In VDPP v. Volkswagen, the Federal Circuit made short work of rejecting VDPP’s argument that settlement licenses are somehow different from ordinary licenses for marking purposes. Following up on Seeing More Clearly: Patent Marking Compliance in the Wake of VDPP v. Volkswagen, this post turns to a question that has been percolating in the background of the VDPP discussion:
Can a patent holder sidestep the marking statute by structuring its settlement agreements as covenants not to sue rather than licenses?
The short answer is probably not — but the question is closer than it appears, and patentees have every incentive to test it.
Link to The Marking Statute: Is “For or Under” the Hinge? The Marking Statute: Is “For or Under” the Hinge?
The marking statute’s language is what makes this question interesting. Section 287(a) conditions the recovery of pre-notice damages on marking by the patentee and by persons making, offering for sale, or selling patented articles “for or under” the patentee:
Patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented… In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter…
The phrase “for or under” is doing a lot of work, and it may be the hinge on which the covenant-not-to-sue question turns. To understand why, start with the Federal Circuit’s treatment of the license/covenant distinction in the exhaustion context.
Link to Has the Crack in the Glass Already Filled? Has the Crack in the Glass Already Filled?
In Jacobs v. Nintendo, a panel at the Federal Circuit distinguished between the covenant not to sue and the license grant in a settlement agreement for implied-license purposes. The license provision, the panel found, “goes much further by granting [the manufacturer] an affirmative right to engage in the manufacture and sale,” while the covenant not to sue “would have been fully sufficient” just to free the manufacturer of its own liability. That distinction mattered in Jacobs because the analysis turned on the parties’ intent regarding downstream customers.
But TransCore v. Electronic Transaction Consultants Corp. put that distinction to rest, at least in the context of exhaustion. Citing to the Supreme Court’s decision in Quanta that had made clear that the parties’ intent regarding downstream rights is irrelevant to patent exhaustion, TransCore clarified that what matters in the context of patent exhaustion is whether the sale was authorized. It held that the distinction between a license and a covenant not to sue is one of form, not substance:
[t]he real question… is not whether an agreement is framed in terms of a ‘covenant not to sue’ or a ‘license.’ That difference is only one of form, not substance — both are properly viewed as ‘authorizations.’
And, since a covenant not to sue authorizes sales just as effectively as a license does, the two seem to be functionally indistinguishable for exhaustion purposes.
The reasoning is grounded in the fundamental nature of patent rights. A patent does not give the patentee an affirmative right to practice the invention. Rather, it only gives the patentee the right to exclude others from practicing the invention. It thus follows that a patentee, by license or otherwise, can only convey a freedom from suit. The Supreme Court said as much in De Forest Radio: “[a]s a license passes no interest in the monopoly, it has been described as a mere waiver of the right to sue by the patentee.”
The Federal Circuit echoed this reasoning in TransCore:
A patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. Even if couched in terms of ‘[l]icensee is given the right to make, use, or sell X,’ the agreement cannot convey that absolute right because not even the patentee of X is given that right.
Link to The Nuance Is Real, Even If the Outcome Is Likely The Nuance Is Real, Even If the Outcome Is Likely
While this question has been settled in the exhaustion context, it has not been squarely decided in the marking context. The VDPP panel left a sliver of hope, expressly declining to “foreclose the possibility that a licensor can ever establish it made reasonable efforts to ensure licensee compliance with 35 U.S.C. § 287 in the absence of a marking obligation.” A patentee might therefore press additional angles. An entity might start structuring settlement agreements as pure covenants — e.g., “we promise not to sue you for making, using, or selling products under patents X, Y, Z” — while explicitly disclaiming any license or authorization, and pairing this with arguments distinguishing this approach in the marking context from the prior decisions:
Textual Distinction. Section 287 applies to “persons making, offering for sale, or selling within the United States any patented article for or under” the patentee. As the Federal Circuit explained in Arctic Cat Inc. v. Bombardier Recreational Products Inc., a patentee’s licensees must comply with § 287 precisely because the statute extends to persons making or selling patented articles “for or under” the patentee. But the marking obligation attaches to licensees, i.e., entities acting “for or under” the patentee, not merely to anyone the patentee has promised not to sue. A party operating under a bare covenant not to sue could argue it is not making or selling products “for or under” the patentee in the way a licensee does. It is simply free from the threat of litigation while acting under its own authority.
A pure covenant not to sue, unlike a license, does not affirmatively authorize the recipient to do anything. It merely removes the threat of litigation. The recipient acts under its own authority, not “under” the patentee. Under this theory, products sold by a covenantee would not be “patented articles” sold “for or under” the patentee, and the marking obligation would never attach. The “for or under” language arguably implies an agency-like relationship, i.e., someone acting with the patentee’s authorization or on the patentee’s behalf, and a covenant not to sue does not create that relationship. The statutory text in consideration here differs from the exhaustion framework, which turned on whether a “sale” was “authorized.”
Policy Distinction. The marking statute exists to provide constructive notice to the public that an article is patented. If a covenantee is not truly operating “under” the patentee’s authorization but is simply free from suit, the public-notice rationale is arguably weaker—the patentee has no meaningful control over the covenantee’s products and no relationship that would support imposing a marking obligation on the covenantee’s activities.
The more likely outcome is that courts will treat covenants not to sue the same as licenses for marking purposes, consistent with the Federal Circuit’s well-established position that the two are functionally indistinguishable. Drafting around that position with a disclaimer is unlikely to work: The settlement language under consideration in TransCore itself disclaimed any “express or implied license,” and the court held the language did not change the result. Nor does the policy argument likely fare any better after VDPP since the panel held that excusing licensee marking would frustrate all three purposes of § 287 by putting products the patentee believes to infringe into the market unmarked.
But “likely” is not “certain,” and, as noted above, the question has not been squarely decided in the marking context. Patent holders structuring settlements should be aware that labeling an agreement as a “covenant not to sue” rather than a “license” is unlikely to avoid a marking obligation; the failure to mark could bar pre-notice damages altogether. On the other side of the table, accused infringers should scrutinize the patent holder’s settlement portfolio for exactly this kind of creative structuring, because it may open a marking defense that the patent holder assumed it had designed around.