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Federal Circuit Underscores Importance Of Carefully Reviewing The Language In A Covenant Not To Sue When Entering A License Agreement
03/26/2024On February 28, 2024, the U.S. Court of Appeals for the Federal Circuit (“CAFC”) reversed the U.S. District Court for the Eastern District of New York’s summary judgment decision to dismiss AlexSam, Inc.’s (“AlexSam’s”) lawsuit for breach of contract against MasterCard International Inc. (“MasterCard”). AlexSam owns two U.S. patents directed to prepaid cards that can be used with point-of-sale devices. In 2005, AlexSam granted MasterCard a license to the two patents. In exchange, MasterCard agreed to pay ongoing royalties in the amount of a fee per licensed transaction. The two patents expired on July 10, 2017.
In 2015, AlexSam sued MasterCard for breach of contract, asserting that MasterCard had under-reported the number of licensed transactions and had not paid AlexSam for each licensed transaction. MasterCard moved for summary judgment, arguing that the covenant not to sue provision in the license agreement is worded so broadly as to prohibit a claim for unpaid royalties. The provision states, in relevant part, that “Alex[S]am … agrees and covenants to not at any time initiate, assert, or bring any claim … against MasterCard, for any claim or alleged liabilities of any kind and nature … relating to [the licensed transactions]….” The district court granted MasterCard’s motion for summary judgment.
On appeal, AlexSam argued that, when read in light of other sections of the license agreement, the covenant not to sue does not bar a suit for breach for non-payment of royalties. Second, AlexSam claimed that the district court’s interpretation of the provision renders the requirement for MasterCard to pay a royalty fee superfluous because AlexSam has no recourse when MasterCard fails to pay. The only interpretation that would preserve the clear intent of the parties is to limit the covenant to only bar patent infringement suits, AlexSam asserted. Third, AlexSam argued that the covenant terminated with the agreement when the patents expired. As a result, the covenant not to sue cannot bar the present suit.
The CAFC was not persuaded by AlexSam’s first two arguments. The language of the covenant not to sue does not even mention patent infringement, the CAFC reasoned. The CAFC also did not agree that the district court’s interpretation of the covenant not to sue renders the royalty payment requirement superfluous. The CAFC held that the agreement provides AlexSam the option of terminating the agreement, which would then terminate the covenant not to sue, allowing AlexSam to assert its breach of contract claims against MasterCard. The agreement states, in relevant part, that the agreement “shall remain in full force and effect for the life of the [licensed patents] unless … either party breaches any material provision of the Agreement, including … [duty to pay royalties] .…” Moreover, the agreement states that certain sections “shall survive termination” of the agreement, including the duty to pay royalties for licensed transactions that took place during the life of the agreement. On the other hand, the covenant to not sue terminates with the agreement.
The CAFC, however, did agree with AlexSam’s third argument that the covenant not to sue terminated when the license agreement terminated. MasterCard countered that AlexSam is barred from bringing a claim related to the licensed transaction in perpetuity because the covenant itself includes the words “at any time.” Rejecting MasterCard’s argument, the CAFC reasoned that “at any time” means at any time during the term of the license agreement.
