A New Jersey federal court ruled that the doctrine of patent exhaustion can be the basis for dismissal of a patent infringement suit against a customer’s manufacturer, where the patent owner offered the customer a covenant not to sue – even if that offer was subject to certain conditions and therefore never accepted.
In Re TR Labs Patent Litigation involved a patent dispute between Alberta Telecommunications Research Centre (“TR Labs”), Cisco, and Cisco’s customers.
TR Labs, Canada’s largest non-profit research consortium, owns the two patents at issue, for a “Scalable network restoration device” and “Evolution of a telecommunications network from ring to mesh structure.” Since 2009, TR Labs has sued eight Cisco customers, including AT&T, Qwest, Sprint, and Comcast, alleging that their use of certain Cisco networking solutions and routers infringed TR Labs’ patents. Other Cisco customers were threatened with similar suits. In 2012, Cisco sought a declaratory judgment of invalidity and non-infringement with respect to the TR Labs patents. According to Cisco’s complaint,
Defendants’ allegations of infringement arising from the use of Cisco’s products are unwarranted, and Cisco brings this declaratory judgment action to free its customers, its product lines and itself from these unwarranted allegations of patent infringement.
The district court originally dismissed Cisco’s complaint for lack of subject matter jurisdiction, because TR Labs was not suing Cisco (as opposed to Cisco’s customers) for direct or indirect infringement of the patents, and thus Cisco had no standing to bring suit. On appeal, the Federal Circuit affirmed the dismissal, based on part of TR Labs’ offer of a covenant not to sue Cisco for alleged infringement of the patents at issue. However, although TR Labs offered such a covenant, Cisco never accepted it, due to the condition it was subject to. In the patent infringement action by TR Labs against AT&T, the issue arose as to whether AT&T could use TR Labs’ offer of a covenant not to sue to Cisco to support a claim of patent exhaustion.
According to the court’s decision, the doctrine of patent exhaustion “provides that the initial authorized sale of a patented item terminates all patent rights to that item.” Under the doctrine, after a patent owner sells an item covered by the patent, the patent owner can’t then control the buyer’s (or any future buyer’s) use of the item. Thus, “the buyer is impliedly authorized to repair, use, modify, and resell the purchased item, free from further claims under the patent laws by the seller.”
The court noted that a US patent holder “is granted the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States.” This right to exclude others can be conveyed by a patent license or other agreement. According to the court, a patent license is “simply a promise not to sue for infringement,” and a covenant not to sue “operates in the same way as an authorized sale or license of a patented product under the patent exhaustion doctrine.”
Said the court,
Courts have also held that the offer of a covenant not to sue qualifies as an authorized sale and has the same effect as a covenant that has been executed and agreed upon between the parties.
AT&T argued that its use of Cisco’s products was thus covered by the patent exhaustion doctrine, based on the offer of a covenant from TR Labs to Cisco. TR Labs contended that the covenant was never executed because TR Labs was unwilling to extend the covenant to Cisco’s customers, and thus that the covenant was irrelevant to AT&T (as one of those customers). The court disagreed, finding that TR Labs’ offer a covenant not to sue was an “authorized sale” within the meaning of the patent exhaustion doctrine.
Since even a conditioned covenant not to sue can be construed as a sale for purposes of patent exhaustion and therefore applicable to downstream customers (despite the condition expressly negating such a scenario), patent owners should be very careful in offering covenants not to sue generally and even specifically, outside of the scope of confidential, non-binding negotiation.