TransCore, LP and TC License, Ltd. v. Electronic Transaction Consultants Corporation (Fed. Cir. 2009)

A settlement agreement with a covenant not to sue is equivalent to a non-exclusive patent license and implicates the doctrine of patent exhaustion, according to the Federal Circuit.

TransCore is in the business of manufacture, sale and installation of automated toll-collection systems and is the assignee of several patents of related technologies. In 2000, TransCore sued Mark IV Industries, a competitor, for infringement of several of these patents. The action was resolved with a settlement in which Mark IV agreed to a payment to TransCore in exchange for an unconditional covenant not to sue and release of all existing claims regarding the patents at issue in the suit.

Electronic Transaction Consultants Corporation (ETC), a consulting and systems integration firm, won a contract with the Illinois State Toll Highway Authority to install and test a new open-road tolling system. As part of the contract, ETC agreed to install and test a toll-collection system purchased from Mark IV. TransCore sued ETC for infringement of three patents that were part of the settlement agreement between TransCore and Mark IV, as well as a patent that was pending before the Patent and Trademark Office, but was not in existence at the time of the original settlement. ETC argued, in support for its motion for summary judgment, that the TransCore-Mark IV settlement agreement allowed its own activities under the doctrines of patent exhaustion, implied license and legal estoppel. The U.S. District Court for the Northern District of Texas granted ETC’s motion for summary judgment and TransCore appealed to the Federal Circuit.

On appeal, TransCore asserted that, while patent exhaustion provides that patent rights are terminated upon the initial authorized sale of a patented item by the patent holder, the sale in this situation was not authorized. TransCore reasoned that the unconditional covenant not to sue that was part of the TransCore- Mark IV settlement was not an authorization of sales because there was no authorized sale by the patent holder, and thus the doctrine of patent exhaustion was not at issue here.

The Federal Circuit agreed with the district court and held that the doctrine of patent exhaustion applies in this context. The Federal Circuit further explained that, because a patent holder can exclude others only from practicing a patent and not convey an affirmative right to practice the patented invention, a nonexclusive patent license is equivalent to a covenant not to sue. With this in mind, the court further concluded that the settlement agreement in this case amounted to an authorization of sales. The Federal Circuit affirmed the district court’s grant of summary judgment for ETC.

Practice Tip:

Consider the impact of future sales when evaluating settlement agreements with covenants not to sue.