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April 8, 2009

Toll Taken

"In 2000, TransCore sued a competitor, Mark IV Industries, for infringement of several TransCore patents. That action was resolved by a settlement agreement, in which Mark IV agreed to pay $4.5M in exchange for an unconditional covenant not to sue and a release of all existing claims." Then TransCore sued again.

TransCore v. Electronic Transaction Consultants Corp. (ETC) (CAFC 2008-1430) precedential

Several years later, ETC, a firm engaged in consulting and systems integration related to toll-collection systems, won a bid with the Illinois State Toll Highway Authority (ISTHA) to install and test a new open-road tolling system. As part of the contract, ETC agreed to set up and test toll-collection systems purchased by the ISTHA from Mark IV.

TransCore sued ETC for infringement of three patents that had previously been in suit against Mark IV (U.S. Patent Nos. 5,805,082; 5,289,183; and 5,406,275 (the '082, '183, and '275 patents)) as well as U.S. Patent No. 6,653,946 (the '946 patent), a related patent that was pending before the Patent and Trademark Office but had not yet issued at the time of the TransCore-Mark IV settlement.

In summary judgment, the district court found the patents exhausted. The appeals court agreed.

Recently, in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008), the Supreme Court reiterated unequivocally that "[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item," id. at 2115, and that "[e]xhaustion is triggered only by a sale authorized by the patent holder," id. at 2121. The question for this court is whether an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion. We hold that it does.

TransCore argued about downstream customer liability, citing Jacobs v. Nintendo of America, Inc., 370 F.3d 1097 (Fed. Cir. 2004).

As the Supreme Court explained in Quanta, however, the parties' intent with respect to downstream customers is of no moment in a patent exhaustion analysis. See Quanta, 128 S. Ct. at 2122 ("But the question whether third parties received implied licenses is irrelevant because [the downstream customer] asserts its right to practice the patents based not on implied license but on exhaustion. And exhaustion turns only on [licensee's] own license to sell products practicing the [licensor's] Patents.").

The CAFC panel longwindedly detailed what it has "on numerous occasions explained that a non-exclusive patent license is equivalent to a covenant not to sue."

More specifically, does the TransCore-Mark IV settlement agreement authorize sales? We conclude that it does.

The language of the TransCore-Mark IV settlement agreement is unambiguous: "[TransCore] agrees and covenants not to bring any demand, claim, lawsuit, or action against Mark IV for future infringement . . . ." This term, without apparent restriction or limitation, thus authorizes all acts that would otherwise be infringements: making, using, offering for sale, selling, or importing. TransCore did not, as it could have, limit this authorization to, for example, "making" or "using." And indeed, at oral argument, TransCore conceded that the TransCore-Mark IV settlement agreement does not include a restriction on sales.

TransCore tried to hang onto its latest patent for further extraction. The courts wouldn't have it. The family was "exhausted by Mark IV's authorized sales under an implied license to practice that patent by virtue of legal estoppel."

As explained by our predecessor court in AMP Inc. v. United States, 389 F.2d 448 (Ct. Cl. 1968):

[W]hen a person sells a patent which employs an invention which infringes a prior patent, the person selling is estopped from bringing an action against his grantee for that infringement, even though the earlier patent is acquired after the sale of the later patent. The same principle applies to the grant of a patent right by license as well as assignment.

Id. at 451 (citation omitted). Although TransCore argues that this form of legal estoppel only applies to "prior" or "earlier" patents, we see no reason for so fine a distinction--the timing of patent issuance is no more relevant to this inquiry than the timing of acquisition.

The basic principle is, therefore, quite simple: "Legal estoppel refers to a narrow[] category of conduct encompassing scenarios where a patentee has licensed or assigned a right, received consideration, and then sought to derogate from the right granted." Wang Labs., Inc. v. Mitsubishi Elecs. Am., Inc., 103 F.3d 1571, 1581 (Fed. Cir. 1997).


Posted by Patent Hawk at April 8, 2009 3:39 PM | Case Law


Seriously, how underhanded can you attempt to be? People keep setting the bar a little higher on the attempted unethical enforcement of patents.

Posted by: 6000 at April 8, 2009 4:38 PM

Not sure what the plaintiff or its lawyer was thinking in this case. This suit was tantamount to a frivolous action if you ask me and the plaintiff should have been slapped with having to pay the defendant's attorneys' fees. The covenant in this case was clearly equivalent to a non-exclusive license. It is a hornbook principle of patent law that a non-exclusive or bare license is nothing more than a promise not to sue the licensee (or promisee) for infringement. Why would the manufacturer of the products in this case have paid the patentee $4.5 million dollars to settle the prior lawsuit and still be unable to sell a product that its customers could not use without incurring liability from the patentee? That makes absolutely no legal or business sense and even less sense why the plaintiff decided to sue this downstream user anyway. One interesting thing about this decision is that the lower court decision was issued 18 days before Quanta was issued by the Supreme Court. The lower court therefore held that the plaintiff's patent rights were exhausted even under the Federal Circuit's narrower view of exhaustion pre-Quanta. So it seems likely that this case may have been decided the same way by the Federal Circuit even if Quanta had not been decided by the Supreme Court.

Posted by: Anonymous at April 14, 2009 1:27 PM