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Covenant Not to Sue and Patent Exhaustion

On Behalf of | Nov 17, 2021 | Patent Law

A covenant not to sue is a legal agreement in which the party seeking damages agrees not to sue. Covenants not to sue are typically used to settle specific patent litigation issues outside the civil court system. When signing a covenant not to sue, you will preserve the existence of the underlying cause of action. However, there will be contractual restrictions on the injured party’s right to file a lawsuit.

When a patent owner wishes to prevent or halt patent litigation, the patent owner may use a covenant not to sue to exhaust the patent litigation. Doing so can result in divesting the court of jurisdiction over any non-infringement declaratory judgment action that the alleged patent infringer filed. The patent holder may agree to sign a covenant not to sue with a company to which they license their patents. The patent holder may agree not to sue the licensee when a third party uses the patent without legal permission, but they may reserve the right to sue any third party itself.

Covenant Not to Sue vs. Release of Liability

It is important to note that a covenant not to sue differs from releasing a person from liability. A release of liability is a waiver or relinquishing a known right to use a patented idea or design. A release of liability essentially relinquishes or destroys the cause of action of the injured party. On the other hand, a covenant not to sue is not a waiver of a known right. No rights are destroyed or relinquished when agreeing to a covenant not to sue. Instead, the covenant not to sue preserves the cause of action but restricts the injured party’s right to file the lawsuit.

Patent Licenses Versus Covenants Not to Sue

Covenants not to sue and patent licenses are closely related to each other. However, they can have different effects, some of which may be unintended or undesirable. If you decide whether to use a license or a covenant not to sue, it is important to understand the similarities and differences. Both types of agreements are essentially a promise by the licensor not to sue the licensee. Even if a licensor purports to grant to use, make, or sell, the agreement cannot truly transfer that right. There are some differences, however.

A license that grants the licensee some of the proprietary rights of a patent, such as an exclusive license, does more than provide a covenant not to sue. Covenants not to sue at least imply its similarity to a nonexclusive “bare” license. Patent licensees have a right to grant a covenant not to sue but not without a granted right to sublicense. However, the licensee probably cannot grant a license, even a non-exclusive license.

The Benefits of Creating a Covenant Not to Sue

If you are creating a covenant not to sue, there are several different options you can take. One of the best strategies you can employ is hiring an experienced patent attorney. A patent attorney can help you draft a covenant not to sue that will be tailored to your needs and legally enforceable. Instead of using a boilerplate covenant not to sue, an attorney can help you determine which type of agreement will meet your needs. A patent attorney can also help you consider other options that may work better, such as a non-exclusive license agreement or release, depending on the facts in your case.

Patent Exhaustion

Patent exhaustion occurs when a patented item is made and sold in the U.S. The person who holds the patent forfeits all rights to the patent. Typically, when a patented item under a utility patent exists, the owner gives up the right to use and profit off of the item. If the only value in your invention is its use, patent exhaustion could become necessary. A recent opinion from the District of Delaware in Purdue v. Collegium demonstrates how a covenant not to sue can cause patent exhaustion.

Purdue brought a lawsuit against Collegium for infringing a patent for pain-relief medication. Pursue settled a separate patent-infringement lawsuit with Assertio, granting Assertio a covenant not to sue. This covenant not to sue was extended to other entities, but Collegium was given an exception. When Assertio received the covenant not to sue to settle with Purdue, Assertio, and Collegium amended the commercialization agreement. The title transferred from the contract manufacturing organization to Assertio before transferring to Collegium.

Covenants Not to Sue Can Cause Patent Exhaustion

In the end, the court ruled that the recipient of a covenant not to sue could cause patent exhaustion. The recipient of a covenant not to sue can become a source of necessarily non-infringing competing products as long as the covenant’s terms does not state otherwise. One of the main takeaways from this case is that patent holders need to consider the possible long-term effects of entering into a covenant not to sue.

Trying to manage the effects of a covenant not to sue requires carefully considering all of the possible ways in which non-infringing products could go through the covenantee. If the patent holder desires to carve out a third party, he or she needs to delineate what types of products are not authorized explicitly. For example, selling to a third party, selling directly to third party customers with a finders fee, or sub-licensing to the third party.

Contact a Skilled Patent Lawyer Today

Do you have questions about a covenant not to sue or patent exhaustion? Are you involved in patent litigation? If so, the skilled patent lawyers atAU LLC are here to help. We have successfully represented clients in Chicago and throughout the US. Contact us today to schedule your initial consultation.