There was not any binding authority concerning this issue in Canada
A recent intellectual property case explored whether a so-called no challenge clause is in the public interest.
The case was unique in that counsel were not able to find any binding authority concerning this issue in Canada, according to the decision, Loops v. Maxill Inc., 2020 ONSC 971.
Jaime Holroyd, an associate at Siskinds who did not work on the case, says that although the decision is relatively small-scale, no-challenge clauses are very commonplace for commercial agreements. The decision has raised questions about the enforceability of these types of clauses, he says.
“[No challenge clauses] are found, certainly, in IP settlement agreements — not just patent settlement agreements but also, licenses, franchise agreements, any number of agreements that involve intellectual property. They are quite common and haven’t been challenged in this way — to my knowledge, or the courts’ and parties knowledge,” says Holroyd.
“So, it was interesting to see a case come out fairly strongly against them.”
In the case, Loops’ sought an interlocutory injunction prohibiting Maxill Canada from challenging a U.S. patent. The two toothbrush manufacturers had previously settled a fight over the Supermaxx toothbrush, and Maxill Canada had agreed to destroy the moulds that allegedly infringed on a Loops’ toothbrush design.
However, Maxill Canada then created another toothbrush as a “design-around” the Loops’ Canadian patent. The two companies fought legal battles in the U.S. and Canada.
The no challenge clause, which the court also calls the estoppel rule, is used in U.S. settlement agreements to prevent “defendant’s future use of affirmative defenses in other litigation including invalidity and noninfringement.”
“The court commented that sometimes the only person with the proper motivation to challenge a patent is precisely the person on the other end of the patent infringement lawsuit,” says Holroyd.
“If they are being muzzled or agreeing not to challenge the validity of the patent, there may not be anyone else with the sufficient reason to do that. That leaves the public with potentially invalid patents on the register. There’s an economic price being paid by the public for a patent that ought not to be granted. That’s the argument anyway.”
Citing U.S. law, Ontario Justice Lynda Templeton noted that the no-challenge clause “constitutes an attempt to resolve a dispute about patent validity prior to any litigation, which runs contrary to the ‘strong federal policy favouring the full and free use of ideas in the public domain.’” While contract law doesn’t allow a party to shirk promises “simply because he later becomes dissatisfied with the bargain he has made,” federal law requires that “all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent,” the U.S. Supreme Court caselaw says.
“In a contract that includes a ‘No Challenge Clause,’ the price to pay by one party is access to a potentially valid legal position that has potential to affect the public at large. In my view, that price is simply too high if public trust and confidence in the administration of justice are to be maintained,” wrote Templeton in the decision.
“For these reasons and the public policy reasons cited by the American courts above with which I concur, I find that the restrictive covenant in the Agreement is not reasonable in the public interest.”
Sandra DiMeo, who represented Maxill, said that while she was surprised to see the issue come up before the courts, she agreed with the judge’s analysis. The decision, which is being appealed, does not shut down use of no-challenge clauses, but does put scrutiny on how they are drafted, she says.
Karen MacDonald, partner at Norton Rose Fulbright Canada LLP who represented Loops, declined to comment, citing the Divisional Court appeal.
“There is certainly an argument to be made that this case it is limited to its context: it was an injunction in the context of a patent settlement agreement,” Holroyd says.
“Maybe the courts down the road, who consider subsequent cases, may say that in settlement agreements these types of clauses are not permissible. But maybe they are in other types of agreements, such as franchise or license agreements. . . . a lot of the principles that came out of the U.S. cases cited by the judge relate to free use of ideas in the public domain, which is something that is more patent concept than trademark concept. So, it could be the precedential value is more limited to the patent context.”
