Indefinite Covenants Within License Agreement May Not Be Enforceable

Womble Bond Dickinson

Womble Bond Dickinson

Where a software license agreement precluded the licensee from developing similar software for an undefined period of time, the license agreement inhibited “free trade” and was therefore unreasonable and unenforceable. Triage Logic Management & Consulting, LLC v. Innovative Triage Services, LLC, 2020 NCBC 57 (J. Robinson). As a result, the Business Court held the licensor could not maintain a claim for breach of this provision of the license agreement.

Plaintiff Triage Logic Management and Consulting, LLC (“TLMC”) developed a software platform (“System”) for call-in triage nurses to use to address a patient’s specific medical questions. The patient-specific characteristic of the System distinguished TLMC’s software from similar products. In 2011, TLMC agreed to license the System to Defendant Innovative Triage Services, LLC (“Innovative”). Within the License Agreement, TLMC included various “Protective Covenants,” including a provision whereby Innovative agreed not to develop software similar to the System. Although the License Agreement was apparently of limited duration, the Protective Covenants explicitly “survive[d] the end of the license term” with no specified end date. Prior to the Spring of 2019, Innovative allegedly contracted with another company, PQC Tech, to create software similar to the System, allegedly providing PQC access to TLMC’s software packages in the process. PQC then created a software platform that competed with and had many similar features of TMLC’s System. In the Spring of 2019, TLMC terminated the License Agreement with Innovative and filed suit, alleging Innovative breached the License Agreement by, inter alia, developing a software similar to the System. Innovative sought to dismiss this claim, contending that the Protective Covenant’s indefinite ban on developing a competing product was unreasonable and unenforceable.

The Business Court agreed. Although it did not adopt Innovative’s effort to analogize this particular Protective Covenant with a non-compete in the employment context, the Business Court nonetheless followed Fourth Circuit precedent and found that the Protective Covenant’s total lack of any expiration date inhibited “free trade” in North Carolina and was therefore unreasonable and unenforceable as a matter of law. As a result, no claim for breach of that particular provision could be maintained.

Based upon this decision, a business may want to ensure that any restrictive covenant in its license agreements has a sunset provision to ensure its enforceability.

Additional legal points from this decision:

  • A claim for breach of a software license agreement may likely be pre-empted by federal copyright laws unless the claim requires an “extra element” other than the acts of reproduction, performance, distribution or display. (Opinion, ¶¶28-30).
  • In order to maintain a common law unfair competition claim, a complaint must allege the defendant to be a competitor whose actions deceived the public. (Id., ¶56-57).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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