
When RTI became aware of Covad’s infringement of the two RTI patents, RTI offered a similar
settlement agreement to Covad. However, instead of entering into the settlement agreement,
Covad sued RTI challenging the validity of the two RTI patents. Id. In response, RTI alleged
that Speakeasy was in violation of the settlement agreement by providing information that Covad
relied on in challenging the validity of the two RTI patents.
B.
The Enforceability of No-Challenge Clauses – the Importance of the Timing
of the Settlement Agreement
The balancing test of Lear, while a useful tool for determining whether or not nochallenge clauses are enforceable, turns on when the settlement agreement containing the nochallenge clause was formalized. The court in Rates discusses various scenarios by which patent
disputes can be resolved.
1.
Final Judgment and Res Judicata
The principle of res judicata or claim preclusion is well established in law. Res judicata
operates when a prior decision rendered by a court having competent jurisdiction is final,
involves the same parties or parties that are in privity, and involves claims arising out of the
same transaction. See Monahan v. N.Y. City Dep't of Corr., 214 F.3d 275,284 (2d Cir. 2000); see
also Mayo Clinic Jacksonville v. Alzheimer's Institute of America, Inc., 683 F.Supp.2d 1292,
1298-99 (M.D.Fla. Nov. 24, 2009). Thus, in situations where a final judgment in a suit involving
patent validity or infringement is litigated to a final judgment, the question of licensee estoppel
in a settlement agreement containing a no-challenge clause does not arise. See Rates, 685 F.3d at
169; see also Foster v. Hallco Mfg. Co., 947 F.2d 469 476 (Fed. Cir. 1991).
2.
Settlement Agreements in Pending Litigations
A second situation arises when there is no final judgment on the merits in a patent suit,
but a consent decree is issued at the conclusion of the litigation. In such a case, various circuit
courts have routinely found that such agreements are dispositive in relation to a patent's validity,
estopping any further challenges. See, e.g., Wallace Clark & Co. v. Acheson Indus., Inc., 532
F.2d 846, 849 (2d Cir. 1976); Foster, 947 F.2d at 476-77; Am. Equip. Corp. v. Wikomi Mfg. Co.,
630 F.2d 544, 547,48 (7th Cir. 1980); Schlegel Mfg. Co. v. USM Corp., 525 F.2d 775, 780-81
(6th Cir. 1975). In a situation where there has been no final judgment on the merits, but there
has been extensive litigation, the courts surmise that the discovery mechanism provides ample
Patents or their respective foreign counterpart patents applications, except in defense to a Patent infringement lawsuit brought
under the Patents against Speakeasy, its [products and services], and except as otherwise required by law.” Rates, 685 F.3d at
165.
13
“In the event that the above representation is incorrect then Speakeasy agrees that it shall pay to RTI as liquidated
damages the additional amount of Twelve Million U.S. ($12 Million) Dollars plus all legal expenses necessary to collect this
added amount.” Id.
14
Covad defendants-appellees in the Rates, Inc. v. Speakeasy, Inc., include Platinum Equity, LLC, CCGI Holding
Corporation, Covad Communications Group, Inc., Covad Communications Company, and Speakeasy Broadband Services, LLC.
7
opportunity for the parties to weigh a patent’s validity. See, e.g., Wallace Clark, 532 F.2d at 849
(distinguishing pre-Lear estoppel on the basis that the consent decrees are arrived at in settlement
of adversarial litigation with the discovery machinery of the courts available to the parties, and
are subject to court scrutiny).
3.
Settlement Agreements Without Litigation
If litigation has already been initiated, parties may settle the disagreement at any time by
entering into a settlement agreement. While such a settlement agreement is not a final judgment
on the merits of the case, presumably parties enter into such an agreement with the knowledge of
merits of the case. See Warner-Jenkins Co. v. Allied Chemical Corp., 567 F.2d 184, 185 (2d Cir.
1977) (finding that a licensee can challenge the validity of a patent, despite the existence of a
nonterminable licensing agreement). The Warner-Jenkins court balanced the public interest
versus expedient litigation and found that:
[t]here is certainly a public interest in the avoidance
of
litigation
through
the
peaceful
resolution
of
lawsuits. In the patent field, however, this interest is
to be balanced against the public interest in having
invalid patents cleared away through litigation.
Id. at 188.
The Warner-Jenkins court also reiterated that if a settlement agreement containing
explicit prohibitions on licensee suits during some future period, or if the payment of royalties is
ordered by the court, then such prohibitions and/or payments would be enforceable. Id.
However, relying on Lear, the court cautioned against reading such provisions into a settlement
agreement. Id. It is interesting to note here, however, that unlike the Rates case, the settlement
agreement in Warner-Jenkins did not include a no-challenge clause prohibiting a challenge to the
patents at issue. Id. at 186.
A few years ago, this issue was also visited by the Federal Circuit in Flex-Foot, Inc., v.
CRP, Inc. See 238 F.3d 1362 (Fed. Cir. 2001). In Flex-Foot, the parties entered into a
settlement and licensing agreement after conducting discovery and fully briefing a motion for
summary judgment. Id. at 1363. The agreement contained language wherein the licensee
waived its right to challenge the validity and enforceability of the patent at issue. Id. The
Federal Circuit found that although the licensee's dismissal with prejudice following the
settlement agreement did not rise to the level of collateral estoppel, the settlement agreement
does create a contractual estoppel. Id. at 1367-68. The Federal Circuit also distinguished the
Flex-Foot case from Lear:
In Lear, notably, the license did not contain, and was
not accompanied by, any promise by the licensee not to
challenge
the
validity
of
the
patent.
This
distinguishing fact is meaningful because it implicates
the important policy of enforcing settlement agreements
and res judicata.
Indeed, the important policy of
enforcing settlement agreements and res judicata must
themselves be weighed against the federal patent laws'
prescription of full and free competition in the use of
ideas that are in reality a part of the public domain.
Id. at 1368.
8
4.
Settlement Agreements Prior to Litigation
In light of some of the cases that have been decided since the Lear decision, what makes
the Rates case of interest is the timing of the settlement agreement. Unlike the cases discussed
above, the settlement agreement between RTI and Speakeasy was formalized when RTI first
became aware of potential infringement of its two patents by Speakeasy, i.e., prior to the
commencement of any litigation between RTI and Speakeasy, or any litigation related to the RTI
patents at issue. Rates, 685 F.3d at 165. As discussed above, soon after Lear was decided, the
Ninth Circuit ruled that the Lear Doctrine applied to no challenge clauses, because the federal
policy favoring the full and free use of ideas in the public domain outweighs the contractual
obligations under a settlement agreement containing a no-challenge provision. See Massillon,
444 F.2d at 427.
The Rates court relies primarily on the Ninth Circuit’s holding in Massilon in
determining whether the no-challenge clause of the settlement agreement between RTI and
Speakeasy was enforceable. The settlement agreements in both cases were prior to litigation,
and both settlement agreements included provisions prohibiting the licensee from later
challenging the validity of the patent(s) at issue. Rates, 685 F.3d at 171. The court’s main
concern was the potential for a patent owner to “couch licensing arrangements in the form of
settlement agreements” by including provisions declaring a patent to be valid, while sidestepping the actual issue of validity. Id. (citing Massilon, 444 F.2d at 427).
Another issue that the court highlighted is that that in both Rates and Massilon neither
licensee had the opportunity to conduct discovery regarding the validity of the patent(s) at issue
prior to entering into the settlement agreements. Rates, 685 F.3d at 172. The court found that
the opportunity to conduct discovery prior is essential to enforcing a no-challenge provision in a
settlement agreement based on two issues – first, the licensee can fully assess the validity of a
patent during discovery and therefore is presumed to be making an informed decision when
entering into a settlement agreement; second, initiating litigation and conducting discovery is
evidence of a genuine issue regarding the validity of a patent. Id. Thus, the patent owner is less
likely to characterize licensing agreements as settlement agreements to avoid potential
challenges to patent validity. Id. The court also clarified its position with regard to resolving
infringement disputes between two parties. The Lear Doctrine does not prevent two parties from
resolving a dispute. Instead, it prevents a party from entering into a
covenant to forever shield itself from an invalidity
action that [a licensee] might someday with to bring, or
assist others in bringing.
Id. at 173.
III.
The Lear Doctrine and Trademark Cases
The Lear Doctrine is not limited to patent cases, but has also been applied to Trademark
cases with varying results. In Beer Nuts, Inc. v. King Nut Co., King Nut entered into an
agreement with Beer Nuts15 that released King Nut from all liability in exchange for King's
15
The agreement was between King Nut Co. and Brewster Food Co., predecessor to Beer Nuts Inc. Beer Nuts, 477 F.2d
at 327.
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promise not to using the name "Brew Nuts," which Beer Nuts alleged was an infringement on
Beer Nuts' trademark.16 477 F.2d 326, 327 (6th Cir. 1973). The court distinguished the
application of the Lear Doctrine in patent cases from trademark cases. Unlike in patent cases,
the court held that
Trademark protection guards the public from being
deceived into purchasing an infringing unwanted product.
It further protects the owner's investment in advertising
and quality control which is often considerable.
See id. at 328-29; see also Stahly, Inc. v. M. H. Jacobs Co., 183 F.2d 914 (7th Cir.), cert. denied,
340 U.S. 896 (1950). After applying the Lear balancing test, the court found that the public
interest in determining whether a valid and enforceable mark had evolved into a merely
descriptive word was not so great as to disregard contractual obligations. Beer Nuts, 477 F.2d at
329. The Beer Nuts court was not alone in reaching such a holding. See, e.g., E.F. Prichard Co.
v. Consumers Brewing Co., 136 F.2d 512, 522 (6th Cir. 1943), cert denied, 321 U.S. 763 (1944);
MWS Wire Indus., Inc. v. California Fine Wire Co., 797 F.2d 799, 803 (9th Cir. 1986); Peyrat v.
L.N. Renault & Sons, Inc., 247 F.Supp. 1009 (S.D.N.Y. 1965).
In a more recent decision, the court in Idaho Potato Commission v. M&M Produce Farm
& Sales, considered the applicability of the Lear Doctrine to cases involving certification
marks17 as opposed to trademarks. 335 F.3d 130 (2nd Cir. 2003). First, the court found that the
Lear Doctrine was applicable to the case at issues. See id. at 137 (finding that applicability of the
Lear Doctrine is not predicate on the presence or absence of a no-challenge clause in a settlement
agreement). In fact, the court concluded that although trademarks and certification marks are
generally treated the same, there is a difference in the public interests associated with the two
marks. See id. at 138 (finding that the owner of a certification mark "cannot refuse to license the
mark to anyone on any ground other than the standard it has set," is an importation distinction
between the policies embodied in trademark and certification marks) (internal citations omitted).
Thus, in the case of certification marks, the balance tilts in the favor of the licensee because of
the greater public interest in maintaining a free market for a certified product, which may be
unduly affected by the economic interests of the certification mark owner. Id. at 139.
IV.
Conclusion
As can be seen from the cases discussed in this paper, application of the Lear Doctrine
has been far from uniform - weighing public policy interest against patent rights has to be
considered on a case-by-case basis. However, when patent infringement and validity is at issue,
it is foreseeable that courts will find no-challenge clauses in settlement agreements to be
enforceable, as long as the settlement agreement is formalized after a real question of patent
validity arises (such as the onset of litigation or a final judgment).
16
The facts of the Beer Nuts case is similar to the facts of Rates, the difference being that Beer Nuts relates to potential
trademark infringement, while Rates relates to potential patent infringement.
17
"A certification mark is a special creature created for a purpose uniquely different from that of an ordinary trademark or
service mark. It is a mark owned by one person and used by others in connection with their goods and services to certify quality,
regional or other origin." 3 McCarthy on Trademarks and Unfair Competition § 19.91.
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