Thursday 3 September 2009

Covenant Not to Sue; Non-Exclusive Licence: Nonassertion Agreement: Do The Differences Matter?

It happens from time to time. A young lawyer working on a patent licence comes into my office and earnestly asks: What is the difference between a "non-exclusive licence", a "covenant not to sue", and a "non-assertion agreement"?Panic strikes. The notion of a non-exclusive licence is relatively straightforward; indeed, it is anchored in many national patent laws. But what do I say about a "covenant not to sue" and a "non-assertion agreement"? They have no statutory anchor. In truth, I am not certain from whence they come. Are they creatures of case law, or did they somehow, somewhere simply appear from the mists of licensing past, a bit like those wonderfully talismanic terms-- "background IP" and "foreground IP"?

The question remains: Do I mumble, dissemble, claim an in-coming call on my iPhone (hopefully she will not recall that I do not own an iPhone), or do I urge her to research the issue in the name of professional training (making certain to later erase her hours on any bill that might be sent to the client)? I choose the last alternative, the offer is accepted, and I breath a sign of temporary relief. I have managed to bite the bullet once again. In the silence and solitude of my office, door shut, blinds closed, I look into the mirror and admit--I am not really certain of the difference.

I then reach for the most recent edition of the Brunsvold and O'Reilly treatise, Drafting Patent Licensing Agreements, which states as follows:
"A patent owner may contractually agree to not assert the patent. Such an agreement, interchangeably known as a nonassertion agreement or a covenant not to sue, is used where a nonexclusive license is inappropriate or is perceived to have unacceptable consequences."
The authors go on to explain these circumstances as follows:
"The grantor of a nonexclusive license ... represents possession of the power to grant the license and necesssarily represents posession of the power to impose the equivalent of a lien on the patent. The grantor of a covenant not to sue merely promises not to use; there is no implied representation that the grantor has the power to sue. Absent an express representation of owneship of the patent in a nonassertion agreement, the grantee assumes a risk that the true patent owner may sue. [Also, a] covenant not to sue is a promise that the true patent owner may sue."
These distinctions are interesting, but their sources are not disclosed, and the extent to which there are other views on the issue is not certain. Further, I am not sure what are the full practical implications.

Some help may be on the way. A recent article, Jung and Mollo, "TransCore and Freedom of Contract", Bloomberg Law Reports, July 6 2009, has viewed the issue from a somwhat different perspective in light of new US case law. The authors noted that until recently, the perceived differences between a non-exclusive licence, on the one hand, and a covenant not to sue/nonassertion agreement, on the other, was as follows:
"[A] covenant not to sue [is] a personal, contractual commitment of the grantor to the grantee alone. A patent licensee, in contrast, was considered a grant of authority or rights under the patent that extended to downstream users of the licensed article."
The key here is the application of the exhaustion principle. Since the covenant not to sue was held only to apply to the named beneficiaries, rather to the licensed goods, the exhaustion doctrine, at least under US law, was held not to apply.

However, the U.S. Federal Circuit (TransCore LP v. Electronic Transaction Consulting Corp., 563 F3d 1271, Fed. Cir. 2009) appears to put paid to that commonly held distinction, holding that an unconditional covenant not to sue (or a nonassertion agreement) is essentially similar to a non-exclusive licence. While the court did not explicitly set out what differences, if any, remain between a non-exclusive licence and a covenant not to sue, one result is clear. Under US law, one can no longer rely on a covenant not to sue to try and avoid the application of the patent exhaustion doctrine.

I thought I could rely on the "covenant not to sue"

And so the question(s):
1. After the TransCore decision, are there any substantial differences between the two? If so, what are they?

2. Given this uncertainty, is the better position to resist the use of a "covenant not to sue"/ "nonassertion agreement" in place of (and sometimes together with) a non-exclusive license?

3. As Jung and Mollo ask, can anything be done to change existing agreements that were drafted on the basis that there was a distinction that was relevant with respect to the application of the patent exhaustion doctrine?

4. Is all of the foregoing a U.S.-centric issue? Do the notions of "covenant not to use"/"nonassertion agreement" have a significance outside of the US? If so, what is it?"


Unknown said...


Another great post!

You bring up a blast from the past on licenses and downstream rights. Over the years more senior lawyers (a class of which I now find myself) would throw out these "important" rules of patent licenses, but as you indicate, no one knows from whence they came. As a result, many modern patent licenses in the US contain clauses that are supposed to mitigate unknown future risks, some of which are so remote as to not be relevant to any real situation. Indeed, many patent clauses can be traced back to a reported case from many years ago and are put in a license "just in case."

Now that I am on the license execution end (as opposed to license drafting side), I am continually amazed at how lousy most patent licenses are in effect. For example, I recently counseled on a patent license that resulted from a settlement in a growing technology area that effectively was for the life of the patents (many of which have not yet issued). The patent license was drafted by a well-respected patent litigator (at great cost to my client), and someone I know personally, but the license effectively contained no way for the patent owner to terminate the non-exclusive license--even if there were absolutely no royalties paid. I will provide more info in a blog post, but the point of this story is that the license was chock-full of clauses and provisions that dealt with (perhaps) imagined, remote risks, but the license did not properly cover the patent owner for future commercial issues. And, as we see by the TransCore case, courts will stress test a legal recitation to see what its full operation is.

My recommendation to clients is to work out all the commercial scenarios where you see risk and opportunity and draft the license from that perspective, and only then put in the legal provisions--almost as an afterthought. Too many people rely on their attorneys to understand their current and future business issues, as demonstrated by the really hard to understand license that their lawyer prepares for them. My view is that in the realm of patent licenses, you often don't get what you pay for.

James Wagner said...

One possible explanation thrown out for consideration by those who have thought of this more than I.

Covenant not to Sue = personal promise which covenantor will be held to through a Court of equity, but which will not bind a subsequent patentee who is a bona fide purchaser without notice. (except perhaps in the US where the patent exhaustion doctrine will apply).

Non-exclusive license = legal obligation arising in contract which runs with the title.

Possible Practical effect

As a licensee, you can raise the license as a defence to an infringement suit, but could be forced to litigate over the terms and scope of license, whether you were in breach, etc.

As a recipient of a covenant not to sue, you could seek summary dismissal of any infringement claim as an abuse of process. Absent evidence of fraud in obtaining the covenant, the Court should not let the matter proceed.