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Tuesday, 5 May 2009

What is a 'covenant not to sue'?

The IPKat has been contacted by a European patent attorney working for a large company, who is keen to find out what the IPKat's readership thinks of a potential licensing issue that many may not yet have considered will even be a problem.  He says (with some minor IPKat editing):

"It's not often that I see US patent law mentioned in the IPKat, but I wonder if your readership are aware of the recent US CAFC case "Transcore" [available here, and with commentary from Patently-O here], which could have important ramifications for patentees, licensors and licensees alike, at least in the USA, and perhaps in Europe too.

The Court effectively held that a previous "covenant not to sue" clause (sometimes called a "non-assert") in an agreement between Transcore and a supplier effectively barred Transcore from suing a downstream recipient of transcore patented technology under its patents.

In effect, the covenant not to sue was held to be no different than a patent license, and hence the sale by the supplier was "authorised" and the patents were then "exhausted" (following Quanta - a US Supreme Court ruling last year reaffirming the long established principle of patent exhaustion following an authorised sale).

Interestingly, the Court in Transcore based its analysis on the fact that "the grant of a patent does not provide the patentee with an affirmative right to practice the patent but merely the right to exclude, see 35 USC S154(a)(1)"

In the USA at least now, any perceived difference between a non-assert or covenant not to sue and a bare explicit patent license would appear to be one of form, and not substance, which could have rather large consequences for patent licensing houses and the like.

The question for the Kats and their readership is whether European patent law effectively grants the same "negative monopoly", and whether we (and our clients) would be wise to take heed of the principles in Transcore?

For instance, I note that whilst
section 60 of the UK Patents Act is not worded in the same way as the US code, it is based on the EPC, which in turn takes from the Community Patent Convention (which, whilst not in force is sometimes referred to by european Judges to aid interpretation). Interestingly, both TRIPS Article 28 and Article 25 of the CPC explicitly state that the only right a patentee is granted is the right to "prevent" others from making, using and so on. Therefore, it may be that any perception that a "covenant not to sue" clause is not a grant of a patent license is moot in Europe too (or perhaps it always was)."
The IPKat cannot see any effective difference between a covenant not to sue and a licence. Like other legally complex areas, however, he also suspects that the devil is always in the actual detail of any agreement. He would be interested to see what his readers think. Is there any effective difference?  If so, would it stand up in a European court?


Anonymous said...

patent license, covenant not to sue, and authorization refer to, substantially, one and the same thing, ie, patentee's permissions to perform allowed (otherwise infringing acts) acts. All of them can be regulated by way of detailing on specific circumstances, conditions, acts allowed under the permission granted etc. Exhaustion is an extra corollary to the permissions. In view of Quanta (2008), one can always place conditions in order to define permitted acts, so where is the problem?

Does one foresee problems in enforcing each of them? Again this should be determined by the scope defined under them.

Mark Anderson said...

Several interesting questions here:

1. Is a covenant not to sue the same as a licence? If there is a difference, it may lie in the question of whether a licence grants any property rights or rights that are binding on third parties (eg subsequent owners of the IP), as distinct from a purely contractual right.

2. Point 1 above is from an English (common law) perspective. My impression is that some civil code countries imply positive obligations into an IP licence, eg an obligation to sue infringers or license improvements (France in particular). Would the position be different if all that is granted is a covenant not to sue?

3. Then there is the question of exhaustion of rights. Under English law I have heard this principle formulated in terms of a supplier of goods exhausting their IP rights on supply of the goods. The Transcore judgment seems to be one step further on, by saying that if you are an IP owner and settle litigation with a supplier of goods on the terms of a covenant not to sue the supplier, that covenant covers purchasers of the goods. Is this uncharted territory in the UK? Perhaps it will need a House of Lords case, like BL v Armstrong, for new law in this area based on public policy considerations to emerge?

Andre said...

The problem is that all these models do not exist under continental and Uk law. We need a kind of creative commons for patent licensing, a standard license.

Anonymous said...

There may not be any differences in relation to the acts that are allowed by a covenant not to sue and a licence agreement, but there are certainly differences in the status of the contract parties. A licensee is recognized in most of the patent laws and he can have some extra capabilities (i.e. he can sometimes sue infringers). I do not see that a party in a covenant not to sue would have this capability, since such an agreement would not lend itself for having such a clause. Also the fact that a license can be entered into the register is a basic difference between the two forms of contract. Further, if the entitlement to the patent is challenged and eventually a new party is entitled, then a licence right will follow the patent right, whereas the covenant (probably) does not.

These changes basically boil down to the fact that the licence is a right in itself whereas the covenant not to sue is basically a gentleman's agreement. The licence, being a right, can be the subject of sublicensing and transfer. This will be less simple with an agreement not to sue.

Norman said...

I agree with what I take Anon 1 to be saying. Transcore settled its infringement action against Mark IV on the basis that TransCore agreed not to bring any action “against Mark IV for future infringement.” Mark IV subsequently sold a unit to a third party (P) for installation by ETC. TransCore brought an action against ETC. ETC defended on the basis of the Transcore-Mark IV settlement agreement. Transcore argued that this didn’t bar its action, as it had only agreed not to sue Mark IV; it hadn’t agreed not to sue third parties, such as ETC. The Fed Cir said TransCore had agreed not to sue Mark IV for _infringement_, infringement includes selling, and agreeing not to sue Mark IV for selling is the same as authorizing Mark IV to sell. On the facts, this seems right - Mark IV was primarily a manufacturer / vendor, not an end-user, so a settlement extending to “future infringement” cannot be interpreted in a way that would effectively prevent Mark IV from selling. It seems clear that it would still be possible to draft a covenant not to sue that would extend only to the other party to the settlement by specifying more precisely which acts are permitted (e.g. use, but not selling).

Anonymous said...

let us trace phylogeny, so which one came first, patent license or covenant not to sue? I am of the view that "covenant not to sue" should be an ancient concept rooted in contract law while patent licensing a modern form of the concept. The two may be used in any way you wish :)

Anonymous said...

It's perhaps just a drafting point, but there's also the question of what happens after the licence/covenant terminates. If you were sloppy, you might find yourself liable for your *unlicensed* infringement over the preceding 6 years...

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