Clauses restricting future challenge to IP rights not unenforceable as penalties

Following a dispute over certain matters including the ownership of IP rights, C and D entered into a settlement agreement (SA) under which D agreed not to claim any entitlement in, or challenge, certain assigned intellectual property (IP) rights. The SA provided that, in the event of breach, D would repay sums paid to him by C, and future payments due to him would be forfeit. D subsequently breached the SA by seeking to register an interest in patents and patent applications comprising the IP rights.

The judge in the Patents Court applied the following two tests to the case:

1. What legitimate business interest of C was served and protected by the SA? A challenge to C’s IP rights leading to a dispute had the potential to cause C to suffer significant damage that could run into hundreds of thousands of pounds. D's conduct prior to entering into the agreement gave rise to a reasonable expectation that, if he challenged the IP rights, his behaviour would maximise the time, costs and management effort required to enforce C's rights under the SA. Further, D had entered into the SA with the benefit of legal advice. The SA was designed to protect C's legitimate business interests by deterring breaches that could have highly damaging consequences for C's business.

2. Was the detriment imposed on D as a consequence of his breach unconscionable, exorbitant, extravagant or out of all proportion to that interest? Although harsh and damaging, the detriment to D was not out of proportion with the potential consequences to C, so as to make the clauses in the SA unenforceable as penalties.

Permavent Ltd and another v Makin [2021] EWHC 467 (Ch) (2 March 2021)