Draft License and Settlement Agreements Carefully: Covenant Not to Sue Can Bar Future Litigation on Continuation Patents

Draft License and Settlement Agreements Carefully: Covenant Not to Sue Can Bar Future Litigation on Continuation Patents

Patent and Technology trial lawyer Stan Gibson discusses the importance of precise language in a covenant not to sue.

Covenants not to sue are frequently included in license and settlement agreements. The impact of a covenant not to sue can function similarly to a non-exclusive license and, as a result, the language of the covenant should be carefully drafted to avoid unexpected consequences. A recent Federal Circuit decision, General Protecht Group, Inc. v. Leviton Manufacturing Co., Inc., Case No. 2011-1115 (Fed. Cir. July 8, 2011) illustrates the importance of covenants not to sue.

Leviton Manufacturing Co., Inc. (“Leviton”) and General Protecht Group, Inc. (“GPG”) both manufacture ground fault circuit interrupters (“GFCIs”). After Levison sued GPG for patent infringement on U.S. Patent Nos. 6,246,558 (the “‘558 patent”) and 6,864,766 (the “’766 patent”) in the District of New Mexico, the parties entered into a settlement agreement. The settlement agreement contained a covenant from Leviton not to sue GPG for alleged infringement of the ‘588 patent or the ‘766 patent for current products and for anticipated future GFCI product that GFG had indicated its intent to market in the United States. The settlement agreement also covered GFG’s customers and stated that they were intended third-party beneficiaries. The settlement occurred in 2007. It also contained a forum selection clause selecting New Mexico as the forum for any disputes regarding the settlement agreement.

In 2010, Leviton filed a complaint with the International Trade Commission (“ITC”) and a separate complaint in the Northern District of California alleging infringement by GPG and its United States distributors of two patents that were continuations of the ‘558 patent and the ‘766 patent, respectively (the “Continuation Patents”). The Continuation Patents were issued after the settlement agreement was executed. GPG, contending that it had a license to the Continuation Patents because of the settlement agreement, filed its own action in the District of New Mexico and moved for a temporary restraining order and a preliminary injunction against Leviton’s new actions in the ITC and the Northern District of California, which the district court in New Mexico granted. Leviton appealed to the Federal Circuit.

The Federal Circuit focused its analysis on whether the settlement agreement contained an implied license of the Continuation Patents and noted that the controlling case on the implied license question is TransCore v. Electronic Translation Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009). In TransCore, the Federal Circuit found that TransCore had licensed its patent by covenanting not to sue on the patents and that continuation patents were also impliedly licensed as a result.

Leviton argued that TransCore was not applicable because some of the claims of its continuation patents were narrower than previously asserted claims and, therefore, did not derogate from the right to practice the licensed claims. The Federal Circuit found this argument unavailing because the “newly asserted continuations are based on the same disclosure as the previously licensed patents and that, by definition, the continuations can claim no invention not already supported in the earlier issued patents.” The Federal Circuit stated that “where, as here, continuations issue from parent patents that previously have been licensed as to certain products, it may be presumed that, absent a clear indication of mutual intent to the contrary, those products are impliedly licensed under the continuations as well.”

Leviton also attempted to argue that the mutual intent of the parties was not to license the continuation patents and that distinguished the case from TransCore. To make this argument, Leviton pointed to several provisions of the settlement agreement , including a right to sue on related patents, which evidenced an intent that both parties anticipated future litigation. The Federal Circuit also rejected this argument, finding that the settlement agreement, at best, was silent on the point and, at worst, failed to leave open the possibility of future litigation on the same products based on continuations of the parent patent previously asserted. As a result, the Federal Circuit affirmed the decision of the district court in New Mexico.

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The Federal Circuit’s decision is another reminder, just as TransCore was, that settlement agreements and licenses must be drafted carefully. The Federal Circuit has now made it plain on two occasions that a covenant not to sue can function as a license and bar future patent infringement actions. That reasoning applies to continuations as well. To avoid future problems with covenants not to sue, it is important to address these issues with precise language that plainly defines the scope of the covenant not to sue.