• Does a Covenant Not to Sue Run With the Patent?

    by  • July 10, 2013 • patent • 0 Comments

    There is some belief in the open source community that a patent license and a covenant not to sue have different legal effect. The theory is that a license runs with the patent but that a covenant not to sue may not — in other words, if a company that has covenanted not to sue assigns its patents to another company, or is acquired, the assignee will be free from the covenant not to sue and can bring patent infringement claims against open source software implementations. One draft of version 3 of the GNU General Public License offered a covenant not to sue but it was changed back to a license (p. 20, sec. 3.3.2) because of this concern.

    But a California district court recently examined whether this legal distinction exists and held that it does not. In Innovus Prime, LLC v. Panasonic Corp., the covenant not to sue was a 1982 agreement between non-party Philips Corporation and defendant Panasonic Corporation. The parties agreed that the patent-in-suit, the ‘350 Patent, was covered by the 1982 Agreement. Plaintiff Innovus Prime was the patent owner after three previous transactions: Philips assigned the patent to NXP B.V., “subject to all existing rights, commitments, licenses, non-assertion agreements and the like made by Assignor [Philips] and/or its affiliates under said Patent Rights and to any extensions of term and/or renewal thereof.” NXB B.V. assigned the rights to NXP Holding 1 B.V., which was renamed Trident Microsystems (Far East) LTD. Trident Microsystems assigned the patent to Innovus Prime. Innovus Prime sued Panasonic, which raised a license defense.

    The district court relied on TransCore, LP v. Electronic Transaction Consultants Corp., No. 2008-1430 (Fed. Cir. April 8, 2009), for the proposition that a license and a covenant not to sue have the same legal effect. It then applied the well-settled principle that an assignee of a patent takes the patent subject to prior licenses, whether or not it has notice:

    Patent owners cannot transfer an interest greater than what they possess, so assignees “take[ ] a patent subject to the legal encumbrances thereon.” Datatreasury Corp. v. Wells Fargo & Co., 522 F.3d 1368, 1372–72 (Fed.Cir.2008) (explaining that agreements involving the actual use of the patent “run with the patent” and are binding on subsequent owners, but holding that arbitration clauses in license agreements do not involve actual use and do not run with the patent).

    This occurs whether or not an assignee had notice. A subsequent assignee “takes title to the patent subject to such licenses, of which he must inform himself as best he can at his own risk.”

    Innovus argued that an earlier Federal Circuit case, Hilgraeve Corp. v. Symantec Corp., No. 00-1373, 00-1374 (Fed. Cir. 2001), compelled a different conclusion. In Hilgraeve there was a covenant not to sue but defendant Symantec was not the direct grantee; rather, it acquired the covenant in a transaction. The Innovus court distinguished Hilgraeve:

    Unlike the situation in Hilgraeve, here, Panasonic is not attempting to convey a license to anyone. Instead, Panasonic is merely seeking not to be sued, the right which it possesses under the 1982 and 2007 Agreements. While it is true that Panasonic may not be able to grant a license to the ‘350 Patent to a third party, it is not attempting to do so. The question is whether Philips can convey the right to sue Panasonic, a right which it does not possess, to assignees.

    So the relevant inquiry is, not whether a grant is called a “covenant not to sue” or a “license” (both called “authorizations” in TransCore), but rather the scope of what was granted. In Innovus, the covenant allowed Panasonic to practice the patent in any way it desired for the life of the patent. Panasonic’s motion for summary judgment of noninfringement was therefore granted.

    The case is also notable for its explanation of the effect of recordation, or lack thereof:

    While this court understands the unfairness that may arise from an assignee not being on notice of a prior covenant not to sue or license, it is well settled that assignees take a patent subject to any prior licenses. And licenses are not required to be recorded any more than covenants not to sue. The assignee’s duty to inform himself of encumbrances on the patent rights exists regardless of the formal definition of the agreement as a covenant not to sue. As such, the fact that Innovus is a fourth generation assignee does not change the fact that Innovus did not acquire the right to sue Panasonic under the ‘350 Patent because neither Philips nor any later assignee could “convey what [it] does not own.”

    And the court had no sympathy with this particular set of facts, either:

    Moreover, the first assignment, from Philips to NXP B.V., specifically states that the Assignee, NXP B.V., took the patent

    subject to Assignor [Philips] retaining a royalty free, world wide, nonexclusive, irrevocable and unrestricted license … and further subject to all existing rights, commitments, licenses, non-assertion agreements and the like made by the Assignor … and/or its affiliates under said Patent Rights and to any extension of term and/or renewals thereof.

    Thus, NXP B.V. expressly took the patent subject not only to Philip’s continued license, but also subject to Panasonic’s non-assertion rights…. Because Philips never possessed the right to sue Panasonic, Philips could not convey that right to NXP B.V., NXP B.V. could not convey that right to NXP Holdings, and NXP Holdings could not convey that right to Innovus. All of these assignments are available as a matter of public record, including the first assignment from Philips to NXP B.V., which contains the express limitations on the rights transferred and should have put Innovus on notice of the nonassertion rights (although notice is not required, as explained supra).

    Innovus Prime, LLC v. Panasonic Corp., No. C-12-00660-RMW (N.D. Calif. July 2, 2013).

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