Cancelling a Covenant-Not-To-Sue

by Dennis Crouch

Molon Motor and Coil Corp. v. Nidec Motor Corp. (Fed. Cir. 2020)

In a divided opinion, the Federal Circuit affirmed the district court’s summary judgment against the patentee Molon — holding that a 2006 covenant-not-to-sue remained in force despite a subsequent 2007 settlement agreement stating that prior covenants “concerning the subject matter hereof” are “of no further force or effect.”

The Subject Matter of a Contract: The majority opinion penned by Judge Lourie and joined by Judge Hughes concludes “that the two agreements concern different subject matter” and and thus finds the merger and cancellation clause inapplicable.  Writing in dissent, Judge Reyna came to the opposite conclusion since both the 2006 covenant and the 2007 settlement agreement focused on a license to practice the ‘915 patent.

In the 2006 Covenant, Molon granted Merkle-Korff [Nidec’s predecessor] a bare license to practice the ’915 patent in any market. In the 2007 Settlement, Molon granted Merkle-Korff an exclusive license to practice the ’915 patent in the Kinetek Exclusive Market only. Both licenses relate to the same subject matter—the right to practice the ’915 patent. Thus, the 2007 Settlement’s merger clause, which wiped away all prior covenants with the same subject matter, wiped away the 2006 Covenant.

Judge Reyna in dissent. Judge Reyna appears to have the better argument — although not good enough to convince Judges Lourie and Hughes.  Further, Nidec’s counsel Rudy Telscher did an excellent job marshaling Illinois cases that supported his client’s position.

The difference in interpretation between these judges is a matter of contract interpretation under Illinois law. Unfortunately, the majority’s statement of Illinois law is not too helpful: “Illinois courts have cautioned against defining ‘subject matter’ too broadly or too narrowly.”

Some Background on the First Lawsuit: Molon sued Markle-Korff on family-member patent (US6054785), and the defendant responded with a declaratory judgment couinterclaim against Molon’s Patent (US6465915).  At that time, Molon was not interested in litigating the ‘915 patent and issued the 2006 covenant-not-to-sue.

Molon hereby forever covenants not to sue Merkle-Korff for patent infringement … under …
the ’915 patent … with respect to any and all products previously or presently made,
used or sold by Merkle-Korff in the United States. …

2007 Covenant. The district court dismissed the ‘915 patent claims but that first lawsuit continued with Molon’s originally filed infringement claims regarding the ‘785 patent.  In 2007 the parties settled the ‘785 lawsuit with an exclusive license agreement that extended beyond the original lawsuit itself to include more than a dozen Molon patents (including foreign patents and the ‘915 patent).  A difference between the 2006 covenant and the 2007 settlement was the scope of license.

  • 2006 covenant – non-exclusive license to “any and all products previously or presently made, used or sold by Merkle-Korff.”
  • 2007 settlement – exclusive license restricted to the “Kinetek Exclusive Market.”  (The briefing explains that the “Kinetek Exclusive Market” is a specific confidential customer list that the licensee is allowed to sell to.)

As mentioned above, the 2007 agreement also states that prior agreements “concerning the subject matter hereof” are “merged” and “of no further force or effect.”  However, the 2007 agreement does not particularly and explicitly revoke the 2006 agreement.

Fast forward to 2016 — Molon filed a new lawsuit against Nidec — successor in interest to Merkle-Korff.  The new suit alleges that Nidec is selling beyond the Kinetek market and the big question here is whether the original broad covenant is still in effect.

For the majority, the big difference between the two promises is exclusivity:

There are fundamental differences between an exclusive license and a nonexclusive license, particularly in the context of standing to assert a claim for patent infringement. In essence, an exclusive licensee has an interest in the patent sufficient to establish an injury when a third party infringes, akin to an ownership interest, while a nonexclusive licensee has no such interest in the patent and merely enjoys freedom from suit. Under this framework, it cannot be said that an exclusive license and a nonexclusive license necessarily concern the same subject matter, even though both licenses include the same patent.

Id.  The holding here then is that the original covenant was not cancelled — and so the patentee has no case.

= = = = =

One interesting additional issue not addressed here is the extent that a unilateral covenant-not-to-sue can be revoked, even by agreement. If we think of the covenant as a conveyance (of property rights), a revocation would ordinarily be insufficient to transfer rights back to the patentee. Rather, we would need an express conveyance or release.  A covenant-not-to-sue could also be seen as an abandonment of rights — something like a ‘release.’  Historically courts have distinguished between a release and a covenant-not-to-sue, although that distinction appears to have lifted based as covenants now operate as a complete bar to a subsequent underlying action rather than their historical role of only creating a breach of contract action. See Skilstaf, Inc. v. CVS Caremark Corp., 669 F.3d 1005, 1017 (9th Cir. 2012).

11 thoughts on “Cancelling a Covenant-Not-To-Sue

  1. 8

    A covenant-not-to-sue is sometimes used in patent portfolio licensing as analogous to an [irrevocable] quit-claim-deed to the licensee and its assigns, where the licensor does not want to be liable for any express or implied warranties or any obligation to pay maintenance fees.

  2. 7

    I actually agree with the majority view here. It is consistent with a pretty long line of thinking cautioning against applying generic boilerplate clauses to broadly in a way that creates a “gotcha” that the parties may not have intended.

    For example, the merger clause here was a boilerplate provision, the kind that gets recycled from agreement to agreement without much attention and shoved at the back of these licenses. You could Google search it and find a hundred sample contracts out there with almost identical language. Clauses like this are often stuffed in the “Miscellaneous” section of agreements along with such blockbuster clauses as allowing the agreement to be executed in counterparts, disclaimer of implied warranties, choice of law, force majeure, and other things that most people don’t pay attention to or care about.

    These contract interpretation cases always come down to basic human nature and common sense — not the law — and this one was no exception. The majority no doubt found it difficult to imagine that the contracting parties in 2007 would have relied on a boilerplate merger clause that makes no reference to the 2006 agreement, if they actually intended to extinguish that earlier agreement. I think common sense and basic human nature suggest that had the parties truly intended such a significant result, they would have been more explicit in referencing the 2006 agreement as one that would be extinguished.

    Of course, this notion of common sense and human nature isn’t an accepted legal doctrine, even though it drives the outcomes in almost all of these “intent of the parties” contract cases. So the court had to dress it up with a pretty bizarre interpretation of “subject matter hereof.” So like so many other contract cases that came before, the outcome here makes logical sense even if the underlying reasoning does not.

  3. 6

    In the notion of “heads I win, tails you lose,” the comment of “ now operate as a complete bar to a subsequent underlying action rather than their historical role of only creating a breach of contract action.” grabs my attention because the sounding of remedy in breach of contract is a mirror of efficient breach that serves as the template for Efficient Infringement.

    It’s as if “efficiency” only counts if it works against patent holders.

    1. 6.1

      “Efficient licensing” is also a thing.

      Welcome to reality.

      1. 6.1.1

        I have no problem with a concept called “efficient licensing.”

        However, how is that concept related to efficient breach or efficient infringement?

        You do recognize the base difference in the terms, right? Here’s a hint: the second word in two of the three phrases is generally considered to be a bad thing.

  4. 5

    This holding propagates a nonsensical chain of case laws that gives licensees ownership rights – splitting up ownership of a patent. In essence, an exclusive licensee has an interest in the patent sufficient to establish an injury when a third party infringes, akin to an ownership interest What does “akin to” mean?

    But a patent IS the ownership of the right. An exclusive license is 1) a covenant not to sue and 2) a promise to exclude all others. Independent Wireless Tel. Co. v. Radio Corp., 269 U.S. 459 (1926). The LICENSOR owns the patent. The LICENSEE rents that patent. But that is too simple and predictable…

    Yes I know, an agreement that transfers all substantial rights is a de facto assignment. But short of that, the owner of the patent owns ALL of the patent.

    This is yet another area where patent law has left the reservation. In the old days a patent was a property right with clear and reliable case law. Now we have whatever feels right to the presiding PTAB or Federal Circuit judges.

    1. 5.1

      Waterman v. Mackenzie specifically contemplates situations “splitting up ownership of a patent.” E.g., under Waterman v. Mackenzie, the grant of “the exclusive right under the patent within and throughout a specified part of the United States . . . is an assignment, properly speaking, and vests in the assignee a title in so much of the patent itself, with a right to sue infringers . . . .”

  5. 4

    Nidec’s counsel Rudy Telscher did an excellent job marshaling Illinois cases that supported his client’s position.

    This is the same fellow who won in the SCotUS in Octane Fitness v. ICON Health & Fitness. Rudy Telscher knows his stuff.

  6. 3

    Off topic. The notes on the IP deal w.China are out. link to ustr.gov

    Interestingly the US is requiring China to create a Xi privy court in parallel to a common law court. So if the independent judge happens to uphold the patent, the privy court staffed with the King’s cronies can strike it down after-the-fact. /Sarc. But it is true, that if China had something likes courts and PTAB – we would be screaming about the PTAB – being a Star Chamber.

  7. 2

    Really? A covenant-not-to-sue is like a feoffment? It requires return of the seisin. So I guess in the professor’s view, even if the agreement said explicitly not-transferable to successor in interest to littleCo, the covenant would transfer like an asset (even if not listed) to largeCo, that purchased and dissolved the litteCo holding the covenant. So, I guess they should say revokable covenant-not-to-sue, when the parties agree in a subsequent written agreement? Is it just me, or do all pits-falls, estoppels, trap doors, slumbering, reasonable reliances, laches, etc, always cut against the patent owner?

  8. 1

    A general comment regarding:

    although not good enough to convince Judges Lourie and Hughes

    Not only as here (intra-panel), but even (or perhaps especially) from panel to panel, the judges of the CAFC appear to not give a flying flip about what the other judges of the CAFC think.

    While this discord is not new (easily seen under the pen of Judge Rader’s ‘additional thoughts’ in the Alice en banc mess), but it seems to me to be getting ever worse.

    Reminds me (a bit oddly) of the line from Remember the Titans:

    Attitude reflects Leadership.
    Sir.

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