No penalty clause in IP Settlement Agreement: royalty clawback & 6 figure lump sum payment permitted
A judge in the Patents Court has ruled that terms concerning the ownership and validity of IP rights in a settlement agreement were not “unenforceable penalty clauses”, in a case concerning patents for roofing products: Permavent Ltd & Anor v Makin  EWHC 467 (Ch).
This case is very important in the context of IP settlement discussions. Creative solutions are often the key to reaching a longer lasting solution. However, if the contracting parties cannot have legal certainty that their solutions will be viable when given the laser eyed attention of the court, issues will inevitably arise in the future.
Following a protracted dispute involving IP rights and other issues, the parties signed a Settlement Agreement in September 2017. This included provisions assigning relevant IP rights to the claimant (Permavent) and the payment of royalties and licence fees to the defendant (Mr Makin).
Mr Makin promised not to claim entitlement to any of the assigned IP rights or to challenge the ownership or validity (and other things that are not relevant here). If Mr Makin breached these promises, under Clause 2.11 of the Agreement, the royalties would be reduced to 0%, any payments made or due would be clawed back and Mr Makin would also be liable for payment of £616,667.
In December 2018, patent attorneys instructed by Mr Makin filed a Patents Form 21 at the UK IPO seeking registration of an equitable interest in five patents and patent applications. Permavent cited the breach of contract and promptly ceased the payments due under the Agreement.
In May 2020, HHJ Hacon granted the claimants' application for summary judgment on the issue of breach of contract. However, the question of whether Clause 2.11 of the Agreement was an unenforceable penalty remained unanswered... until now.
The judge, Zacaroli J, focussed on the Supreme Court’s decision in Cavendish Square Holding. He summarised the court as being required to answer the question of whether the detriment imposed by the relevant clauses of the Agreement “is unconscionable in the sense of being extravagant or out of all proportion to the claimant’s legitimate business interest” . The judge note that this question is determined by constructing the contract at the date it was entered into, and the burden lies on the party who is sued to demonstrate that it is a penalty.
In this case, the judge said the detriment imposed was “undoubtedly extremely harsh” but not “extravagant, exorbitant or unconscionable”. He added that “a challenge to the IP Rights would directly affect a substantial portion of the business of the group, given the importance of the Easy Roof System products to the group's business”. The clauses in the Agreement were designed to protect against damage to Permavent's business in a broad sense and the detriment imposed was not so out of proportion with the potential consequences for Permavent to make them unenforceable.
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