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Understanding the Details: Termination of “At Any Time” Covenant Not to Sue upon License Expiry

Highlighting the significance of meticulous drafting and scrutiny of language within a covenant not to sue, the US Court of Appeals for the Federal Circuit ruled on a case  affirming that the straightforward wording of such a covenant authorized a licensor to pursue legal action against a licensee for contract breach only subsequent to the contract’s termination. This verdict was rendered in the case of AlexSam, Inc. v. MasterCard Int’l., Inc., Case No. 22-2046 (Fed. Cir. Feb. 28, 2024), with Judges Lourie, Chen, and Stoll presiding (non-precedential).

In 2005, AlexSam and MasterCard forged a patent licensing pact, guaranteeing ongoing royalties to AlexSam for the use of its patents concerning prepaid cards utilized with point-of-sale systems. Integral to the agreement was a covenant not to sue, wherein AlexSam pledged to abstain from instigating any claims against MasterCard pertaining to licensed transactions occurring before or during the agreement’s term.

Furthermore, the agreement featured a Term and Termination clause specifying its continuity for the duration of the licensed patents unless a breach occurred, in which case, if unremedied, the non-breaching party retained the right to terminate the agreement. The patents expired on July 10, 2017. In May 2015, two years before the patents’ expiration, AlexSam initiated legal action against MasterCard in the district court, alleging breach of contract due to improper royalty payment per transaction under the agreement. Concurrently, in March 2017, MasterCard petitioned for a Covered Business Method (CBM) Review before the Patent Trial & Appeal Board to reassess the patentability of the licensed patents. AlexSam contended that MasterCard lacked standing under 37 C.F.R. § 42.302(a), which necessitated prior litigation or accusation of patent infringement against MasterCard for seeking review. The Board ruled in favor of AlexSam, stating MasterCard lacked standing for the review. Additionally, it refrained from addressing whether AlexSam’s breach of contract claim in the New York Action violated the covenant not to sue.

MasterCard moved for and obtained summary judgment in the district court, arguing that AlexSam’s arguments before the Board concerning the covenant not to sue estopped it from asserting breach of contract claims. AlexSam appealed, and the Federal Circuit overturned the district court’s decision in its first appeal, citing an abuse of discretion in crediting AlexSam with a position it never took before the Board. The case was remanded to the district court to determine whether the covenant not to sue barred claims for unpaid royalties. Subsequently, MasterCard moved for summary judgment once more, which the district court granted, asserting that the covenant not to sue precluded AlexSam’s claim for unpaid royalties.

AlexSam appealed again. In the subsequent appeal, AlexSam argued that the covenant not to sue in the 2005 License Agreement didn’t prohibit legal action for breach of nonpayment of royalties, as it would render AlexSam without recourse against MasterCard’s failure to pay royalties, thus making it illusory. However, the Federal Circuit disagreed, stating that the agreement outlined a specific method for recovering royalty payments, albeit stringent, requiring termination of the agreement before initiating legal action for breach of contract. AlexSam further contended that the covenant terminated upon the expiration of the patents in 2017, thus not barring the current suit (originally filed in 2015) for breach of contract. MasterCard argued that the covenant, inclusive of the phrase “at any time,” barred AlexSam from filing suit indefinitely.

The Court sided with AlexSam, indicating that MasterCard’s interpretation would render the agreement meaningless, emphasizing that the phrase “at any time” applied only during the agreement’s lifespan, not post-termination. Consequently, the Court determined that the covenant didn’t survive the license’s termination, allowing AlexSam to proceed with its breach of contract claim. The Federal Circuit concluded that a remand was necessary for the district court to address significant issues, including whether AlexSam lacked standing at the time of filing the breach of contract suit in 2015 or, alternatively, whether the suit should be dismissed for failure to state a claim, given that at that time, the patents hadn’t yet expired, and AlexSam hadn’t terminated the agreement, rendering the covenant not to sue still effective.

DC IP Lawyers urge that thoroughly comprehending the implications of a covenant-not-to-sue clause within a patent license agreement is crucial.

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