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Covenant Not to Sue Exhausted Patent Rights Against Downstream Customer and Estopped Enforcement of Later-Issued, Broader Patent

April 08, 2009
Yang, Ming-Tao

Decision icon Decision

Last Month at the Federal Circuit - May 2009

Judges: Gajarsa (author), Dyk, Moore

[Appealed from: N.D. Tex., Judge Kinkeade]

In TransCore, LP v. Electronic Transaction Consultants Corp., No. 08-1430 (Fed. Cir. Apr. 8, 2009), the Federal Circuit affirmed the district court’s grant of SJ that patent infringement claims were barred by patent exhaustion, implied license, and legal estoppel in view of a settlement agreement between the patentee and the supplier of the accused products.

TransCore, LP and TC License, Ltd. (collectively “TransCore”) manufacture, sell, and install automated toll-collection systems, such as E-Z Pass, and own several patents directed to the technology, including U.S. Patent Nos. 5,805,082 (“the ’082 patent”); 5,289,183 (“the ’183 patent”); 5,406,275 (“the ’275 patent”), and 6,653,946 (“the ’946 patent”) (collectively “the asserted patents”). In 2000, TransCore sued one of its competitors, Mark IV Industries (“Mark IV”), for infringement of three of the asserted patents. The parties entered into a settlement agreement (“the TransCore-Mark IV agreement”).

In the TransCore-Mark IV agreement, TransCore “covenants not to bring any demand, claim, lawsuit, or action against Mark IV for future infringement” of certain patents. Slip op. at 2. Specifically, TransCore’s covenant language covers ten U.S. patents, includingthree of the asserted patents, but specifically excludes other patents issued as of the effective date of the TransCore-Mark IV agreement or to be issued in the future. The TransCore-Mark IV agreement also provides that “[n]o express or implied license or future release whatsoever is granted to MARK IV or to any third party by this Release.” Id. at 3.

In 2005, TransCore sued Electronic Transaction Consultants Corp. (“ETC”) for infringement of the asserted patents. ETC engaged in consulting and systems integration related to toll-collection systems and won a bid with the Illinois State Toll Highway Authority (“ISTHA”), in which ETC agreed to set up and test toll-collection systems that ISTHA purchased from Mark IV. ETC moved for SJ, asserting that its activities were permitted by the TransCore-Mark IV agreement under the doctrines of patent exhaustion, implied license, and legal estoppel. Seeking to limit the scope of its covenant not to sue, TransCore proffered at the district court evidence of the parties’ intent not to provide downstream rights to Mark IV’s customers. The district court excluded TransCore’s parol evidence and granted ETC’s motion for SJ.

On appeal, the Federal Circuit first reminded that the Supreme Court recently reiterated that “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” Id. at 4 (quoting Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2115 (2008)). Thus, the Court considered whether the TransCore-Mark IV agreement authorized sales by Mark IV for purposes of patent exhaustion and concluded that it did.

In so doing, the Court rejected TransCore’s argument that sales under a covenant not to sue are not “authorized” under Jacobs v. Nintendo of America, Inc., 370 F.3d 1097 (Fed. Cir. 2004). In Jacobs, the Court considered the contracting party’s intent in assessing downstream customer liability in the context of an implied license analysis. The Court distinguished this from Quanta, in which the Supreme Court explained that “the parties’ intent with respect to downstream customers is of no moment in a patent exhaustion analysis.” Slip op. at 5 (citing Quanta, 128 S. Ct. at 2122).

The Federal Circuit also reminded that “one cannot convey what one does not own.” Id. Specifically, the Court stated that “a patentee, by license or otherwise, cannot convey an affirmative right to practice a patented invention by way of making, using, selling, etc.; the patentee can only convey freedom from suit.” Id. at 6. The Court explained that it and its predecessors have on numerous occasions explained that a nonexclusive patent license is equivalent to a covenant not to sue. Thus, the Court concluded that the question on appeal was whether the TransCore-Mark IV agreement authorizes sales. The Court concluded that it did because the language of the TransCore-Mark IV agreement was unambiguous in authorizing all acts that would otherwise be infringing, i.e., making, using, offering for sale, selling, or importing.

The Court disagreed with TransCore that the district court abused its discretion in excluding parol evidence of TransCore’s and Mark IV’s intent at the time they entered into the TransCore-Mark IV agreement. In so doing, the Court applied Fifth Circuit law, which requires that “unless the trial court has abused its discretion and a substantial right of the defendant has been affected,” the decision will not be reversed on the basis of an evidentiary rule in question. Id. at 9 (quoting United States v. Saldana, 427 F.3d 298, 306 (5th Cir. 2005)). The Court found that the district court’s decision to exclude TransCore’s parol evidence had not affected any of Transcore’s substantial rights.

Moreover, the Court found that California law, which governed the TransCore-Mark IV agreement, prohibits the admission of parol evidence “to insert an additional term into a written contract, if the contract is a complete and exclusive statement of the terms of the agreement.” Id. (quoting Cal. Civ. Proc. Code § 1856(b)). The Court also found that California law prohibits the admission of parol evidence “to influence the meaning of contract terms where no ambiguity exists.” Id. at 9-10 (quoting Cal. Civ. Proc. Code § 1856(g)). For these reasons, the Court found no error in the district court’s decision not to admit the parol evidence.

The Court also considered whether any material facts remained in dispute and concluded they did not. TransCore argued that the sale to ISTHA occurred in Canada rather than the United States, and the sale was by Mark IV US, not Mark IV. The Court found no dispute that a Mark IV entity was responsible for the sale and that toll-collection products were sold and shipped to ISTHA in the United States.

Finally, the Federal Circuit considered whether TransCore’s rights to the later-issued ’924 patent, which was not identified in the TransCore-Mark IV agreement, were exhausted by Mark IV’s authorized sales under an implied license to practice the ’924 patent by virtue of legal estoppel. The Court concluded that, because it was undisputed that the ’946 patent was broader than, and necessary to practice, at least one of the patents included in the TransCore-Mark IV agreement, TransCore was legally estopped from asserting the ‘946 patent against Mark IV under the principles articulated in AMP Inc. v. United States, 389 F.2d 448 (Ct. Cl. 1968), and Wang Laboratories, Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571 (Fed. Cir. 1997). Specifically, the Federal Circuit reiterated that “[l]egal estoppel refers to a narrow[] category of conduct encompassing scenarios where a patentee has licensed or assigned a right, received consideration, and then sought to derogate from the right granted.” Slip op. at 12 (second alteration in original) (quoting Wang Labs., 103 F.3d at 1581).

The Federal Circuit agreed with the district court that, in order for Mark IV to obtain the benefit of its bargain with TransCore, it must be permitted to practice the ’946 patent to the same extent it may practice the other three asserted patents. Thus, the Court concluded that Mark IV was an implied licensee of the ’946 patent and that TransCore was legally estopped from asserting the ’946 patent against Mark IV. For these reasons, the Court concluded that Mark IV’s sales to ISTHA were authorized and exhausted TransCore’s patent rights in the products sold.

Summary authored by Ming-Tao Yang, Esq.