Settlement of patent litigation often includes either a patent license or covenant not to sue for patent infringement. In general, a license is an affirmative grant of authority to commit an act that would otherwise be unlawful, while a covenant not to sue is merely a personal promise not to sue. In other words, a license contains a promise that is transferable to other parties, while a covenant is a promise that protects only a specific party.
The Tenth Circuit recently decided that the scope of a covenant not to sue for patent infringement included downstream customers in view of the broad language of the covenant and in context of the agreement and its attachments. Fuel Automation v. Energera, No. 23-1123, -- F.4th -- (10th Cir. Oct 22, 2024).
The parties are comptetitors in the fracking industry who manufacture automated fuel delivery equipment and provide related services. Previously, Energera (previously known as Frac Shack) had sued Fuel Automation for patent infringement. Settlement of that patent litigation included a covenant not to sue that Energera "covenants not to sue ... or otherwise engage [Fuel Automation] in any domestic or foreign legal or administrative proceeding, for or based on infringement of the [Patent Rights]."
The settlement agreement also included an express disclaimer of any license, and an agreed-upon press release that included the following:
Under the terms of the Settlement Agreement, neither Party conceded infringement or violation of any laws, and both Parties are expressly permitted to manufacture, use, sell, lease, and license their respective mobile automated fuel distribution units utilized in the fracking industry. The remaining terms of the Agreement are confidential.
Energera later sued one of Fuel Automation's customers. Fuel Automation then intervened, seeking declaratory judgment that the Covenant authorized the sale or lease its equipment and the patent exhaustion doctrine prohibited Energera from suing customers, lessees, or users of that equipment.
The patent exhaustion doctrine prohibits a patentholder from suing a downstream user for patent infringement because the first authorized sale of the patented item exhausts the patentholder's right to control others' use of the item. See Impression Prods., Inc. v. Lexmark Int'l, Inc., 581 U.S. 360, 370 (2017) (citing Bloomer v. McQuewan, 55 U.S. 539, 549 (1852)).
At trial, a jury found that the Patent Rights covered the patent-at-issue and that Energera had breached the Covenant. Because the district court previously ruled that the Covenant included downstream users, the jury needed only to determine whether the Covenant covered the patent-at-issue.
The Tenth Circuit noted that the settlement agreement did not expressly include or disclaim third-party rights, but the Covenant used the “engage” whose dictionary definition broadly included concepts such as “to involve”; “to entangle”; “to bring into conflict with the enemy”; and “to induce to participate.”
Defendant must have known, to a high degree of certainty, that Plaintiff would be involved, entangled, brought into conflict, or induced to participate in a lawsuit Defendant brought against Plaintiffs' downstream users .... So the language “otherwise engage” reasonably could show the parties' intent to prohibit Defendant from suing Plaintiff's downstream users.
The Press Release also supports a broad interpretation. Because the parties attached the Press Release to the Agreement as Exhibit C, we must construe it as part of the Agreement. See Colo. Jury Instr., Civil 30:32 (Colo. Sup. Ct. Comm. on Civil Jury Instr. 2024). Fairly read, the Press Release assures current and prospective downstream users that Plaintiff had the authority to sell and lease equipment to downstream users. Indeed, it says explicitly that “both Parties are expressly permitted to manufacture, use, sell, lease, and license their respective mobile automated fuel distribution units utilized in the fracking industry.” This construction shows that the parties contemplated downstream use of equipment that could implicate the Patent Rights
The Tenth Circuit also noted that a disclaimer of license does not conflict with or limit the covenant because "the License Disclaimer merely acknowledges what is legally correct: that Defendant does not grant Plaintiff the affirmative right to recreate Defendant's products."
We thus conclude that the Agreement's plain language unambiguously prohibits Defendant from suing Plaintiff for infringement of the Patent Rights when Plaintiff sells or leases its equipment. The Agreement language does not expressly prohibit Defendant from suing Plaintiff's downstream users for infringement of the Patent Rights. But the Agreement's additional broad terms (“otherwise engage”), its contemplation of downstream users (assuring the public that Plaintiff can sell and lease its equipment), and its absence of curbing third party protections reasonably supports an interpretation that would protect downstream users. In this situation—when a patentholder unconditionally covenants not to sue and thus authorizes sales—the patent exhaustion doctrine operates by law to protect downstream users
Noting that the patent exhaustion doctrine “functions automatically” upon the first authorized sale and forbids lawsuits against downstream users for patent infringement, citing Impression Prods., 581 U.S. at 370 (quoting Bloomer, 55 U.S. at 549), the Tenth Circuit held that patent exhaustion prohibits a patentholder from suing downstream buyers when the seller had authority to sell the item, citing TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1272 (Fed. Cir. 2009).
Absent a carve-out condition otherwise, a covenant not to sue gives the recipient authority to sell an item, and a resulting authorized sale automatically exhausts the patentholder's rights and prohibits suit against the buyer, so the Tenth Circuit held that the Covenant granted Fuel Automation an unconditional covenant not to sue for patent infringement that did not carve out third-party protections such that Fuel Automation's authorized equipment sales/leases exhausted Energera's patent rights with respect to the use of that equipment by others. See TransCore, 563 F.3d at 1274 (when an agreement contains an unconditional covenant not to sue, the covenant grants the recipient the right to make, use, and sell the patented inventions—and a resulting authorized sale exhausts the patentholder's right to exclude). Thus, Fuel Automation had authority to lease or otherwise transfer its equipment for others to use, and that transfer exhausted Energera's patent rights. The Tenth Circuit held that "the Covenant authorized Plaintiff to sell and lease its equipment, and that the patent exhaustion doctrine extends the Covenant to prohibit suit against downstream users."
The Tenth Circuit also held that "[c]ommon usage and ordinary grammar constructs" support interpreting the Patent Rights to include the patent-at-issue because the prepositional phrases “through priority claims” and “to the U.S. Patents” both function as adverbs to modify and limit the preceding adjective, “related,” where each preposition expresses the relation between its object and the word “related.” The parties had argued different interpretations using analogies to a "one-way street" or a "two-way street." The Tenth Circuit noted that the word "related" means "to show or establish logical or causal connection between," which would involve a connection that flows between at least two things, and that this was a two-way street. "In other words, when A is related to B, B is also necessarily related to A."
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