TransCore v. Electronic Transaction Consultants (ETC) (Fed. Cir. 2009)
TransCore's patents cover automated toll collection systems. (Think E-ZPass). The company had previously settlement an infringement suit against a competitor (Mark IV) with a covenant not to sue on the patents. The present lawsuit arose when ETC began installing an automated toll collection system using Mark IV software. The district court dismissed the case – holding that Mark IV's licensed sales exhausted any patent rights. On appeal, the Federal Circuit affirmed.
In Quanta (2008), the Supreme Court re-affirmed the non-statutory doctrine of patent exhaustion. Exhaustion is triggered by an authorized sale and operates to "terminate all patent rights to that item."
Covenant versus Authorization: Here, TransCore slyly argued that its covenant not to sue could hardly be equated with an authorized sale sufficient to trigger exhaustion. Of course, a patent holder's exclusive right is only the right to sue for infringement, and a covenant not to sue gives up all patent rights that could be used in that context. In other words, in the narrow patent context, a covenant not to sue is the functional equivalent to authorizing sales. As the Federal Circuit held in the Spindelfabrik (1987) "a patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee."
Scope of Covenant: The license terms specifically focus on Mark IV as a party: "[TransCore] agrees and covenants not to bring any demand, claim, lawsuit, or action against Mark IV for future infringement." However, the one-party focus does nothing against the exhaustion doctrine because once the software is sold by Mark IV, any patent rights associated with those copies of the software are exhausted. "[T]he district court correctly found that Mark IV's sales to ISTHA were authorized and that TransCore's patent rights are exhausted."