Dear reader, IP Draughts needs your help with some research. He has volunteered to give a short talk on the differences (if any) between an intellectual property licence and a covenant not to sue. The talk will be held at the London offices of Olswang on Tuesday 19 February at 5pm. Registration details here. IP Draughts is sure that the readers of this blog will be able to shed light on this puzzling subject.
The expression covenant not to sue is sometimes seen in IP agreements, but when you examine the detailed wording of the clause in which the term appears, it often looks very much like a licence. The expression seems to originate in US agreements to settle IP litigation, but it has spread to some non-contentious agreements. Here is an example, taken from Drafting Patent License Agreements (Brunsvold et al, BNA Books, 6th edition at page 23):
Company A hereby covenants not to sue Company B under any patent listed in Exhibit A for infringement based upon any act by Company B of manufacture, use, sale, offer for sale or import that occurs after the effective date of this Agreement.
A traditional common law analysis is that a licence is merely a permission to do something which would otherwise infringe the licensor’s IP. A covenant (or promise) not to sue is just a negative way of saying the same thing as giving permission. Therefore a covenant not to sue is effectively the same as a non-exclusive licence.
Ah, but you’ve overlooked some important points, the critic may cry. A licence may carry with it some implied obligations, eg a warranty that the licensor owns the licensed IP, or an obligation to sue infringers. Moreover, a licence may be binding on subsequent owners of the IP, while a covenant not to sue is just a personal undertaking. Put another way, a licence is a kind of property right, while a covenant is merely a contractual obligation.
Whether these criticisms are correct may depend partly on the law of the contract. English law may be at one end of the spectrum on this, as it is traditionally reluctant to imply terms into contracts. Countries that have a civil code may be more inclined to imply terms. There are also provisions in national IP laws that address the question of when a licence is binding on subsequent owners of the IP.
Sometimes, these issues are addressed by including additional wording in the clause. The sentence quoted above is followed in the book by two further sentences:
Company A hereby represents that it owns full legal and equitable title to each patent listed in Exhibit A. Company A further promises to impose the covenant of this paragraph on any third party to whom Company A may assign a patent listed in Exhibit A.
IP Draughts has seen wording that goes further than this, and states that any purported assignment of the patents without imposing the covenant on the new owner will be void. He is very doubtful as to whether such a provision would be effective under many countries’ laws.
On the question of whether a licence is an item of property, English law takes the approach that a licence is merely a contractual right, but it seems that US law may take a different approach, which may be an additional reason for distinguishing between licences and covenants. See this discussion (particularly the readers’ comments) from a few years ago on Ken Adams’ former blog.
As well as these general points, it seems that there are some specific issues in relation to the use of covenants not to sue in US litigation. First, it seems to be an established practice in the USA for a party that is engaged in IP litigation and who wants to stop the litigation (and thereby avoid an adverse decision), to give a covenant not to sue to the defendant. US courts have held that, if drafted widely enough, such a covenant makes the litigation “moot” and brings the litigation to an end. The recent decision of the US Supreme Court in the Nike case confirms this point.
This line of case law is important for IP litigators but doesn’t seem to be relevant to the question of whether a covenant is the same as a licence. More relevant on this point is a recent US case, in re Spansion, which was reported on the PatentlyO blog. An issue in that case was whether a covenant not to sue was a licence for the purpose of US insolvency legislation that allows an IP licensee to keep his licence following the insolvency of the licensor. As reported by PatentlyO, the Third Circuit decided that a covenant not to sue was the same as a licence, and quoted earlier US case law to this effect:
“[A] license … [is] a mere waiver of the right to sue by the patentee.” De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927). A license need not be a formal grant, but is instead a “consent[ ] to [the] use of the patent in making or using it, or selling it … and a defense to an action for a tort.” Id. The Court of Appeals for the Federal Circuit explained that the inquiry focuses on what the agreement authorizes, not whether the language is couched in terms of a license or a covenant not to sue; effectively the two are equivalent. TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009).
IP Draughts is left confused by this maelstrom of conflicting usage and authority. The expression covenant not to sue seems artificial – a lawyer’s construct. The word licence is more straightforward and understandable.
Has IP Draughts identified the main issues that arise on this subject, and is this summary reasonably accurate? Please provide any comments you feel are appropriate to increase IP Draughts’ understanding.