Covenants Not to Sue Are Similar to Patent Licenses

In TransCore LP vs. Electronic Transaction Consultants Corporation (“ETC”), Case No. 20081430 (Fed. Cir. April 8, 2010) (available here), the Court of Appeals for the Federal Circuit held that a covenant not to sue, given in an earlier patent infringement settlement by patent owner Transcore, effectively was the same as a non-exclusive license under the listed patents to make, use, sell and offer to sell Transcore’s patented toll collection system software.

Transcore had settled an earlier lawsuit with Mark IV.  This settlement document had the following covenant not to sue:

“In exchange for the payment set forth in paragraph 1, [Transcore] 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. … 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.”  Slip opn. 3.

Defendant ETC was sued by Transcore because ETC agreed to install Mark IV toll collection software purchased by Illinois State Toll Highway Authority (ISTHA).  The District Court dismissed Transcore’s lawsuit and the Federal Circuit affirmed stating that the Mark IV covenant not to sue had no limiting restrictions.

“The real question, then, is not whether an agreement is framed in terms of a ‘covenant not to sue’ or a ‘license.’ That difference is only one of form, not substance—both are properly viewed as ‘authorizations’ [to make, use, sell or offer to sell under the patent]. Rather, the pertinent question here is not whether but what the TransCore–Mark IV settlement agreement authorizes. More specifically, does the TransCore–Mark IV settlement agreement authorize sales? We conclude that it does.”  Slip opn. 7 – 8.

The Federal Circuit then held that the Mark IV covenant not to sue is not ambiguous and there is no “apparent restriction or limitation, thus [the covenant not to sue] authorizes all acts that would otherwise be infringements: making, using, offering for sale, selling, or importing.”  Id.
For support, the Court cited Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), wherein the Supreme Court unequivocally stated that “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item,” id. at 2115, and that “[e]xhaustion is triggered only by a sale authorized by the patent holder,” id. at 2121.

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