Unknowns of ‘no-challenge clause’ in IP licence contracts

By Guan Bing and Wang Ziqian, East & Concord Partners

Under the no-challenge clause in an intellectual property licence contract, the licensee shall not in theory challenge IP right validity of the licence subject matter. For example, if such a clause is included in a patent license contract, the licensee may not apply to invalidate patent during the valid contract period.

In this article, the authors examine how validity of the no-challenge clause is, however, still debated – and remains unresolved.

International precedence

In Lear v Adkins, the US Supreme Court ruled that the no-challenge clause violated US public interest and federal patent policy, denying the legal effect of the clause. In Rates Tech v Speakeasy, the US Court of Appeals for the Second Circuit also held that the no-challenge clause was invalid under public policy. It can be seen that validity of this clause may be challenged in US courts.

Guan Bing, Concord
Guan Bing
East & Concord Partners

In accordance with relevant regulations promulgated by the European Commission, the EU seems to hold such clause as “invalid with reasonable exception”. Overall, the EU has a negative attitude towards validity of the no-challenge clause – although it can be recognised on condition that it can promote technological and economic development, and enable consumers to share the benefits.

However, according to the Guideline to the Anti-monopoly Law on the Utilisation of Intellectual Property Rights, issued by the Fair Trade Commission of Japan, the no-challenge clause is considered less likely to directly exclude and restrict competition – and unlikely to maintain and strengthen market dominance of the licensor or hinder fair competition. Therefore, it is difficult to consider it an unfair trading method regulated by the Japanese anti-monopoly law. In most cases, Japan recognises the validity of the no-challenge clause.

Chinese attitudes

Article 850 of China’s Civil Code provides that a technology contract that illegally monopolises technologies or infringes upon others’ technological work product is invalid.

Wang Ziqian, Concord
Wang Ziqian
East & Concord Partners

According to article 10(6) of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Laws in the Trial of Technical Contract Disputes, circumstances where “the technology receiver raises objection to the validity of the technical intellectual property right of the subject matter of the contract or attaches conditions to the objection” fall into the description of “illegally monopolises technologies”, as specified in article 850 of the Civil Code.

There are two different views on these provisions in practice. The first accords with article 850 of the Civil Code, with illegal monopoly or infringement rendering the contract as a whole invalid.

The second view believes that if only the no-challenge clause in the contract is invalid – and the invalid item does not affect validity of other parts – it will not invalidate the whole contract.

Historically, there is no court precedent directly discussing or judging the validity of the contract (clause) regarding the situation specified in article 10(6) of the Supreme People’s Court Interpretation. Therefore, the authors are still uncertain of the attitude of Chinese judicial authorities.

However, the difference between the above-mentioned two views lies only in the scope of invalidity caused by the clause; namely, only the clause is invalid or the whole contract is invalid. Therefore, under China’s existing legal framework, it is clear that the no-challenge clause itself is invalid.

What to do?

Parties to IP licence contracts, especially technology licensors, often wish to restrict the licensees from challenging the validity of their rights through contract provisions.

When handling technology licence contracts, the authors are often asked by technology licensors about the feasibility of the following strategies. As such, we advise licensors to consider the following approaches:

Select applicable law recognising validity. This strategy is applicable only when the intellectual property licence contract involves foreign-related factors. For example, when the licensor is a Japanese enterprise, it is stipulated in the intellectual property licence contract that Japanese law shall be the applicable law. It should be noted that if the technology license contract is not foreign-related, any agreement of the parties applying foreign laws to resolve disputes may be considered invalid.

Replace no-challenge clause with other expressions. Take, for example, that the licensor is granted the right to terminate the contract – that is, it is contractually stipulated that “if the licensee challenges the validity of the licensed technology, the licensor may terminate the contract”. At present, there is no judicial case in China setting precedence regarding disputes over the no-challenge clause.

Thus, it is impossible to determine whether the Chinese courts recognise validity of alternative expressions. In such cases, we can only speculate according to the legislative purpose.

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China’s law forbids the no-challenge clause on the ground that it will have adverse effect on market competition. Although the expression of granting parties “the right to terminate the contract” is not a typical no-challenge clause in form, its purpose is still to restrict the objection to the validity of technology – which inevitably leads to suspicion of illegally monopolising the technology and hindering technological progress. Therefore, the authors cannot completely rule out the possibility that it would be deemed invalid.

Similarly, an expression like “no third party shall be instigated or instructed to challenge the validity of the technology that is the subject matter of the contract” may also be deemed invalid.

Since the above-mentioned alternative expressions carry certain legal risks, in the name of prudence, relevant expressions should be avoided as far as possible in any contract with Chinese law as the applicable law.

Guan Bing is a partner and Wang Ziqian is a paralegal at East & Concord Partners


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