In a recent decision, the Ontario Superior Court of Justice, Divisional Court (the “Court”), affirmed the enforceability of patent restrictive covenants (so-called “no-challenge clauses”) in settlement agreements.
In 2014, Loops L.L.C. and Loops Flexbrush L.L.C. (“Loops”) and Maxill Inc. (“Maxill”) entered into a settlement agreement to resolve a patent infringement action by Loops against Maxill. The agreement, governed by the laws of Canada and Ontario, contained a no-challenge clause in which Maxill agreed “not to directly or indirectly assist any person in attacking the validity” of certain Loops patents. Loops subsequently commenced actions in Ontario and Utah claiming Maxill breached the agreement and infringed a U.S. patent covered by the agreement. Loops filed a motion for an interlocutory injunction in the Ontario action. The motion judge dismissed the injunction request. The motion judge found that a strong prima facie case was lacking because Loops’ evidence was rebutted by the fact that the no-challenge clause was not reasonable in the public interest, based on U.S. caselaw principles.
The main issue on appeal was whether the motion judge erred in finding that Loops did not have a strong prima facie case when applying the three-part test for an interlocutory injunction. The Court rejected the motion judge’s reasoning, acknowledging that while there may be limits on contractual restrictions that harm the general public, imposing such a limitation would require evidence allowing the Court to weigh the implications of enforcing the contract. The Court found that no such evidence had been adduced. On this basis, the Court reasoned that an agreement precluding the subsequent use of a defence by a party to the benefit of another party was not able to be limited to prevent public harm.
The Court rejected a line of U.S. caselaw holding that no-challenge clauses may be void under U.S. law due to concerns that they restrict the free use of ideas in the public domain by inhibiting challenges to patent validity. The Court clarified that, contrary to U.S. decisions setting aside the principle that patent licensees may be estopped from attacking patent validity, the estoppel principle continues to apply in Canada. In view of this, and the fact that the no-challenge clause at issue was part of a settlement of a case in which the validity of Loops’ patents was challenged, the Court held that the no-challenge clause was enforceable and, accordingly, Loops had a strong prima facie case.
Upon finding that Loops also satisfied the second and third parts of the test (irreparable harm and balance of convenience), the Court granted the appeal and ordered an interlocutory injunction against Maxill.
This decision will be of interest to patent owners, licensees, and others who may be bound by no-challenge clauses. Notably, the Court left open the possibility that it could be persuaded to hold a no-challenge clause unenforceable with evidence of public harm. The Court’s reasoning is broad enough that it may be applied to other intellectual property rights as well (e.g., copyright). Fasken’s team of experienced intellectual property lawyers are available to consult on all manner of IP matters including litigation, dispute settlement, and licensing.
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 Ibid at paras 3-4.
 Ibid at paras 7-9.
 Ibid at para 1.
 Ibid at paras 47-49.
 Ibid at paras 14-15.
 Ibid at para 50.
 Ibid at paras 52-71.
 Ibid at para 72.
 Ibid at para 73.
 Ibid at paras 74-80 and 83.