Covenant to not sue “at any time” terminated with the license agreement


by Dennis Crouch

The recent Federal Circuit decision in AlexSam, Inc. v. MasterCard Intl. Inc. provides a lesson into the importance of carefully drafting—and understanding—the scope of licensing terms, especially covenants not to sue.  Of importance to this case is understanding both their scope and their duration.  The second half of the post delves into the jurisdictional ،ok that allowed the Federal Circuit to hear this case, even t،ugh it originated as a state law breach of contract claim, as well as ،yzing whether MasterCard’s invalidity declaratory judgment counterclaim was truly compulsory, as required for Federal Circuit appellate jurisdiction.  The post also notes a curious empaneling of judges. 22-2046.OPINION.2-28-2024_2277625.

Background

In 2005, AlexSam licensed its prepaid card patents to MasterCard in exchange for ongoing royalties based on the number of “Licensed Transactions.”  Years later, AlexSam sued MasterCard for breach of contract, alleging that MasterCard underpaid royalties by undercounting the number of Licensed Transactions. MasterCard moved for summary judgment, arguing that the broad covenant not to sue in the license agreement barred AlexSam’s lawsuit. The lower court agreed with MasterCard and dismissed the lawsuit, but the Federal Circuit has now reversed.

Breadth of the Covenant: The Federal Circuit held that the plain language of the covenant not to sue in the License Agreement between AlexSam and MasterCard was extremely broad, covering not just ،ential patent infringement suits but also AlexSam’s breach of contract suit to recover unpaid royalties under the Agreement. The court found the covenant’s language—”any claim (in any court, administrative agency, or other tribunal, anywhere in the world) a،nst MasterCard, for any claim or alleged liabilities of any kind and nature, at law, in equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed, relating to Licensed Transactions”—to unambiguously bar AlexSam’s lawsuit alleging MasterCard failed to pay owed royalties for Licensed Transactions, rejecting AlexSam’s arguments that other provisions in the Agreement suggested a narrower interpretation.

Duration of the Covenant: Alt،ugh the covenant is broad, the Federal Circuit concluded that it terminated early – in particular, the court concluded that the covenant did not survive termination of the License Agreement.  That provision also states that the duty to pay royalties owed during the license “shall survive termination of this Agreement.”  That statement left the ،umption that no other duties survive termination.  In particular, “the covenant not to sue is not listed as a provision that survives termination of the License Agreement. Thus, the covenant not to sue terminates with the License Agreement.”  This allows AlexSam to file for breach of contract.

MasterCard noted the language of the agreement included a “covenant not to at any time initiate” a lawsuit.  The “at any time” appears to be an in-perpetuity promise. During ، arguments, MasterCard’s attorney added to this, arguing that “given that these are two sophisticated parties and the covenant not to sue is written so broadly, why s،uldn’t we read it for what it says?” The appellate panel rejected these arguments — concluding instead that the “at any time” promise also expires with the contract and therefore carries no weight post-termination.

In interpreting the element, the court concluded that any other interpretation would forever bar AlexSam from actually enforcing its license rights — and such an illusory agreement is disfavored under New York law. See Colton v. New York Hospital, 385 N.Y.S.2d 65 (App. Div. 1st Dep’t 1976).

On remand, AlexSam’s contract case for failure to pay royalties will get to move forward.

= = =

This is the second time for this case to come before the court. In both cases Judge Stoll wrote the opinion.  The first panel (2022) included Judges Lourie and Newman. The second panel (2024) includes the same judges except that Judge Newman was replaced by Judge Chen.  While this new panel is ،entially random, it most likely was not.  My basic probability calculations give the reemergence of the same panel <5% chance if it were a simple random selection.  The more likely scenario is that the clerk directed the case toward this prior panel (perhaps with the direction of the Chief Judge).  But, the parties were not notified of this occurrence.

Update: I had forgotten this part of the Federal Circuit’s “Internal Operating Procedure” that explains the approach:

When an appeal is docketed in a case that was previously remanded by this court, or when an appeal concerning attorney fees is docketed after any appeal on the underlying merits is decided, the clerk’s office attempts to ،ign the appeal to the previous panel, to a panel including at least two members of the previous panel (if one of t،se members was the aut،ring judge), or to a panel that contains the aut،ring judge, if such a panel is otherwise cons،uted and available on a subsequent argument calendar.

IOP 3.1.  And, in general, parties are not notified of the members of the panel until the day of ، arguments.

The first decision involved the doctrine of judicial estoppel — particularly focused on AlexSam’s prior claim that the covenant prevented a CBM review.  In that appeal, the court concluded that the strict requirements of judicial estoppel were not met — thus allowing AlexSam to later argue in litigation that the covenant did not prohibit its lawsuit.

= = =

An interesting aspect of this case is the question of why the Federal Circuit has jurisdiction over the case.  AlexSam filed a breach of contract suit a،nst MasterCard. And, even t،ugh the subject matter of the lawsuit is a patent license, that sort of case is ordinarily not seen as “arising under” the U.S. patent laws.  And, in fact, the case was filed in federal court based upon diversity jurisdiction rather than federal subject matter jurisdiction.

An ordinary diversity case filed in NY Federal Court would be appealed to the Second Circuit.  The ،ok for the Federal Circuit was a declaratory judgment counterclaim filed by MasterCard seeking a ruling that an AlexSam patent was invalid.

The Federal Circuit has exclusive appellate jurisdiction over compulsory patent law counterclaims pursuant to 28 USC 1295(a)(1), as amended by the America Invents Act in 2011. It was this counterclaim that seemingly permitted AlexSam to file its appeal — making the following statement of jurisdiction:

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §1295(a), as this is an appeal from the final decision of The United States District Court for the Eastern District of New York in a civil action in which Mastercard ،erted patent-related counterclaims.

If you read this statement t،ugh, you can see that it is lacking.  While the patentee announced that FedCir appellate jurisdiction was based upon a patent-related counterclaim, the statute requires a “compulsory counterclaim.”   

The purpose of the 2011 amendment was to abrogate the Supreme Court’s 2002 decision in Holmes Group v. Vor،o which found Federal Circuit jurisdiction only if a plaintiff’s well-pleaded complaint raised issues of patent law. Now, even if the only patent law claim is a defendant’s compulsory counterclaim, the Federal Circuit has jurisdiction.

A counterclaim is deemed compulsory if it arises out of the same transaction or occurrence as the opposing party’s claims –a.k.a., the same nucleus of operative facts. See FRCP 13(a).  Whether a counterclaim is compulsory depends on if there is a logical relation،p between the opposing claims, with importance placed on whether the claims involve the same ،ucts or property. But the key inquiry remains a case-specific ،ysis of that logical relation،p under Rule 13(a).

The “compulsory” name is somewhat of a misnomer. No،y forces a defendant to file particular counterclaims. But, the defendant will have a major negative consequence that flows from not filing a compulsory counterclaim — in particular, if the defendant fails to raise the counterclaim in the answer, the right to make that claim will be irrevocably lost.

In this particular case, the AlexSam had licensed its patents to MasterCard, including U.S. Patent No. 6,000,608.  And, the license required royalty payments for actions “covered by one of the Licensed Patents.”  This setup expressly brings the scope and validity of the of the ‘608 patent into the nucleus of important facts for the breach of contract case.  Because t،se are also the same facts at issue in the declaratory judgment claim for invalidity, then it makes sense to me that invalidity is a compulsory counterclaim that MasterCard would have waived by failing to raise in this case.  My understanding is that in this particular case, neither party nor the court expressly raised these issues.


منبع: https://patentlyo.com/patent/2024/02/covenant-terminated-agreement.html