Federal Circuit Expands Patent Exhaustion and Licensee Estoppel

April 10, 2009

On April 8, 2009, the Court of Appeals for the Federal Circuit issued an opinion in Transcore, LP v. Electronic Transaction Consultants Corp that includes two holdings of importance to any professional who drafts agreements or settles disputes involving intellectual property.

Transcore settled an earlier dispute with its competitor Mark IV by entering into an agreement that included a covenant not to sue to Mark IV on certain of Transcore's issued patents. The agreement explicitly stated that the covenant would not apply to any third party or with respect to any other patent of Transcore, including those that later issue. Electronic Transaction Consultants Corporation (ETC) later sold products it had purchased from Mark IV. Transcore then sued ETC for infringing three patents listed in the Mark IV agreement, as well as a later issued patent. The district court granted summary judgment to ETC on all claims, finding that ETC was entitled to the benefit of the covenant in the Mark IV agreement, including with respect to the later issued patent. The Federal Circuit affirmed.

The court, citing several cases, noted the similarities between a license and a covenant not to sue before concluding that Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), where the Supreme Court expanded the applicability of the doctrine of patent exhaustion for sales that were authorized under licenses, should also apply to covenants not to sue. Since Mark IV's sales were authorized under the Mark IV agreement, the Federal Circuit held that Transcore's patent rights were exhausted under the covenant, just as they would have been under a license.

In the second part of the opinion, the Federal Circuit utilizes the doctrine of legal estoppel to find that the fourth patent asserted by Transcore, which issued after execution of the Mark IV settlement agreement and which was not included in the covenant not to sue, could also not be enforced. The later issuing patent was broader than and necessary to practice at least one of the patents included in the covenant. The court reasoned that Mark IV, and therefore ETC, must be able to practice the later issuing patent in order to "obtain the benefit of its bargain with Transcore" for the covenant on the other patents.

Instead of granting a license, covenants not to sue have frequently been used where the parties want to settle matters between them without affecting the rights of third parties, since covenants not to sue have until now been considered personal in nature. Transcore would appear to eliminate the possibility of using this tactic in connection with patent disputes, even where express language is included in the agreement limiting the rights of third parties. In view of Transcore, those granting rights under their patents to a seller of products, whether by license or covenant, should assume that they will be unable to enforce those patents against the customers of the manufacturer unless the license grant or covenant not to sue expressly restricts such sales.

Transcore will also require additional investigation by potential licensors to confirm that rights, beyond those specifically granted, will be found unenforceable against the licensee or its customers. Universities or corporations with large portfolios of patents may be most at risk for having other areas of their portfolios contaminated by what was intended to be a narrow license grant. Drafting language specifically carving out other rights would appear, under Transcore, to be insufficient to prevent those rights from being impliedly licensed.

The full opinion is available at http://www.cafc.uscourts.gov/opinions/08-1430.pdf