The team is joined by Guest Kats Rosie Burbidge, Stephen Jones, Mathilde Pavis, and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Hayleigh Bosher, Tian Lu and Cecilia Sbrolli.

Friday, 24 March 2017

"What is this thing called love, this funny thing called love"? And while you're at it, what is a covenant not to sue?


“…[W]hat is this thing called love, this funny thing called love”? (song by Cole Porter)

Some topics in IP attract more attention than they deserve, while others are underappreciated. Think about all the academic ink that has been spilled about genericism in trademarks; it seems that the more that is written, the less likely it is that genericism will be found. To the contrary is IP licensing. Most Kat readers can anecdotally confirm that IP licensing is wide-spread. However, there is a surprisingly thin corpus of commentary, with the result that certain licensing practices are, frankly, not well-understand.

A good example of the latter is the notion of “covenant not to sue” (also referred to as a “nonassertion agreement”). Again, anecdotally at least, it seems that a covenant not to sue is frequently used, especially in patent and trademark licensing. Notwithstanding, this Kat has not found a satisfactory way of defining, or at least describing, what the covenant is. “Come on Kat”, you might say, “the fault lies with you.” Perhaps. But this Kat would argue that the problem rests with the notion itself.

Focusing on patents, consider that the statutory treatment of licenses and licensing varies greatly. In the U.S., the subject is largely absent from the patent statute, with no real treatment of the differences between an exclusive and a non-exclusive license. By contrast, take a country like Israel, whose patent statute provides (at least a partial) definition of exclusive and non-exclusive licenses, with special attention to the right to sue. Here, as well, however, there is no statutory reference made to a covenant not to sue. Varieties of these two approaches can be found in most other jurisdictions; what seems common to all is that none provides a real definition of what is entailed in a covenant not to sue.

“Not so fast, Kat, there is a body of understanding about what is meant.” Let’s explore this claim. A useful book on patent licensing, at least under U.S. law, is Drafting Patent License Agreements, by Brian Brunsvold and others (now apparently published in its 8th edition). The lead paragraph on their brief treatment of the topic in the 6th edition (written by Brunsvold and Dennis O’Reilly) states as follows:
“A patent owner may contractually agree not to 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 in inappropriate or is to perceived have unacceptable consequences.

The grantor of a nonexclusive license impliedly represents possession of the power to grant the license and necessarily represents the power to impose the equivalent of a lien on the patent. Similarly, the grantor of a covenant not to sue will be presumed to have a right of action against the grantee at the time the covenant is granted. Since a patent application does not give its owner a right of action, a covenant not to sue cannot be granted until the patent issues. Notwithstanding a presumption that the grantor has a right of action, i.e., owns or had the right to enforce the patent, good practice suggests obtaining an express representation to that effect.

A covenant not to sue is a promise of the grantor that does not necessarily future owners of the patent. Thus, even where the grantor owns the patent at the time, the grantor may assign it to another who, absent a contractual provision, would not be bound by earlier covenants not to sue. The recipient of such a promise, therefore, should obtain an express representation of ownership by the grantor and should contractually require the grantor to impose the same promise on any future assignee of the patent” (footnotes omitted).
This Kat would suggest that the foregoing reflects a common understanding that a covenant not to sue differs from a non-exclusive license in that it is personal to the parties. A covenant not to sue does not represent that the grantor necessarily has good title or can enforce the patent against the grantee, nor does it bind successors to the patent. (As such, it reminds this Kat of a quitclaim deed in real property, where the grantor does not warrant that it has any rights in the property). So far, so good—if the parties want to bind themselves in this fashion, they should be allowed to do so.

What this Kat does not understand, however, is the suggestion by the authors that express representations be given by the grantor regarding ownership and assignment of the covenant. If these explicit assurances are contractually given, what is the difference between a non-exclusive license and a covenant to sue, whatever the caption? Consider the sample clause provided by the authors—
“Company A hereby covenants not to sue Company B under any patent listed in Exhibit A for infringement upon any act by Company B of manufacture, use, sale, offer for sale, or import that occurs after the effective date of this Agreement. Company A hereby represents that it owns full and equitable title to each patent listed in Exhibit A. Company A further promises to impose the covenant of this paragraph on any third party to whom Company A may assign a patent listed in Exhibit A.”
What makes this provision a covenant not to sue, as opposed to an alternative formulation of a grant of non-exclusive license? This Kat has no answer.

See also, “When is a licence not a licence? When it’s a covenant not to sue?”, IP Draughts, 26 January 2013, here.

3 comments:

Anonymous said...

"What is love?" - Cole Porter certainly "Haddaway" with lyrics...

Stephen Johnson said...

Neil

The U.S. Supreme Court was asked to address this murky question in the Meso Scale v Roche case in October 2015. It did not grant cert.

Prof. Dennis Crouch blogged on it.

Kind regards

Stephen Johnson

Anonymous said...

Neil,

Two thoughts:

1. would there be a difference in terms of a possible asset/share sale of Company B, i.e. a licence could follow such a sale but a covenant not to sue would become ineffective / worthless for the new owner?

2. Other licencees: what if Company A had given out (or intends to give) a licence to Company C for the patents, with a right for C to enforce? In that case a licence from A to B prevents C from enforcing against B, while a covenant by A not to sue B wouldn't. That difference is quite important for B. In fact, if C had an exclusive or sole licence from A (with a right to enforce or not), then a covenant not to sue would be the only way A could promise not to enforce against B, wouldn't it? (A could not award another licence.) That one is perhaps a bit theoretical...

Subscribe to the IPKat's posts by email here

Just pop your email address into the box and click 'Subscribe':