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Sales of products by party under unconditional covenant not to sue exhaust patent rights

April 13, 2009
Post by Blog Staff

In a decision Wednesday, the Federal Circuit affirmed a district court's finding that a patentee's claims for patent infringement were barred by patent exhaustion in view of a settlement agreement between the patentee and a previous defendant in an infringement suit. The patentee previously sued a third party, and the suit was resolved by a settlement agreement granting the third party a covenant not to sue under several patents. The defendant in this case purchased and used products from the previously-sued third party. The patentee sued, arguing the current defendant infringed even though it obtained the products from the party who had the covenant not to sue. In affirming the district court, the Federal Circuit held an unconditional covenant not to sue is, for purposes of a patent exhaustion analysis, the equivalent of a license under a patent. Here, because the defendant purchased the allegedly infringing products from the party with the unconditional covenant not to sue, the patentee's rights were exhausted, and it could not assert the patents against the current defendant.More detail regarding Transcore, L.P. v. Elec. Transaction Consultants Corp. after the jump.The case involved several patents held by TransCore (TCI) regarding automated toll collection systems, such as the E-Z Pass or I-Pass. All but one of the patents were asserted by TransCore in a previous case against Mark IV Industries. That case was settled, and in the context of the settlement, TransCore executed an unconditional covenant not to sue Mark IV for infringement of the patents in exchange for $4.5 million. The covenant not to sue included the following language:

In exchange for the payment set forth in paragraph 1, TCI hereby agrees and covenants not to bring any demand, claim, lawsuit, or action against Mark IV for future infringement of any of United States Patent Nos. 5,805,082; 5,289,183; 5,406,275; 5,144,553; 5,086,389; 5,751,973; 5,347,274; 5,351,187; 5,253,162; and 4,303,904, or any foreign counterparts of the aforesaid United States Patents, for the entire remainder of the terms of the respective United States Patents and their foreign counterparts. 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, Mark IV sold systems to Electronic Transaction Consultants (ETC) so ETC could fulfill a contract with the Illinois State Toll Highway Authority. TransCore sued ETC, claiming that the products ETC purchased from Mark IV infringed 3 patents from the previous suit between TransCore and Mark IV and one related patent that issued after the Mark IV case settled. The district court granted summary judgment in favor of ETC, holding there was no infringement because the goods purchased from Mark IV (under the covenant not to sue) exhausted TransCore's rights in the patents, thus immunizing ETC from suit. TransCore appealed.

The Federal Circuit affirmed. The court framed the issue as: "whether an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion." The court noted "a patentee, by license or otherwise, cannot convey an affirmative right to practice a patented invention by way of making, using, selling, etc.; the patentee can only convey a freedom from suit." Because of this, the court noted a covenant not to sue is the simple equivalent of a nonexclusive license under a patent.The court then turned to the language of the covenant, observing it "authorizes all acts that would otherwise be infringements: making, using, offering for sale, selling, or importing." Notably, the court held "TransCore did not, as it could have, limit this authorization to, for example, 'making' or 'using'." As such, any sale by Mark IV was a sale authorized by the patent holder and, under Quanta, "the initial authorized sale of a patented item terminates all patent rights to that item." Accordingly, because ETC purchased the products from Mark IV, TransCore's patent rights were exhausted, and it could not seek infringement damages from ETC.This covered three of the patents-in-suit, but one additional patent issued after the Mark IV settlement. TransCore asserted that because of the specific limiting language in the settlement agreement not granting any rights in currently-pending applications, exhaustion could not apply to this additional patent. The Federal Circuit, however reached the same result with regard to this patent. The court turned to the concept of legal estoppel which "refers to a narrow category of conduct encompassing scenarios where a patentee has licensed or assigned a right, received consideration, and then sought to derogate from the right granted." The later-issued patent was broader than those included in the license and was required to practice the patents under which Mark IV received the covenant not to sue. Under this theory, the court held Mark IV received an implied license to the late issuing patent, as "in order for Mark IV to obtain the benefit of its bargain with TransCore, it must be permitted to practice the [later] patent to the same extent it may practice the [earlier] patents. TransCore is, therefore, legally estopped from asserting the [later] patent against Mark IV in derogation of the authorizations granted to Mark IV under the [earlier] patents." As a result, because Mark IV had an implied license to the later patent, TransCore's rights in that patent were likewise exhausted by the sales from Mark IV to ETC, and TransCore could not seek damages under the later-issued patent either.To read the full decision in Transcore, L.P. v. Elec. Transaction Consultants Corp., click here.


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