Second Circuit Says License Agreement No-Challenge Clauses Are Unenforceable When Entered Into Before Litigation

On July 10, 2012, the United States Court of Appeals for the Second Circuit held in Rates Technology Inc. v. Speakeasy, Inc. that covenants prohibiting challenges to a patent's validity, along with liquidated damages provisions, are unenforceable where the covenants were entered into prior to litigation. This result is the same regardless of whether the agreements containing such covenants are styled as settlement agreements, license agreements or covenants not to sue.¹

While it is clear that the Second Circuit considers no-challenge clauses and accompanying liquidated damages provisions to be unenforceable when entered into before litigation, it remains unclear whether certain contractual provisions intended to discourage a licensee from bringing an invalidity action would similarly be considered unenforceable.