The Patents Court has held that clauses in a settlement agreement which imposed severe consequences on the defendant in the event of a challenge to the claimants’ intellectual property rights were not unenforceable as penalty clauses, despite the consequences on the defendant being described as “extremely harsh”.
By way of background, the claimants, Permavent and Greenhill, supply products to the construction industry. The defendant, Stephen Makin, was a director of these companies for over 14 years, during which time he invented and developed various roofing products under the name “Easy Roof System”. Mr Makin applied for and obtained a number of patents for the Easy Roof System which were registered in his own name.
The relationship between Mr Makin and his co-directors deteriorated significantly over the years, culminating in proceedings being issued against Mr Makin in 2017. The proceedings were ultimately settled, with the parties entering into a Settlement Agreement in September 2017. The Settlement Agreement included:
- Assignment of the IP rights from Mr Makin to Permavent;
- Clause 2.3 – Provision for ongoing payments to Mr Makin;
- Clause 2.10 - Promises by Mr Makin that he would not claim an entitlement to or challenge any of the assigned IP rights; and
- Clause 2.11 - Agreement that if Mr Makin challenged the IP rights in any way, the payments to him would immediately stop and Mr Makin would be liable to pay back any payments already made to him plus the amount of £616,667.
In December 2018, despite having agreed not to claim entitlement to the IP rights, Mr Makin did just that and sought to register an equitable interest in five of the patents and patent applications. On becoming aware of this, Permavent and Greenhill ceased making payments to Mr Makin and issued proceedings against Mr Makin. In May 2020, the court ruled that Mr Makin had breached clause 2.10 and required him to cancel his registration of an equitable interest in the IP rights. The only issue then remaining was whether clause 2.11 constituted an unenforceable penalty.
The court summarised the law on penalties, as set out in the Supreme Court decision in Cavendish Square Holding BV v Talal El Makdessi  UKSC 67, from which two questions arose:
- What legitimate business interest of the claimants is served and protected by the clauses in question?
- Is the detriment imposed on the defendant as a consequence of his breach unconscionable, exorbitant, extravagant or out of all proportion to that interest?
As to the first question, it was common ground that the clauses imposed a detriment on Mr Makin and they did so to protect a legitimate business interest of the claimants. The question was therefore whether the detriment imposed was unconscionable in the sense of being extravagant or out of all proportion to that legitimate business interest.
The judge accepted evidence from the claimants that the IP rights were of “vital importance” to Permavent and gave it its “reason for being”. In light of this, there was potential for very significant harm if Mr Makin were to challenge the IP rights. A dispute over title to the IP rights could cause harm to Permavent in numerous ways, including its ability to source, manufacture or sell products, lost sales and damage to relationships with suppliers as well as lost opportunities arising from a diversion of management time and effort.
There was also reference to Mr Makin’s conduct before entering into the Settlement Agreement, including numerous emails using very choice words (a lot of which are not repeatable here!), in which Mr Makin made clear that he intended to challenge the IP rights and to do so in such a way as to make it as difficult as possible for the claimants to deal with. The judge said that this gave rise to a reasonable expectation that, in the event of a challenge to the IP rights, Mr Makin would behave in such a way as to maximise the time, costs and diversion of management effort, making the consequences of a breach more severe for the claimants.
Turning to the detriment to Mr Makin, the judge acknowledged that the detriment imposed by the Settlement Agreement was “extremely harsh” , since Mr Makin would lose any entitlement to further payments and would be required to pay back over £600,000. The question, however, was not whether the detriment was harsh, or even extremely harsh, but whether it was extravagant, exorbitant or unconscionable, as being out of all proportion to the protected interest. The judge concluded that it was not, taking account of the damage that could arise to the claimants from a challenge to the IP rights. It was also relevant that Mr Makin had entered into the Settlement Agreement with the benefit of legal advice. Accordingly, although the detriment to Mr Makin was harsh, it was not out of proportion to the potential consequences to the claimants, so the clauses were not unenforceable as penalties.
All in all, Mr Makin's challenge to the IP rights did not end well, and this case serves as a useful reminder to anyone entering into a settlement agreement to make sure they fully understand what they are committing to. It is particularly important that parties understand the consequences of breaching important terms, since even terms that impose very harsh consequences can be enforceable, provided the consequence is in proportion to the legitimate business interest being protected.
The question...is not whether the Detriment is harsh or even extremely harsh, but whether it is extravagant, exorbitant or unconscionable, as being out of all proportion to the Protected Interest.