<em> AlexSam, Inc., v. MasterCard Int’l Inc. </em>

No. 2022-2046, 2024 WL 825658 (Fed. Cir. Feb. 28, 2024)

AlexSam filed a breach of contract claim against MasterCard. The District Court held that the claim was prohibited under the parties’ covenant not to sue. The Federal Circuit reversed and remanded based on non-ambiguity in license agreements.

AlexSam is the owner of two patents, both named the “Multifunction Card System.”  The multifunction card system gives one card several abilities, including functionality as a prepaid phone card, a debit card, a loyalty card, and a medical information card. Over a decade ago, AlexSam and MasterCard entered into a license agreement that gave Mastercard the authority to process licensed transactions. Under this type of contract, an owner grants another person or entity the right to use or sell their assets. In return for AlexSam’s permission, MasterCard would pay AlexSam ongoing royalties. The agreement included a covenant not to sue, which states: “AlexSam hereby agrees and covenants to not at any time initiate, assert, or bring any claim (in any court, administrative agency, or other tribunal, anywhere in the world) against MasterCard… relating to Licensed Transactions arising or occurring before or during the term of this Agreement.” The agreement also includes a “Term and Termination” section. The “Term” section states that the agreement will remain in effect for the life of the patents unless either party breaches a material provision of the agreement, the other party gives written notice of the breach, and the alleged breaching party fails to cure the breach within 30 days of its receipt of the notice. In this instance, the non-breaching party has the right to terminate the Agreement.

Ten years after this agreement was formed, AlexSam filed suit against MasterCard for breach of contract. Per AlexSam’s allegations, MasterCard was inaccurately disclosing the number of licensed transactions. In their agreement, MasterCard was to pay AlexSam a fee per transaction. Therefore, alleged underreporting by MasterCard would cause AlexSam to be underpaid. According to AlexSam, MasterCard’s action constitutes a substantial breach to material provisions of the license agreement and trigger their right to terminate. MasterCard filed a motion for summary judgment, claiming that the agreement’s covenant not to sue was broad and barred AlexSam’s claim for unpaid royalties. The Eastern District Court of New York agreed with MasterCard, and AlexSam appealed.

The Federal Circuit was tasked with deciding whether the covenant to sue was ambiguous. In their analysis, they found that the language of the covenant was indeed extremely broad, and it covered AlexSam’s breach of contract claim. The covenant prohibited AlexSam from bringing any claim in any court relating to licensed transactions arising or occurring during the agreement. AlexSam argued that the covenant only prohibited patent infringement suits and they worried that interpreting the covenant more broadly would prevent them from suing MasterCard should MasterCard choose not to pay them properly. The Court did not agree.

In regard to AlexSam's argument of the covenant only covering patent infringement, the Court quickly repudiated it and explained that the covenant didn't even mention patent infringement. The Court, instead, believed the agreement had provided AlexSam the ability to terminate the agreement. Terminating the agreement leads to termination of the covenant and gives AlexSam standing to sue for breach of contract.

In the Court's analysis, they explained that the "Terms and Termination" section of the agreement provided that MasterCard's requirement to pay royalties during the life of the agreement doesn't terminate if and when the agreement terminates. Per the agreement, certain parts survive termination, including the section on the duty to pay royalties. However, the covenant not to sue isn't listed as a provision that survives. The Court explains that, while the requirement of terminating the license being a prerequisite to bringing suit may be an inconvenience, AlexSam agreed to it. AlexSam also argued that under New York law, a covenant not to sue doesn't prohibit suit. Instead, if breached, AlexSam believed it may give rise to a damages remedy. However, the Court rebutted this argument, stating that their interpretation of the case law is still consistent with the Court's interpretation of the provisions in the license agreement. AlexSam's argument was that, under New York law, a covenant not to sue must be: (1) strictly construed against the party asserting it and (2) worded clearly and unequivocally. The Court also rejected this argument, instead holding that the words of the covenant were clear. Lastly, AlexSam argued that the covenant terminated when the patents expired over five years ago. Therefore, according to AlexSam, the covenant cannot be used to bar the present suit. MasterCard's defense was that the covenant's inclusion of the words "at any time” bars suits after the license agreement’s termination. The Court continued to stand on its' prior conclusions and was adamant that the covenant doesn't end until the license agreement ends. The Court understood the term "at any time" to mean at any time during the term of the license agreement, not for an actual infinite amount of time.

Aside from AlexSam's arguments, MasterCard argued that even if the covenant terminates after the patents expire, AlexSam already asserted to the Patent and Trademark Office (“PTO”) that the covenant not to sue barred a patent infringement suit even after expiration of patents. MasterCard believed AlexSam’s previous agreement at the PTO prohibited AlexSam from now arguing the reverse. However, the Court held that, since the parties never actually discussed the impact of the patents expiring in relation to the covenant not to sue or the “at any time” phrase before the PTO, AlexSam’s current position was not directly averse to its' prior position. The Court reversed the district court's summary judgment for MasterCard since it relied on whether the covenant prohibited AlexSam's claim for a breach of contract. The Court acknowledged that the covenant not to sue terminated when the license agreement terminated. Thus, the case was remanded and AlexSam can now bring their case against MasterCard for their failure to pay royalties in district court.