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Legal Update

US Federal Circuit Decision Affects Law of Patent Exhaustion, Licensing and Covenants Not to Sue

13 April 2009
Mayer Brown Legal Update
On April 8, 2009, the US Court of Appeals for the Federal Circuit decided TransCore, LP v. Electronic Transaction Consultants Corp., 2008-1430, which made two significant changes to the law of patent exhaustion.  First, the court held that a covenant not to sue is no different than a non-exclusive  license for purposes of patent exhaustion.  Second, the court held that a covenant not to sue conveys an implied license by estoppel to a  later-issued patent that is necessary to practice the covenanted or licensed patent, even if the covenant expressly states that it does not extend to other or later-issued patents.

TransCore is the assignee of several patents related to automated toll collection systems. In 2000, TransCore sued a competitor, Mark IV Industries, for infringement of several TransCore patents. That action was settled and TransCore covenanted not to sue Mark IV on several listed patents, including foreign counterparts thereto.  The agreement specifically stated, however, that:  “This Covenant Not to Sue shall not apply to any other patents issued as of the effective date of this Agreement or to be issued in the future.” 

Several years later, TransCore sued Electronic Transaction Consultants (ETC) for patent infringement based on ETC’s use of a system sold by Mark IV.  The lawsuit alleged infringement of three patents subject to the covenant not to sue with Mark IV, plus a related patent that was pending but not issued at the time of the covenant. The US District Court for the Northern District of Texas granted summary judgment against TransCore.

On appeal, the Federal Circuit affirmed summary judgment on the grounds of patent exhaustion (with respect to the three patents listed in the covenant not to sue) and legal estoppel (with respect to the newly issued patent).  The Federal Circuit agreed with the district court that Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), compelled the conclusion that “an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion.” 

The Federal Circuit held that Quanta implicitly overruled the panel decision in Jacobs v. Nintendo of America, Inc., 370 F.3d 1097 (Fed. Cir. 2004), which seemed to hold that a covenant not to sue a manufacturer did not exhaust a patent whereas a non-exclusive license to the same patent did.  Put differently, Jacobs seemed to stand for the proposition that while a patent proprietor who granted a manufacturer a covenant not to sue nevertheless could sue the manufacturer's customers for infringement, a patent proprietor who granted the manufacturer a non-exclusive license could not sue the manufacturer's customers for the same infringement.  Jacobs at 1011.  The Federal Circuit in TransCore cited a long list of cases for the proposition that a nonexclusive patent license and a covenant not to sue have identical effect, relying on Quanta for the proposition that both exhausted a patent.

Next, the Federal Circuit agreed with the district court that the covenant not to sue created an implied license by estoppel to a patent that had not issued at the time of the covenant, a license to which was expressly disclaimed by the covenant’s language.  Here, the Federal Circuit extended earlier law, which held that a patent licensor was estopped from asserting a patent issued before the license where that patent was necessary to practice a patent actually licensed.  The Federal Circuit extended that doctrine to any patent, even one that was issued after and was expressly excluded from a covenant not to sue (or presumably, a non-exclusive license), if it is necessary to practice a licensed patent.  An implied license by estoppel to the dominant (or broader) patent is necessary, in the Federal Circuit’s view, to make the license to the subservient (or narrower) patent not illusory.

Two key lessons are taught by TransCore.  First, a covenant not to sue and a non-exclusive license have the identical meaning and identical scope.  Second, an attempt to non-exclusively license a patent while withholding a license to another patent that is necessary to practice the first, whether issued at the time of license or not, may be unsuccessful.  Instead, such a practice  will result in a royalty free license to the broader patent (although any royalty will still be due on the expressly licensed patent). 

A patent proprietor that wishes to exclude a patent from the scope of its non-exclusive license or covenant not to sue should consider making that intent express, by reference to the patent number or application number.  The patent proprietor should also consider explaining in the agreement that while the excluded patent may bar certain uses covered by the licensed patent, it does not exclude them all.  The patent proprietor should also consider listing which uses will not be precluded by the excluded patent, and getting the licensee’s acknowledgement that these are the only uses for which it obtained the license.  Of course, this strategy would not be effective if the patent proprietor’s strategy is to conceal from the licensee or covenantee the existence or scope of non-licensed patents.  And we will not know if this strategy will be successful until the Federal Circuit speaks again on this issue.

For more information on the issues raised in this Client Alert, please contact the author at +1 312 701 8979.

Learn more about our Intellectual Property practice.

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