Another cautionary tale, - Stretchline v H & M

Jane Lambert

Yesterday I told the tale of the claimant who sought an interim injunction and ended uo with a court order to pay £27 million damages to the defendant (see "Be careful for what you wish for when seeking an interim injunction - it may cost you plenty!" 23 May 2015). Today I have another cautionary tale. This time it is about the defendant which barred itself from contesting the validity of the claimant's patent by the terms of a settlement agreement.

The issue arose in Stretchline v H&M (UK) [2014] EWHC 3605 (Ch) (14 Oct 2014). In order to settle patent infringement proceedings in England and the USA the parties had entered a settlement agreement which provided

"...... the Parties each agree, on behalf of themselves, their successors or assigns, not to commence or pursue, or voluntarily assist the pursuit of, any further proceedings relating to or arising from the claims against the other Parties, or their parents, subsidiaries, assigns, transferees, principles, agents, officers or directors, in this jurisdiction or elsewhere (otherwise than for the purpose of carrying into effect the terms of this Settlement Agreement)."

The agreement was scheduled to an order staying the proceedings in England in Tomlin form  "except for the purpose of carrying such terms into effect" for which purpose each party was given liberty to apply. The claimant suspected that the defendant was not complying with this agreement and brought proceedings against it for patent infringement and breach of contract. The defendant pleaded that the patent was invalid. The claimant asked the court to determine whether the settlement agreement prevented the defendant from pleading invalidity. The application came on before Mr Justice Sales (as he then was) who decided at paragraph [43] that it was.

The defendant appealed to the Court of Appeal  on the following grounds:

1. The judge was wrong to conclude that the settlement agreement precluded the defendant from raising the issue of the patent's validity either by way of counterclaim or defence; 
2. Alternatively, if the agreement did preclude the defendant from raising the issue by way of counterclaim, it must nevertheless be entitled to raise it by way of defence, and to do so by way of defence both to the claim for breach of the agreement and to the claim for infringement;
3. The claimant  had materially altered its position as to the scope of the patent, and in these proceedings was now contending that the monopoly it confers is much broader than was or could have been foreseen at the date of the settlement agreement; and
4. The parties cannot be taken to have intended by the settlement agreement that the claimant could thereafter advance whatever fancy interpretation of the patent it chose without imperilling the patent's validity, and it would be manifestly unjust were the agreement to be interpreted in such a way as to allow that to happen.

The appeal was heard by Lords Justices Aikens, Kitchin and Briggs in Stretchline Intellectual Properties Ltd v H&M Hennes & Mauritz UK Ltd [2015] EWCA Civ 516 (22 May 2015).

Delivering the judgment of the Court Lord Justice Kitchin broke the first issue down into two. First, he considered whether the defendant was precluded by the settlement agreement from raising invalidity as a defence to enforcement of the settlement terms.  His starting point was that

"a settlement agreement such as this must be construed in just the same way as any other contract. The aim is to ascertain what a reasonable person would have understood the parties to mean by using the language of the agreement against the background which would reasonably have been available to them at the time."

He considered the following factors to be relevant:

"27, First, the recitals say in terms that the parties intended by the settlement agreement to bring to an end the whole dispute between them, and to do so on a worldwide basis. Further, in referring to the denial by H&M of liability and the claims the parties had or could have asserted, the recitals are plainly cast in terms broad enough to encompass the challenge by H&M to the validity of the Patent and its foreign equivalents.
28. Second, clause 3.1 provides a contractual framework for the regulation of H&M's activities going forward. H&M agreed that from the date of the agreement (and subject to the H&M Low Volume Fabric and the Sell-Through Period) it would not deal in any way in any products falling within the scope of the Patent or its foreign equivalents in any territory for which such a patent had been granted and for so long as the relevant patent remained in force in that territory. It also agreed to pay to Stretchline the Settlement Sum of £235,000 in full and final settlement of all claims (present and future) "in relation to" the subject matter of the earlier proceedings.
29. Third, clause 4.1 contains a general release and it is cast in the broadest of terms. The parties agreed to the terms of the settlement agreement in full and final settlement of all possible claims relating to the subject matter of the proceedings anywhere in the world. In my view this is plainly wide enough to encompass the allegation of invalidity of the Patent made by H&M both in its defence and in its counterclaim.
30. Fourth, the agreement not to sue contained in clause 5.1 is also drawn in very general language. So far as material, H&M agreed that it would not begin or pursue any proceedings "relating to or arising from" the Claims, as defined. Mr Burkill contends that the wording of this clause together with that of the release in clause 4.1 is apt to describe the former infringement proceedings but that it does not extend to revocation proceedings, and still less the deployment of invalidity as a defence. I disagree. I have no doubt that this phrase is broad enough to encompass a defence that the Patent is invalid and a counterclaim for its revocation.
31. Fifth, the view to which I have come as to the proper interpretation of clauses 4 and 5 is reinforced by clause 6, by which the parties agreed to a stay of the proceedings save for the purpose of carrying the terms of the settlement agreement into effect. Here again the parties have made clear their intention to dispose of the proceedings (including the defence and counterclaim and all of the issues they raise) on the terms of the agreement.
32. In my judgment the inescapable conclusion from the foregoing is that the reasonable person would have understood that the parties intended by the settlement agreement to compromise all issues in dispute between them, including the issue of the validity of the Patent, and to substitute for their claims of, respectively, infringement of patent and invalidity or revocation, a contractual arrangement which would from that time regulate the dealings of H&M in products falling within the scope of the Patent and its equivalents in other jurisdictions.
33. I believe the parties recognised and agreed that, as from the date of the settlement agreement and for so long as the Patent remained in force, any dealings by H&M in products falling within the scope of the Patent would amount to an actionable breach of the agreement. Of course the Patent might expire through effluxion of time or because of a decision by Stretchline not to renew it. But I am entirely satisfied that an essential component of the agreement was the compromise by H&M of its right to challenge the validity of the Patent either by way of counterclaim or defence. It agreed not to exercise that right either by way of answer to a claim for breach of the agreement or in any other way."

By the same token Lord Justice Kitchin decided at paragraph [39] was precluded by the agreement from raising a fresh action of patent infringement.  That effectively removed the need to consider the defendant's second and third argument.  As for the fourth, attractively though it had been presented, the Court was unable to accept it because the agreement barred all arguments by both parties that had or could have been raised in the previous proceedings.

There was an argument that I would have liked to have run which does not seem to have occurred to any of the parties, the Court of Appeal or the judge below. A patent confers a monopoly which affects the public as well as the parties to the action. Is it in the public interest to enforce a contract term that precludes a party from challenging a monopoly to which the patentee may well not be entitled? It is very much the argument that was used in answer to the assertion that a licensee is estopped from challenging the validity of his licensor's patent by the rule in Crossley v Dixon (1863) 10 HLC 283.

The other point to note is that this settlement agreement was entered after a mediation. This case underlines the importance of referring a patent case to a mediator who is also a specialist in patent litigation. For more on this topic see my article IP  Mediation 22 May 2015, 4-5 IP Tech.

Should anyone want to discuss this article, compromise negotiations, settlement agreements or patents in general he or she should call me on 020 7404 5252 during normal office hours or send me a message through my contact form.