By Audrey A. Millemann

A recent decision from the Federal Circuit Court of Appeals has interpreted provisions in patent litigation settlement agreements that grant a covenant not to sue. The case is TransCore, LP v. Electronic Transaction Consultants Corp., 2009 WL 929033 (Fed. Cir. 2009). 


In TransCore, the plaintiff,TransCore, LP, owned several patents covering automated toll collection systems. TransCore sued Mark IV Industries, a competitor, in 2000, for infringement of the patents. The parties settled the case. In the settlement, Mark IV paid TransCore $4.5 million and TransCore released all existing claims against Mark IV and agreed to an unconditional covenant not to sue for future infringement of the patents.


Mark IV later sold its toll collection systems to the Illinois State Toll Highway Authority (ISTHA). ISTHA then hired a consulting firm, Electronic Transaction Consultants Corp. (EPC), to install and test the toll collection systems that it had purchased from Mark IV. 


TransCore then sued ETC in the Northern District of Texas for infringement of four patents. Three of the patents were involved in the TransCore-Mark IV case, and the fourth was issued after the settlement. TransCore sought damages of $20 million.


ETC moved for summary judgment on the grounds that Mark IV’s sales of the toll collection systems to ISTHA were authorized pursuant to the TransCore-Mark IV settlement agreement. ETC argued that the doctrines of patent exhaustion, implied license, and legal estoppel barred TransCore’s claims. 


In 2008, the district court granted ETC’s motion for summary judgment. The court held that the TransCore-Mark IV settlement agreement barred TransCore’s claims as to the toll collection systems sold by Mark IV to ISTHA because TransCore’s patent rights with respect to those systems had been exhausted. 


TransCore appealed to the Federal Circuit. The appellate court affirmed the grant of summary judgment. 


The Federal Circuit explained that under the doctrine of patent exhaustion, “the initial authorized sale of a patented item terminates all patent rights to that item” and that “exhaustion is triggered only by a sale authorized by the patent holder,” quoting the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S.Ct. 2109, 2115, 2121 (2008). The Federal Circuit held that the issue raised by the TransCore case was “whether an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion.”


TransCore argued that a settlement agreement conveying a license was different from a settlement agreement containing a covenant not to sue, and that the covenant not to sue in the TransCore-Mark IV settlement agreement did not authorize sales. The appellate court disagreed.


According to the court, a patent owner can only convey what it owns, and patent owners only have the right to exclude others from making, using, selling, offering for sale, or importing the patented invention. The court stated: “one cannot convey what one does not own. This principle is particularly important in patent licensing, as the grant of a patent does not provide the patentee with an affirmative right to practice the patent but merely the right to exclude.” Therefore, the court stated that “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.” The court quoted the Supreme Court in stating that “as a license passes no interest in the monopoly, it has been described as a mere waiver of the right to sue by the patentee.” De Forest Radio Telephone & Telegraph Co. v. United States, 47 S.Ct. 366 (1927). 


The appellate court held that a non-exclusive license to a patent is equivalent to a covenant not to sue. The court explained that:

“As a threshold matter, a patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. Even if couched in terms of ‘licensee is given the right to make, use, or sell X,’ the agreement cannot convey that absolute right because not even the patentee of X is given that right. His right is merely one to exclude others from making, using or selling X. Indeed, the patentee of X and his licensee, when making, using, or selling X, can be subject to suit under other patents. [Citation omitted.]”


The court noted that the question was not whether a settlement agreement is a covenant not to sue or a license, as both are authorizations, but rather whether the settlement agreement authorized sales.


The court found the covenant not to sue language in the TransCore-Mark IV settlement agreement to be very clear – TransCore agreed not to sue Mark IV for future infringement of any kind. Because there was no limiting language, this meant that all possible infringing acts (making, using, selling, offering for sale, and importing) were permitted. The court indicated that the result might have been different had TransCore used limiting language, such as permitting only “making” or “using” the patented systems. 


Based on the clear, broad language of the settlement agreement, the court held that Mark IV’s sales of the systems to ISTHA were authorized and that TransCore’s patent rights to those systems had been exhausted. 


This case is likely to affect the drafting of both patent litigation settlement agreements and patent licenses. It is not enough to refer to the term as a “covenant not to sue” or a “license.” According to the court, this difference is merely one of form, not substance. Thus, careful drafting is required in order to avoid having a covenant not to sue be interpreted as a license.