TransCore, LP v. Electronic Transaction Consultants Corp: Federal Circuit Equates Covenants Not to Sue for Patent Infringement with Unconditional Licenses

TransCore, LP v. Electronic Transaction Consultants Corp., No. 2008-1430, April 8, 2009

Opinion

On April 8, 2009, the United States Court of Appeals for the Federal Circuit affirmed a district court's grant of summary judgment, which held that an unconditional "covenant not to sue" has the same effect as an unconditional "license" for purposes of patent exhaustion.

In 2000, TransCore settled a patent infringement action against Mark IV.  The settlement agreement required Mark IV to pay $4.5 million in exchange for TransCore signing an unconditional covenant not to sue and releasing all existing claims.

The suit here was initiated several years later.  TransCore sued Electronic Transaction Consultants (ETC) for patent infringement based on ETC's use of a system sold by Mark IV.  Three of the allegedly infringed patents were subject to the covenant not to sue with Mark IV; the fourth patent was related but had not been issued when the covenant was signed.  The United States District Court for the Northern District of Texas granted summary judgment against TransCore.

On appeal, the Federal Circuit affirmed the grant of 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."

Ian Feinberg and Joseph Mahoney explain (registration required) that the case makes 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. The Harvard Law School IP Conference produced a summary of Quanta.

The Federal Circuit 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.  With regard to the patent that had not issued at the time of the covenant, a license to which was expressly disclaimed by the covenant's language, the court held that the covenant not to sue created an implied license by estoppel.  The Federal Circuit extended a doctrine, which holds that a patent licensor is estopped from asserting a patent issued before the license where that patent is necessary to practice a patent actually licensed, to any patent - even one that is issued after and is 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.

In short, the court held that a license is nothing other than a covenant not to sue for infringement, and therefore a covenant not to sue is essentially the same thing as a license, conferring the right to use, make, or sell products with the use of technology made available by the patent.  A patentee signing a covenant not to sue therefore effectively licenses the patents included in the covenant, and can no longer sue for infringement.

The decision will certainly have important consequences for patent licensing practices moving forward.