Fuel-Automation-Patent Covenant Covered Downstream Customers and Foreign Parent Patent
Patent suits are often settled with licenses or covenants not to sue. What is the scope of such agreements? The recent Tenth Circuit decision Fuel Automation Station, LLC v. Energera Inc., 119 F.4th 1214 (10th Cir. 2024), considered this question, and found that the covenants were broad, enough to cover the parties’ dispute.
Fuel Automation and Energera compete in the fuel industry. Each manufactures automated fuel delivery equipment and provides related services. In 2016 and 2018, Energera sued Fuel Automation for patent infringement; both cases settled in 2019 with Energera providing Fuel Automation with a covenant not to sue. In 2020, Fuel Automation contracted with a Canadian company to provide fuel automation technology; Energera objected that this would infringe its Canadian patent. Fuel Automation brought a declaratory judgment action in federal court in Colorado to determine the scope of the covenants. The two disputed issues were (1) whether the covenant extended to customers of Fuel Automation and (2) whether it covered the Canadian patent. The Tenth Circuit ruled in Fuel Automation’s favor on both issues.
On the customer issue, Energera pointed to language in the covenant extending it to related corporate entities, officer and employees, but not customers. Further, the covenant expressly disclaimed a license, which is generally held to be a requirement for transferability to third parties. But the Tenth Circuit relied on two long-settled aspects of patent law. First, a patent is not a positive right to practice the invention, but merely the right to exclude others from practicing it. This means that there is no legal difference between a covenant not to sue, and a license. “[T]he License Disclaimer [in the Settlement Agreement] merely acknowledges what is legally correct: that Defendant does not grant Plaintiff the affirmative right to recreate Defendant’s products—and indeed, Defendant’s patent rights do not give it authority to grant this affirmative right.”
Second, under the doctrine of patent exhaustion, once the covenant was granted to Fuel Automation to manufacture and sell products covered by the patents, any patent rights Energera had as to such products were exhausted. “In this situation—when a patentholder unconditionally covenants not to sue and thus authorizes sales—the patent exhaustion doctrine operates by law to protect downstream users. . . If a patentholder promises not to sue an entity for patent infringement when the entity sells items, the doctrine recognizes an inherent promise not to sue downstream users of those items.”
On the Canadian-patent issue, the original settlement agreement covered two U.S. patents “and any foreign patent related through priority claims to the [U.S. Patents].” The Canadian patent at issue was in fact senior to the U.S. Patents, which had claimed priority to the Canadian Patent. Energera argued that “relate” meant a one-way street, such that the Canadian Patent, to which the U.S. Patents had claimed priority, was not “related” to the U.S. patents in suit. But the Tenth Circuit rejected that, citing to dictionary definitions of “related” that indicated that each was related to the other.
Fuel Automation indicates that patent licenses or covenants not to sue will likely be construed broadly. A patent owner desiring to limit their scope is advised to make clear any such limitations.
