'No challenge' provision in licence deemed unenforceable

In Idaho Potato Commission v M&M Produce Farm & Sales, the US Court of Appeals for the Second Circuit has ruled that a licensee of a certification mark is not estopped from challenging the validity of the mark, even if the licensing agreement contains a 'no challenge' provision.

The Idaho Potato Commission (IPC) was established to promote the sale of Idaho russet potatoes. The IPC registered a number of certification marks with the US Patent and Trademark Office, two of which M&M Produce Farm & Sales licensed during 1990 to 1995. In February 1995 M&M voluntarily gave up the licence but still continued packaging Idaho potatoes in bags featuring the IPC marks. In 1997 the IPC sued M&M for:

  • trademark infringement in violation of Section 32 of the Lanham Act;

  • false designation of origin and dilution in violation of Section 43 of the Lanham Act; and

  • unlawful and unfair competition in violation of various New York and Idaho statutes and common law.

M&M counterclaimed for, among other things, cancellation of the IPC marks under both federal and state law.

A US district court held that M&M was estopped from challenging the IPC marks based on a provision in its licensing agreement in which M&M (i) acknowledged that the marks were valid registered marks, and (ii) agreed that it would not during the term of the agreement, or at any time thereafter, attack the title or any rights of the IPC in the relevant marks. M&M appealed.

M&M contended that the 'no challenge' provision in its licensing agreement was unenforceable because it violated public policy. M&M relied primarily on the Supreme Court's opinion in Lear Inc v Adkins, which held that the doctrine of licensee estoppel under state contract law was outweighed by the public policy embodied in the patent laws that discourage restrictions on the use of ideas that are part of the public domain. M&M argued that although the Lear Case applied to patent licences, it should be extended to certification mark licences because the public interest was similar in both cases.

The Second Circuit stated that the Supreme Court's decision in Lear spelt out that courts should weigh the federal policy embodied in intellectual property laws against principles underlying the common law of contracts when deciding whether explicit contractual provisions should be rendered unenforceable. Applying the Lear balancing test, the court concluded that the 'no challenge' provision in the licence was contrary to public interest for a number of reasons. First, the provision placed restrictions that, similar to the situation addressed in Lear, were inconsistent with the public interest of free use of ideas that are a part of the public domain. Second, parties that have entered into a licensee relationship with the IPC may often be the only individuals with enough economic incentive to challenge the IPC's licensing scheme and thus the only individuals with enough incentive to force the IPC to conform to the federal trademark laws.

Also, the court concluded that this case lacked a strong countervailing public interest other than the general interest in enforcing written contracts, which was insufficient to persuade the court to enforce the 'no challenge' provision.

Accordingly, the Second Circuit held that the district court erred in finding M&M contractually estopped from challenging the IPC marks and remanded to the district court for consideration of M&M's counterclaims.

Birch Stewart Kolasch & Birch LLP, Falls Church

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