When Is a Covenant Not to Sue Like a Patent License?

Although parties often go to great pains to distinguish covenants not to sue from patent licenses, those two legal constructs may not be treated any differently by the courts. For example, in Innovus Prime, LLC v. Panasonic Corp. & Panasonic Corp. of N. Am., Inc., No. C-12-00660-RMW (N.D. Cal. July 2, 2013), the court accepted the proposition that "[u]nconditional covenants not to sue are equivalent to non-exclusive licenses." Accordingly, where Panasonic had received a covenant not to sue from a patent's original owner, and then was sued by a subsequent assignee, the court granted summary judgment in Panasonic's favor.

In 1982, Phillips and Panasonic entered into an agreement in which Phillips gave Panasonic a convenant not to sue for infringement of certain patent properties, including U.S. Patent No. 5,280,350. A 2007 agreement between these parties clarified the scope of the 1982 agreement, but no one disputed that the '350 patent was, and remained, within the scope of the covenant not to sue. In 2008, Phillips assigned the ’350 patent to a third party; after two more assignments, the ’350 patent was owned by Innovus. Panasonic moved for summary judgment after Innovus sued it for patent infringement.

The court preliminarily granted a motion to strike declarations that it agreed constituted parol evidence with respect to the Phillips-Panasonic agreements. Further, United States federal law, and not state law, applied because “this dispute centers on the effect of Philip's [patent] assignment as opposed to general contract interpretation.” In that vein, Innovus' argument that the 2007 agreement specified application of the law of England and Wales was unavailing at least because Panasonic had rights under the 1982 agreement, and “the 2007 Agreement does not expressly limit or supersede the rights provided in the 1982 Agreement."

Panasonic, relying on TransCore, LP v. Electric Transaction Consultants Corporation, 563 F.3d 1271 (Fed. Cir. 2009), argued that the ’350 patent was subject to an unconditional covenant not to sue, which should be treated like a non-exclusive patent license. Innovus, on the other hand, relied on Hilgraeve Corp. v. Symantec Corp., 265 F.3d 1336 (Fed. Cir. 2001), and argued that "the 2007 Agreement creates nothing more than a conditional covenant not to sue (conditioned on the patent being an audio or video patent issued before January 1, 2005), which is not equivalent to a license, and is not transferable to subsequent assignees."

The court reasoned that “[a] patent license is nothing more than a promise by the patent owner not to sue the licensee. Further, the court followed the reasoning of the TransCore court that “the covenant not to sue 'authorize[d] all acts that would otherwise be infringements: making, using, offering for sale, selling, or importing,'" which in TransCore meant that “the patentee's rights were exhausted with respect to [certain] patented articles." In sum, Phillips' “authorization” to Panasonic was in the form of a covenant not to sue, which was the same as a license. The question was “whether Philips could assign the '350 Patent free and clear of the covenant not to sue Panasonic.”

The court held that Phillips could not assign the ’350 patent free and clear of the covenant based on the “longstanding principle that an assignee of a patent takes the patent subject to prior licenses.” This principle applied regardless of whether Innovus had notice of the covenant. If Phillips never had the right to convey the patent without the covenant, then Innovus could never have received the patent without that restriction. Further, Innovus was not being deprived of its rights in the ’350 patent; it was merely being deprived of its right to sue one entity.

Hilgraeve was distinguishable because the question there was whether a software copyright license had been conveyed. In so holding, the Hilgraeve "court also held that the covenant not to sue with respect to the patents did 'not grant a transferable license to the patent.'" However, Panasonic here was “not attempting to convey a license to anyone,” which the court agreed Panasonic might not be able to do (thus, one would think, belying its statement that a covenant not to sue is equivalent to a license). Instead, Panasonic sought merely to enforce the right not to be sued that it had received under the 1982 and 2007 agreements.

In this case, the covenant in the 1982 agreement was unambiguous, and was not in any way altered by the 2007 agreement. Further, Phillips and Panasonic “operated for years as if consenting to each other's use, without any objection.” Thus, “[t]he parties' conduct bolsters what the plain and unambiguous language of the contract creates: an implied non-exclusive license.” While unfairness to a patent owner such as Innovus may arise where it has no notice of the covenant, nonetheless “it is well settled that assignees take a patent subject to any prior licenses.”

The fact that neither the 1982 agreement nor the 2007 agreement included a clause explicitly binding future assignees to the covenant not to sue did not change the court's analysis. Such a clause would have been redundant because Phillips could not have conveyed the ’350 patent without the covenant in any event. Furthermore, the 2007 agreement did contain a provision stating that it conferred no rights on any third party “except the non-assertion rights expressly granted herein.”

Accordingly, the court granted Panasonic's motion for summary judgment.