Illustrating the importance of carefully drafting and reviewing language in a covenant not to sue, the US Court of Appeals for the Federal Circuit found that the plain language of a covenant permitted a licensor to sue a licensee for breach of contract only after termination of the contract. AlexSam, Inc. v. MasterCard Int’l., Inc., Case No. 22-2046 (Fed. Cir. Feb. 28, 2024) (Lourie, Chen, Stoll, JJ.) (non-precedential).

In 2005, AlexSam and MasterCard entered into a patent licensing agreement that guaranteed AlexSam ongoing royalties under two of its patents that involved pre-paid cards used with point-of-sale devices. The agreement included a covenant not to sue, in which AlexSam agreed to “not at any time initiate, assert, or bring any claim . . . against MasterCard . . . relating to Licensed Transactions arising or occurring before or during the term of this Agreement.” The agreement also included a Term and Termination provision, which recited that the agreement would remain in full force for the life of the licensed patents unless a party breached, at which time, if the party failed to cure, the non-breaching party would have the right to terminate the agreement. The patents expired on July 10, 2017.

In May 2015, two years before the licensed patents expired, AlexSam sued MasterCard for breach of contract in the district court, claiming that MasterCard had not properly paid the royalties per transaction under the agreement. Separately, in March 2017, MasterCard filed a petition for Covered Business Method (CBM) Review, asking the Patent Trial & Appeal Board to review the patentability of the licensed patents. AlexSam argued that MasterCard lacked standing under 37 C.F.R. § 42.302(a), which required that MasterCard first be sued or charged with infringement of the patent on which it sought review. The Board determined that MasterCard lacked standing to bring the review. The Board also noted that it “need not, and do[es] not, address the question of whether [AlexSam’s] breach of contract claim in the New York Action itself violates the covenant not to sue.”

MasterCard moved for and was granted summary judgment in the district court on the grounds that AlexSam’s arguments before the Board regarding the covenant not to sue judicially estopped it from asserting its breach of contract claims. AlexSam filed its first appeal, and the Federal Circuit reversed the district court’s ruling, finding that it had abused its discretion in crediting AlexSam with a position it never actually took before the Board. The Court remanded the case for the district court to determine whether the covenant not to sue prohibited a claim for royalties. MasterCard again moved for summary judgment. The district court granted the motion, finding that the covenant not to sue barred AlexSam’s claim for unpaid royalties. AlexSam again appealed.

In this second appeal, AlexSam argued that the covenant not to sue in the 2005 License Agreement did not bar suit for breach of nonpayment of royalties since AlexSam would then have no remedy against a failure by MasterCard to pay the royalties due under the agreement, rendering it illusory. The Federal Circuit disagreed, finding that the agreement provided a specific method of recovering those royalty payments. Recognizing that the method was “in some ways harsh,” the Court explained that AlexSam must terminate the agreement and then file suit for breach of contract.

AlexSam also argued that the covenant terminated when the patents expired in 2017 and hence could not bar the present suit (originally filed in 2015) for breach of contract. MasterCard responded that the covenant itself included the words “at any time,” thus barring AlexSam from filing suit in perpetuity. The Court agreed with AlexSam, pointing out that MasterCard’s interpretation would render the agreement illusory, and that the words “at any time” only applied during the life of the agreement, not post-termination. The Court concluded that the covenant did not survive termination of the license and AlexSam was entitled to file for breach of contract.

The Federal Circuit found that remand was required in order for the district court to address key issues, including whether AlexSam lacked standing at the time it filed suit for breach of contract in 2015, or alternatively whether the suit should be dismissed for failure to state a claim, because at the time the patents had not yet expired and AlexSam had not terminated the agreement – and so the covenant not to sue was at that time alive.

Practice Note: It is important to read carefully and understand the meaning of a covenant-not-to-sue clause in a patent license agreement. In this case, if AlexSam wanted to sue MasterCard for underpaying the royalties it was owed, it had to first terminate the agreement, an arrangement that, as the Court noted, “has some drawbacks.”