Promises, Promises: Cutting Off Unwanted Patent Litigation With a Covenant Not to Sue

 

By Meredith Ainbinder, a member of our Litigation Practice Group

 

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any innovators seek patent protection for their ideas, while ardently hoping that they will not be forced to sue to enforce their rights. Most patentees prefer to spend their time and money on continued efforts to innovate and run their businesses.

Sometimes, however, patent owners find themselves on the defensive end of a lawsuit, often after simply informing a competitor of their rights or offering a license to a company in their technology space. This is because our highest courts have upheld the right of competitors who receive such communications to file declaratory judgment actions — lawsuits that ask a judge to determine whether or not the asserted patent is valid and infringed. 

Potentially infringing competitors thereby seize one advantage: They get to choose when and in what court their differences with a patent holder will be decided. For many patent owners, this makes the IP landscape a minefield and discourages straightforward business resolutions of common patent concerns. 

A patent owner with no desire to engage in protracted litigation has little certainty about how to stay out of court.  Under the law, one party may sue another if, as the U.S. Supreme Court restated in MedImmune, Inc. v. Genentech, Inc. (2007), “…the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.” 

Numerous patent decisions since then have dealt with how this standard affects the ability of a potential infringer to bring a lawsuit on his own terms against the owner of the patent. The unmistakable trend is that less and less in the way of initiating aggressive activity from the patent owner is required to sustain jurisdiction.

For example, in Hewlett Packard Co. v. Acceleron LLC, discussed in an earlier IP Update, the patent owner’s triggering activities did not even involve explicit claims of infringement or threats of suit. Nonetheless, the Federal Circuit was convinced that a declaratory judgment was proper because the patent owner had sent a letter stating a relationship between a patent and a product and had refused to agree to a litigation standstill. 

The Federal Circuit recently pointed a way out of unwanted declaratory judgment lawsuits. In Dow Jones & Co., Inc. v. Ablaise Ltd., which involved explicit accusations of infringement, Dow Jones sued for a declaration that it did not infringe two patents and that those patents were invalid. The patent owner then took the common step of filing a counterclaim for patent infringement. 

During the course of the litigation, patent owner Ablaise offered Dow Jones a covenant not to sue, that is, an agreement never to sue on one of the patents. Ablaise then asked the district court to dismiss the litigation as to that patent. The court refused and ultimately ruled that the patent was invalid.

On appeal, the Federal Circuit held that the judge should have granted Ablaise’s motion to dismiss the case, because the patent owner’s covenant not to sue eliminated any controversy about that patent. The district court was thereby divested of subject matter jurisdiction and had no power to rule on the validity of the patent. With that gesture, the Federal Circuit revived a patent that had been reduced to ashes by the trial court.  

Dow Jones argued that the patent owner’s refusal to include News Corp., Dow Jones’s parent company, in the covenant not to sue made it unacceptable. The Federal Circuit disposed of this argument based on the facts that Dow Jones and the parent were separate legal entities, and that only Dow Jones had filed suit seeking to have the patent declared invalid.

The limited usefulness of a covenant not to sue

With Dow Jones in the mix, patent owners have another strategic weapon at their disposal. Even if their statements and actions make them susceptible to declaratory judgment actions, they may get themselves out of costly and time-consuming litigation in an unfriendly forum by offering a covenant not to sue after the litigation is filed. Also, as in Dow Jones, they may be able to limit the number of patents at issue by eliminating the controversy about one of them. 

At the same time, there are risks to viewing the covenant not to sue as a get-out-of-jail-free card. One obvious problem is that a covenant that is strong enough to end litigation is an agreement never to enforce certain rights against a particular entity. An imprudently granted covenant will require a patent owner to walk away from royalties or lost-profits damages. 

The usefulness of a covenant may be further limited by the potential infringer’s litigation conduct. For example, a party may file both a declaratory judgment action and a request for reexamination, which could result in cancellation of the patent claims. Even if the patent survives, the PTO proceeding will cost the patent owner time and money, regardless of whether an accompanying lawsuit is dismissed. 

Also, the availability to the public of most papers filed in a lawsuit may provide a roadmap for future opponents to challenging a particular patent. For this reason, a belated covenant increases the ammunition that subsequent challengers will have handy. There is also the small risk that large companies that are potential declaratory judgment plaintiffs will be emboldened to sue small patent owners in order to force a covenant not to sue through aggressive litigation tactics.
 
By no means does a covenant not to sue fit most situations, because the patentee is often reluctant to forfeit the opportunity to enforce his rights. Thus, even when a battle is not chosen, but is forced upon a patent holder by a competitor, the wiser course will often involve defending the validity of the patent and trying to prove that the competitor has infringed it. Indeed, it is likely that any competitor willing to spend the money needed to file a declaratory judgment lawsuit is the very competitor whom the patentee most desires to keep away from his invention. 

By contrast, a covenant might be ideal for a patent owner who wishes to keep his powder dry until a competitor he really worries about seems to be infringing his patent.

As with any result that seems to give the patent owner power and options, the Dow Jones case raises thorny strategic questions that anyone with a stake in patent rights must consider as early in the litigation process as possible.

 

 

 

 

 

 

 

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