Rates Tech. Inc. v. Speakeasy, Inc.

• Decision Date: 10 July 2012
• Docket Number: Docket No. 11–4462–cv.
• Citation: 685 F.3d 163,103 U.S.P.Q.2d 1462
• Parties: RATES TECHNOLOGY INC., Plaintiff–Appellant, v. SPEAKEASY, INC., Best Buy Co., Inc., Speakeasy Broadband Services, LLC, Megapath, Inc., Covad Communications Company, Covad Communications Group, Inc., CCGI Holding Corporation, Platinum Equity, LLC, Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

685 F.3d 163

103 U.S.P.Q.2d 1462

RATES TECHNOLOGY INC., Plaintiff–Appellant,

v.SPEAKEASY, INC., Best Buy Co., Inc., Speakeasy Broadband Services, LLC, Megapath, Inc., Covad Communications Company, Covad Communications Group, Inc., CCGI Holding Corporation, Platinum Equity, LLC, Defendants–Appellees.

Docket No. 11–4462–cv.

United States Court of Appeals, Second Circuit.

Argued: May 14, 2012.

Decided: July 10, 2012.

David Lazer (Zachary Murdock, on the brief), Lazer Aptheker Rosella & Yedid, P.C., Melville, NY, for Plaintiff–Appellant.

David Leichtman (Avani P. Bhatt, on the brief), Robins, Kaplan, Miller & Ciresi L.L.P., New York, NY, for Defendants–Appellees Speakeasy, Inc. and Best Buy Co., Inc.

David S. Elkins, Christopher D. Mays, Squire Sanders (US) LLP, Palo Alto, CA, for Defendants–Appellees Megapath, Inc., Covad Communications Company, Covad Communications Group, Inc., CCGI Holding Corporation, Platinum Equity, LLC, and Speakeasy Broadband Services, LLC.

Before: McLAUGHLIN, SACK, and LYNCH, Circuit Judges.

GERARD E. LYNCH, Circuit Judge:

This case requires us to consider whether a clause in a settlement agreement which bars a patent licensee from later challenging the patent's validity is void for public policy reasons under the Supreme Court's decision in Lear, Inc. v. Adkins, 395 U.S. 653, 89 S.Ct. 1902, 23 L.Ed.2d 610 (1969), where the parties entered into the agreement after an accusation of infringement by the patent owner but prior to any litigation. We hold that, in these circumstances, such a no-challenge clause is void under Lear. We therefore affirm the decision of the United States District Court for the Southern District of New York (Denise Cote, J.) dismissing the complaint in this action.

BACKGROUND

According to the First Amended Complaint (“Complaint”),¹ plaintiff-appellant Rates Technology Inc. (“RTI”) is the owner of two patents (the “Patents”) that cover inventions relating to the automatic routing of telephone calls based upon cost. RTI alleges that it is well known in the telecommunications industry “for its policy of settling patent infringement claims in accordance with a one-time payment tiered pricing structure based on the size of the accused infringer measured by its annual sales.” In or around April 2007, RTI became aware that the Patents were being infringed by defendant-appellee Speakeasy, Inc. (“Speakeasy”), a telecommunications company that provided broadband, voice, and data services to businesses. RTI notified Speakeasy that it believed Speakeasy was infringing the Patents and, in accordance with company policy, offered to release Speakeasy from liability in exchange for a one-time payment consistent with RTI's tiered pricing structure.

On April 30, 2007, RTI and Speakeasy entered into an agreement, which was styled as a “Covenant Not to Sue” (hereinafter, the “Agreement”). The Agreement began with a series of recitals, which declared that (1) RTI is the holder of the Patents; (2) RTI “has alleged that products, services, and technology made, used, sold, offered for sale and imported by Speakeasy ... infringe” the Patents; (3) “Speakeasy has denied any possible infringement”; and (4) “the parties desire to settle their potential differences on the terms and conditions set forth” in the Agreement. The Agreement then provided that RTI “release[d] and promise[d] not to sue Speakeasy” for any past or future infringement of the Patents. In exchange, Speakeasy agreed to make a one-time payment of $475,000 to RTI. The Agreement further provided that “Speakeasy acknowledges the validity, and enforceability of the Patents. Speakeasy does not admit that it has infringed the Patents.”

The Agreement also included a provision barring Speakeasy from ever challenging, or assisting others in challenging, the validity of the Patents:

Speakeasy hereby warrants and represents to RTI that on and after the execution date of this Covenant Speakeasy will not anywhere in the world challenge, or assist any other individual or entity to challenge, the validity of any of the claims of the Patents or their respective foreign counterpart patents or their respective foreign counterpart patent applications, except in defense to a Patent infringement lawsuit brought under the Patents against Speakeasy, its [products and services], and except as otherwise required by law.

This no-challenge clause was accompanied by the following liquidated damages provision:

In the event that the above representation is incorrect then Speakeasy agrees that it shall pay to RTI as liquidated damages the additional amount of Twelve Million U.S. ($12 Million) Dollars plus all legal expenses necessary to collect this added amount.The Agreement further defined “Speakeasy” to include both Speakeasy and defendant-appellee Best Buy Co., Inc., which had previously announced plans to acquire Speakeasy. Shortly after the Agreement between Speakeasy and RTI was signed, Best Buy's acquisition of Speakeasy closed.

Three years later, on June 10, 2010, Best Buy announced a plan to sell Speakeasy and merge it into entities associated with the various Covad defendants-appellees (“Covad Defendants”).² The particular details of the merger, and of the byzantine corporate relationships among the Covad Defendants, are not relevant to this appeal. What is relevant is that around the time this transaction was announced, RTI once again learned of an infringement of the Patents. On June 25, 2010, RTI notified one of the Covad Defendants, Covad Company, that RTI believed it was infringing the Patents. RTI offered to release Covad Company from any liability for infringement in exchange for a one-time payment in an amount to be determined by RTI's tiered pricing structure. On July 23, 2010, Covad Company responded by filing a declaratory judgment action against RTI in the United States District Court for the Northern District of California (the “California Action”) seeking a declaration that the Patents were invalid and unenforceable.

About a month later, on August 31, 2010, RTI initiated the present lawsuit. RTI's Complaint, as amended, alleges that during due diligence conducted in anticipation of the proposed merger, another of the Covad Defendants, Covad Group, learned of the Agreement between RTI and Speakeasy. It further alleges that Speakeasy and/or Best Buy “provided certain information relating to the RTI patents” to Covad Group, and that Covad Group or one of the other parties to the merger provided that same information to Covad Group's subsidiary, Covad Company. According to RTI, Covad Company used this information in formulating the allegations of the complaint in the California Action.

Accordingly, RTI's Complaint alleges that Speakeasy and Best Buy breached the Agreement's no-challenge clause—which included a prohibition on “assist[ing]” any challenge to the Patents' validity—by providing information relating to RTI's Patents that helped Covad Company challenge the validity of the Patents in the California Action. The Complaint also claims that all of the Covad Defendants are liable for the breach of contract by virtue of the merger. The Complaint seeks to hold all of the defendants jointly and severally liable, and to enforce the Agreement's $12 million liquidated damages clause.

A few months after the present lawsuit was filed, Covad Company voluntarily dismissed the California Action before RTI filed an answer. See Notice of Dismissal at 1, Covad Commc'ns Co. v. Rates Tech. Inc., No. 10–cv–3233 (N.D.Cal. Dec. 3, 2010), ECF No. 15.³ Thereafter, the defendants in this case moved to dismiss the Complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). On May 9, 2011, the district court granted the motions. The court relied on the Supreme Court's decision in Lear, which held that the doctrine of licensee estoppel—under which a licensee of intellectual property “effectively recognizes the validity of that property and is estopped from contesting its validity in future disputes,” Idaho Potato Comm'n v. M & M Produce Farm & Sales, 335 F.3d 130, 135 (2d Cir.2003)—is “unenforceable in the context of challenges to the validity of patents,” Rates Tech. Inc. v. Speakeasy, Inc., No. 10–cv–6482, 2011 WL 1758621, at *3 (S.D.N.Y. May 9, 2011) (citing Lear, 395 U.S. at 670–71, 89 S.Ct. 1902). The district court held that the no-challenge clause in this case, which was “entered into prior to the commencement of any litigation,” was contrary to the “public interest in litigating the validity of patents” identified in Lear and its progeny. Id.⁴ The court therefore held that the no-challenge clause was invalid, and that dismissal of the Complaint was required.

RTI appealed to the United States Court of Appeals for the Federal Circuit. Speakeasy moved to dismiss the appeal for lack of subject matter jurisdiction or to transfer the appeal to this Court. On September 8, 2011, the Federal Circuit determined that it lacked jurisdiction over this case because “the district court's jurisdiction did not arise in whole or in part under the laws governing [the Federal Circuit's] appellate jurisdiction” and because this “contract dispute does not require the resolution of a related question of patent law, such as inventorship, infringement, validity, or unenforceability.” Rates Tech., Inc. v. Speakeasy, Inc., 437 Fed.Appx. 940, 941 (Fed.Cir.2011) (citing Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 599 F.3d 1277, 1283–84 (Fed.Cir.2010)). Rather than dismiss the appeal, the Federal Circuit transferred it to this Court. Id.

DISCUSSION

RTI argues that the district court erred in applying the public policy rationale articulated in Lear favoring challenges to the validity of patents to invalidate the no-challenge clause in the Agreement. For support, RTI invokes a series of circuit court decisions which recognize that the strong public interest in settling ongoing litigation can justify the enforcement of...