Claims Against Downstream Purchasers Barred By Settlement And Estoppel

Posted on | June 26, 2008 | 6 Comments

2008-1430 TransCore v. Electronic Transaction
ND/TX 3:05-cv-02316
Judge Ed Kinkeade

TransCore appeals from the summary judgment order of Judge Ed Kinkeade finding that TransCore is judicially estopped from suing defendant for patent infringement due to its earlier settlement with third-party Mark IV.

TransCore manufacturers and installers automatic vehicle identification systems ("AVI systems"), including systems that could be used for high-speed toll collection.  Non-party Mark IV Industries, Ltd. ("Mark IV") is a manufacturer of AVI systems.  Defendant Electronic Transaction Consultants Corporation ("ETC") is a systems integrator that does not manufacture AVI systems, but installs and tests AVI equipment supplied by others. TransCore has sued ETC for patent infringement, based upon ETC’s installation of certain Mark IV AVI systems for the Illinois State Toll Highway Authority.

In 2001 TransCore (also, sometimes, "TCI") and Mark IV settled a patent infringement suit brought by TransCore.  Under the settlement agreement (the “Settlement Agreement”), Mark IV paid TransCore $4,500,000 and obtained a covenant which, in relevant part, states:

3. In exchange for the payment set forth in paragraph 1, TCI hereby agrees and covenants not to bring any demand, claim, lawsuit or action against MARK IV for future infringement of any of United States Patent Nos. 5,805,082; 5,289,183; 5,406,275; 5,144,553; 5,086,389; 5,751,973; 5,347,274; 5,351,187; 5,253,162; and 4,303,904, or any foreign counterparts of the aforesaid United States Patents, for the entire remainder of the terms of the respective United States Patents and their foreign counterparts. This Covenant Not To Sue shall not apply to any other patents issued as of the effective date of this Agreement or to be issued in the future.

8. TCI, TII and GRAVELLE, for themselves and their respective predecessors, successors, heirs and assigns, fully and forever release, discharge and dismiss all claims, demands, actions, causes of action, liens and rights, in law or in equity (known, unknown, contingent, accrued, inchoate or otherwise), existing as of June 26, 2001, that they have against MARK IV, and its officers, directors, employees, representatives and attorneys of MARK IV, but excluding any claims for breach of this Agreement. No express or implied license or future release whatsoever is granted to MARK IV or to any third party by this Release.

ETC argued that the foregoing barred TransCore from suing it now based on its installation of Mark IV products.  The court addressed each of ETC’s theories in turn.

Express License.  The court found that paragraph 3 granted Mark IV an express, non-exclusive license in the subject patents as it specifically covered "future infringement."  The court rejected TransCore’s argument that the last sentence of paragraph 8 limited paragraph 3: paragraph 3 is the covenant not to sue, while the "Release" (for past acts of infringement) was set forth elsewhere in the agreement.

Patent Exhaustion. Patent exhaustion generally provides that the first authorized sale of a product extinguishes the patentee’s rights under patent law.  Even applying the more stringent view of patent exhaustion existing before the Supreme Court’s LG decision, the court still found that the doctrine of patent exhaustion barred TransCore’s claims.  Mark IV was clearly licensed, and therefore its sale of licensed products was authorized.  Nothing in the Settlement Agreement provided a condition or limitation on that sale so as to defeat exhaustion. 

The court also rejected TransCore’s efforts to use parol evidence to show that the parties did not intend the settlement and license to cover down stream purchasers–a provision to cover such purchasers was considered but not included in the final settlement.  However, the court found the Settlement Agreement unambiguous and clear, therefore, under California law, parol evidence was not needed or allowed.

Implied License.  The court also found an implied license to Mark IV customers, noting that the purpose of the covenant and settlement would be defeated if customers were subject to patent infringement claims–a liability that would be put right back onto Mark IV. 

Equity.  The court also found that the general principles of equity favored ETC’s position.

Legal Estoppel.   One of the patent in suit, 6,653,946, was obtained after the Settlement Agreement, and thus beyond its express scope under the last sentence of paragraph 3.  Nevertheless, the court found that TransCore could not bring suit on this later patent:

It is clear from the language of the Covenant Not to Sue that the parties intended to permit Mark IV to practice the Settlement Agreement Patents. Moreover, it is undisputed that at the time the Settlement Agreement was executed, Mark IV was unaware of the pendency of the ‘946 patent. TransCore does not dispute that the ‘946 patent is an expansion of the ‘082 patent, which is explicitly covered by the Covenant Not to Sue. Therefore, for all of the above reasons, the court concludes that TransCore’s infringement claims arising from the ‘946 patent are barred by legal estoppel.

The ‘946 is a continuation of the ‘082.

More Reading:

Summary Judgment

Counsel:

TransCore: Foley & Lardner LLP, Los Angeles (William Robinson).

ETC: Haynes & Boone, LLP, Dallas (Phillip Philban).

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