Licensing & Management of IP Assets Covenant Not to Sue

Licensing & Management of IP Assets
Covenant Not to Sue
AIPLA Spring Meeting
May 2, 2013
Presented by
D. Patrick O’Reilley
Background to Covenants
 Emotional
– Implication of validity
 Exhaustion
– Lemelson
 License to make, covenant to sell, license
 Implied License
– Covenant to supplier, sue customer
Covenant not to sue
 Contractual promise not to sue for infringing acts
– Non-assertion agreement (difference?)
 Judicially enforceable agreement. Already LLC v. Nike Inc., 2013 U.S.
LEXIS 602 (Jan. 13, 2013)
 Equivalent to a license. Transcore v. Elec. Trans. Consults., 563 F.3d
1271 (Fed. Cir. 2009)
– “The inquiry focuses on what the agreement authorizes, not whether
the language is couched in terms of a license or a covenant not to
sue; effectively the two are equivalent.”
– “the difference [between a license and a covenant not to sue] is only
one of form, not substance-both are properly viewed as
Assignment of Covenant
 Hilgraeve Corp. v. Symantec Corp., 265 F.3d 1336 (Fed. Cir. 2001).
– “Symantec also contends that the covenant not to sue for patent
infringement . . . is equivalent to a freely transferable license to the
patent. This court has stated that ‘licenses are considered as nothing
more than a promise by the licensor not to sue the licensee.’ . . . The
covenant not to sue does not grant a transferable license to the
– License = covenant not to sue, but not covenant not to sue = license
– Covenant does not grant a transferable license
 License is assignable but only with permission of licensor
– Hapgood v. Hewitt, 119 U.S. 226 (1886); Unarco Indus. v. Kelley
Co., 465 F.2d 1303 (7th Cir. 1972)
Covenant not to sue
 Does sales by covenantee require marking like a license?
– Actual or constructive notice required to recover
damages for infringement of patent on product. 35
U.S.C. §287
– In re Yarn Processing Patent Validity Litigation (No. II),
602 F.Supp. 159 (D. N.C. 1984)
 “Section 287… applies to authorizations by patentee
of other persons ... regardless of the particular form
these authorizations may take and regardless of
whether the authorizations are ‘settlement
agreements,’ ‘covenants not to sue’ or ‘licenses.’”
– Holding approved in Amstead Indus. V. Buckeye Steel
Castings, 24 F.3d 178 (Fed. Cir. 1994)
Patent Exhaustion
 Transcore v. Elec. Trans. Consults.
– Transcore sued Mark IV and settled, granting a covenant
 “[TransCore] agrees and covenants not to bring any demand,
claim, lawsuit, or action against Mark IV for future infringement”
– When Mark IV won contract to supply same product to ETC (ISTHA),
Transcore sued for infringement of same patents, plus one
– On patent exhaustion defense, Federal Circuit held
 Referring to covenant, “This term, without apparent restriction or
limitation, thus authorizes all acts that would otherwise be
 “Mark IV's sales to ISTHA were authorized and . . . TransCore's
patent rights are exhausted.”
Covenant Under 11 U.S.C. § 365(n)
 In re Spansion, 2011 U.S. Dist. LEXIS 82829 (D.
Del. 2011), aff’d 2012 U.S. App. LEXIS 26131 (3d
Cir. 2012)
– “Spansion is willing to dismiss the ITC action,
and will not re-file the ITC action or another
action related to one or more of the same
patents against Apple, in consideration of the
– Spansion sought rejection of covenant. Apple
wanted benefit of Section 365(n)
In re Spansion
 Spansion promised “not to sue Apple for its use of
Spansion's patented products. Accordingly, . . . the letter
agreement is a license.”
 365(n) applies to rejected “contract under which the debtor
is a licensor of a right to intellectual property” and provides
licensee right to retain its rights.
 “Since the letter agreement was a license, Spansion's
rejection of the license under § 365(a) triggered Apple's
right to elect to retain its licensing rights under § 365(n).”
Does a Covenant Run With Patent?
 Does it runs with the patent?
– No current decision on point.
– Older decisions suggest equitable to extend grant to assignee
 Pratt v. Wilcox Mfg., 64 F. 589 (C.C.D. Ill. 1893)
– Unclear whether court considered agreement to be a
covenant or license
 A personal promise not to enforce
– Implied license arising from equitable estoppel
– Whether assignee would be bound by equitable encumbrance would
depend on facts
 Assignee’s knowledge of covenant
 As between covenantee and assignee, who should suffer?
Covenant not to sue
 If covenant not to sue is a license, why have two
approaches to same result?
– Covenant not to sue is not a different concept; it is an
imprecise or implied grant of a license
 “No formal granting of a license is necessary in order to give it
effect. Any language used by the owner of the patent . . . that . . .
may properly infer that the owner consents to . . . use of the
patent . . . constitutes a license and a defense to an action for a
 De Forest Radio v. United States, 273 U.S. 236 (1927)
Covenant not to sue
 Contract, like a license, should
– Define scope of promise not to sue
 Extends to whom – customers, suppliers?
 Identify patents (all claims or specific product), field,
 Define term – can be for less than life of patents
– Under what conditions can it be assigned
 Require assignment with patent assignment
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for educational and entertainment purposes to contribute to the
understanding of U.S. intellectual property law. These materials reflect
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