It happens from time to time. A young lawyer working on a patent licence comes into my office and earnestly asks: What is the difference between a "non-exclusive licence", a "covenant not to sue", and a "non-assertion agreement"?Panic strikes. The notion of a non-exclusive licence is relatively straightforward; indeed, it is anchored in many national patent laws. But what do I say about a "covenant not to sue" and a "non-assertion agreement"? They have no statutory anchor. In truth, I am not certain from whence they come. Are they creatures of case law, or did they somehow, somewhere simply appear from the mists of licensing past, a bit like those wonderfully talismanic terms-- "background IP" and "foreground IP"?
The question remains: Do I mumble, dissemble, claim an in-coming call on my iPhone (hopefully she will not recall that I do not own an iPhone), or do I urge her to research the issue in the name of professional training (making certain to later erase her hours on any bill that might be sent to the client)? I choose the last alternative, the offer is accepted, and I breath a sign of temporary relief. I have managed to bite the bullet once again. In the silence and solitude of my office, door shut, blinds closed, I look into the mirror and admit--I am not really certain of the difference.
I then reach for the most recent edition of the Brunsvold and O'Reilly treatise, Drafting Patent Licensing Agreements, which states as follows:
"A patent owner may contractually agree to not assert the patent. Such an agreement, interchangeably known as a nonassertion agreement or a covenant not to sue, is used where a nonexclusive license is inappropriate or is perceived to have unacceptable consequences."The authors go on to explain these circumstances as follows:
"The grantor of a nonexclusive license ... represents possession of the power to grant the license and necesssarily represents posession of the power to impose the equivalent of a lien on the patent. The grantor of a covenant not to sue merely promises not to use; there is no implied representation that the grantor has the power to sue. Absent an express representation of owneship of the patent in a nonassertion agreement, the grantee assumes a risk that the true patent owner may sue. [Also, a] covenant not to sue is a promise that the true patent owner may sue."These distinctions are interesting, but their sources are not disclosed, and the extent to which there are other views on the issue is not certain. Further, I am not sure what are the full practical implications.
Some help may be on the way. A recent article, Jung and Mollo, "TransCore and Freedom of Contract", Bloomberg Law Reports, July 6 2009, has viewed the issue from a somwhat different perspective in light of new US case law. The authors noted that until recently, the perceived differences between a non-exclusive licence, on the one hand, and a covenant not to sue/nonassertion agreement, on the other, was as follows:
"[A] covenant not to sue [is] a personal, contractual commitment of the grantor to the grantee alone. A patent licensee, in contrast, was considered a grant of authority or rights under the patent that extended to downstream users of the licensed article."The key here is the application of the exhaustion principle. Since the covenant not to sue was held only to apply to the named beneficiaries, rather to the licensed goods, the exhaustion doctrine, at least under US law, was held not to apply.
However, the U.S. Federal Circuit (TransCore LP v. Electronic Transaction Consulting Corp., 563 F3d 1271, Fed. Cir. 2009) appears to put paid to that commonly held distinction, holding that an unconditional covenant not to sue (or a nonassertion agreement) is essentially similar to a non-exclusive licence. While the court did not explicitly set out what differences, if any, remain between a non-exclusive licence and a covenant not to sue, one result is clear. Under US law, one can no longer rely on a covenant not to sue to try and avoid the application of the patent exhaustion doctrine.
And so the question(s):
1. After the TransCore decision, are there any substantial differences between the two? If so, what are they?
2. Given this uncertainty, is the better position to resist the use of a "covenant not to sue"/ "nonassertion agreement" in place of (and sometimes together with) a non-exclusive license?
3. As Jung and Mollo ask, can anything be done to change existing agreements that were drafted on the basis that there was a distinction that was relevant with respect to the application of the patent exhaustion doctrine?
4. Is all of the foregoing a U.S.-centric issue? Do the notions of "covenant not to use"/"nonassertion agreement" have a significance outside of the US? If so, what is it?"