When is a Covenant-Not-to-Sue a Patent License?

Meso v. Roche (Meso Scale petition & app)

In a new petition for cert, Meso Scale asks the following simple question:

Whether a covenant, promise, or agreement not to sue for the infringement of a federal patent is a license of that patent as a matter of federal law.

Patent licensing is a messy area of law because it is largely governed by state law (or foreign law if contracting abroad), but is also governed by federal patent law.

The Federal Courts have been rather clear that, in the patent context, a covenant-not-to-sue is the equivalent of a license.  See, De Forest Radio Telephone & Telegraph Co. v. United States, 273 U.S. 236 (1927) and TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009). However, in this case, the Delaware Courts ruled that the covenant-not-to-sue granted by Meso to Roche was “more than a simple consent, but less than” a license. — Thus the question presented.

The importance here for Meso is that, since its covenant-not-to-sue wasn’t seen as a contractual license then Meso wasn’t able to enforce other (implied?) terms of that agreement.  Meso explains this setup in its brief:

In this case, the Delaware courts’ mistaken conclusion that Meso did not grant Roche a license led them further to conclude that Meso was not a party to a license agreement between Roche and respondent IGEN, under which Roche agreed that it would use certain patented technology only within a strictly limited field. By going outside that field, as it has since 2007, Roche placed itself in direct competition with Meso and caused great harm to Meso’s business. Meso therefore sought to enforce the field restrictions in the license agreement against Roche, as the agreement permitted it to do. Because, however, they thought that Meso had not granted Roche a license (but had merely agreed not to sue Roche for otherwise infringing activities), the courts below accepted Roche’s position and held that Meso had no right to enforce the terms of the license agreement.

The issues here continue to be very important and relate to complex litigation and bankruptcy strategies as well.  In its 2013 decision in Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013) and MedImmune v. Genentech (2007), the Supreme Court considered the impact of covenants-not-to-sue and licenses on federal jurisdiction questions.  Two pending petitions (Mylan v. Apotex and Daiichi Sankyo v. Apotex) focus on the similar issue of patent disclaimer in the context of Hatch-Waxman gaming.  In those cases, a second ANDA filer (Apotex) is trying to trigger an early completion of the first-filer’s 180 days of generic exclusivity by challenging the brand’s patents that, in both cases, have been disclaimed but remain listed in the Orange Book.

In the bankruptcy context, we know that a Trustee generally has power to selectively reject or accept executory contracts.  Section 365(n) creates an exception for licensed IP rights (thus barring an executor of an estate holding patent rights from unilaterally cancelling previously agreed-to licenses).  However, the Delaware court decision implicitly suggests that a covenant-to-sue wouldn’t fit within the exception and may instead be cancelled.

The Meso petition also raises questions involving exhaustion – does exhaustion apply to an otherwise infringing article made subject to a covenant-not-sue — as well as taxation and notice.

 

24 thoughts on “When is a Covenant-Not-to-Sue a Patent License?

  1. 7

    In fact, I also have a question of licensing agreement. Typically, we can find a term like “licensor grants licensee a right to produce or sell…”. However, why can licensor to grant licensee a right which licensor himself does not own?

  2. 6

    As I understand the facts, Meso had an exclusive license from IGEN for field X as the result of the cancellation of a prior license to Roche who had breached the prior license by selling outside its licensed field. As a result of termination, that field sprang into Meso’s exclusive license fields pursuant to “springing” rights in its license with IGEN. Roche then acquired IGEN, and generated a new license that re-granted Roche a license to field X. Meso signed that deal, but not as a named party. It’s consent was required because IGEN no longer had the right to grant the license regarding Field X to Roche pursuant to the springing of Field X exclusively to Meso.

    There are some more corporate maneuvers, but Roche again expanded its business scope beyond field X, just as before, now competing within Meso’s fields. Meso sued in Chancery for specific performance. Deined – because the court found that Meso was not a party to the Roche-IGEN license and therefor had no right to enforce it.

    The problem I see here is that Meso cannot effectively sue Roche for patent infringement because Roche, as effective co-owner of the patents, will not join. But, but that does leave breach of contract action and specific performance.

    The result here seems to be a very hometown decision by the courts of Delaware. The whole covenant not to sue vs. license is a smokescreen to cover highway robbery. The courts of Delaware should be embarrassed.

  3. 5

    I think the petitioner is misstating the issue. The issue in the state court was whether they were a party to the agreement in the first place; not whether the agreement was a covenant vs. a license. To me, this is a purely contractual issue, and they’re trying to make it a patent issue to justify cert. I don’t think SCOTUS has jurisdiction here.

    Also, I don’t really see why the petitioner has to rely on the covenant being a license or not; seems to me that no matter what, they remain the exclusive licensee to the patents within the relevant field of use, and can just go ahead and sue for infringement rather than breach of contract. I guess they may have had a reason to want state court rather than federal (although now they want to take it to federal court it seems?). In any case, I feel like there’s an important part of this story that’s missing.

    1. 5.1

      JPS, since Roche acquired IGEN, the patentee, they can effectively veto any patent suit by simply not joining or having IGEN join.

      After Roche’s acquisition, this basically because a case where the patentee grants one an exclusive licensee and then breaches that license himself. There really is no patent remedy.

  4. 4

    When I was a trainee, long ago, I was taught that the term “licence” is very broad . There is a “but for” test for the existence of a licence. Can you define an act Z, which would constitute an infringement of the patent but for the existence of Instrument X? If you can, then Instrument X is a Licence.

    I prefer the Question the other way around, namely, is what we dub “a Licence” in fact a specific form of the wider “Covenant not to Sue”. It surely is, isn’t it?

  5. 3

    There are several differences.

    Another example is if the patent is owned by more than one entity, Owner B might grant a patent license without Owner A’s okay, but Owner B can only grant a “covenant not to sue” on it’s own behalf.

    It largely depends on the facts and the intentions of the parties.

    1. 3.1

      But if all owners must be joined to sue for infringement – and unless I’ve been living under a rock, that’s still the case in the USA – then with respect to a third party’s possible infringement, a covenant not to sue granted by one co-owner of a patent would have the same net effect as a license granted only by that co-owner: suit for infringement could not be brought against the infringer. And though we don’t like to admit it, if you can’t convince a court to rule that there’s infringement, then legally there’s no infringement.

      1. 3.1.1

        Not sure. If Sam offers Jack a convenant not to sue under a Patent owned by Sam and Sue, not sure why the convenant will tie up Sue. Also, Sam being forced to join a lawsuit filed by Sue likely doesn’t breach the Covenant.

          1. 3.1.1.1.1

            A covenant not to sue legally obliges a party (Party A) that could initiate a lawsuit against another (Party X) not to do so. It’s a legal agreement between Party A and Party X.

            A license grants permission to another to use that property or engage in an activity in relation to that property.

            In most cases, “covenant not to sue” and license result in the same thing, but not sure if that’s always the case.

            Not sure any co-owner can always tie hands of co-owner using covenant not to sue.

            1. 3.1.1.1.1.1

              As Prof. Crouch alludes to, it IS certain that such can** happen.

              **the devi1 in the details of course is being the scrivening used by the co-owner coventing the not-to-sue agreement.

          2. 3.1.1.1.2

            Exactly. Any joint owner of a U.S. patent can do anything they want with the entire patent, which is why joint ownership is stupid, but some university employees and inventors still don’t get it. See, e.g., my “Joint Ownership” of Inventions, Patents or Copyrights – A Legal mess to Avoid” December 1997 AUTM Newsletter [The Association of University Technology Managers.]

            1. 3.1.1.1.2.1

              Contrast this notion of “[a word that Paul F. Morgan can type but triggers the filter for me – starts with Stu and ends with pid]” with the AIA runup from Mark Lemley and the nearly overriding push to view nearly all patents as being “it takes a village”….

    1. 2.1

      I don’t buy the tax argument: States tax license revenue, but the suggestion here is that they might not be able to tax revenues associated with a covenant-not-to-sue.

      Notice: For constructive notice, section 287 requires marking of covered products sold by, “for” or “under” the patentee. The question is whether a product sold subject to a covenant-not-to-sue would need to be marked in order for the patentee to qualify.

      1. 2.1.1

        This is an interesting topic. A “covenant not to sue” on a patent has some useful analogies to a “quit claim deed” for real estate, in being valid but advantageously not warranting a clear title or full title including overcoming possible joint or part ownership rights by someone other than the signer.* The potential effect on the marking statute that Dennis notes is another that had never occurred to me.
        I hope the indicated bankruptcy case argument is dicta not followed, as that seems highly unfair to the recipient of a “covenant not to sue” who relies on it.

        *A “covenant not to sue” can thus also eliminate any alleged implied warranties of the validity of the patent, any duty to continue paying maintenance fees on the patent, or any duty to defend the patent from attacks by others. Useful if the recipient that paid for it tries to later sue to get its money back.

        1. 2.1.1.1

          Wow, this is an interesting mess.

          I always viewed a ‘covenant-not-to-sue’ as a personal right between the parties in direct privity. ‘A’ promises not to sue B for 5 months. There is no third party beneficiary, i.e., company C buying product from company B and committing the tort of infringement of company A property by further retailing the product to consumer D. And further, company E cannot buy company B and use the covenant between A and B as a shield for parent company E activity. In contrast, a ‘license’ between ‘A’ and ‘B’ invokes things like ‘exhaustion’ wherein C would have an exhaustion defense if sued for infringement by ‘A’ in that buy from company B and re-sell to D scenario.

          In other words, my adjacent parcel owner and I agree to not sue each other over a boundary dispute – that does not create a license to C to trespass. Sort of like the ‘quite title’ warranty mentioned by others.

      2. 2.1.2

        Another interesting point raised by the petition is whether a covenant not to sue is personal between the then-current patent owner and the accused infringer, or does it “run with the patent” like licenses so as to bind future assignees?

        Another issue – can a patent owner grant a covenant not to sue against a direct infringer, but still maintain a suit for contributory/inducing infringement against an indirect infringer arising out of those same acts of direct infringement?

  6. 1

    A covenant not to sue seems an awful lot like a royalty-free license in the territory covered by the covenant, but perhaps (though not necessarily) lacking the typical field-of-use clauses and the attendant definitions. Irrespective of whether cert is granted, it sounds like this case may be the trigger for lawyers drafting covenants not to sue to change their practice and to explicitly use more licensing language, so as to exert more control over the activities of the otherwise-infringing party.

    1. 1.1

      A covenant not to sue is more often used in situations where the future validity of the patent, if a challenge to it continues, or its ownership, may be in question. So, to “exert more control over the activities of the otherwise-infringing party” may raise more than just patent or contract law concerns as to its enforceability?

      1. 1.1.1

        I’m afraid I don’t follow you. I’m not aware of any patentee that warrants the validity of a patent it’s licensing to another party, explicitly or otherwise; if the patent is invalid, the licensee can stop paying royalties, which in this case are zero in any event. How does calling it a “license” versus calling it a “covenant not to sue” matter in this regard?

        1. 1.1.1.1

          Perhaps I am reading too much into what you meant by “exert more control over the activities of the otherwise-infringing party” ? I would simply be nervous about a contract entered into between competitors that might contractually constrain trade in some way based on a patent that neither party thought was valid but had entered into a covenant not to sue agreement to end a dispute over it?

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