Auction of Covenants Not to Sue Attracts Attention, Suspicion

Dan Whalen is a JD candidate at Osgoode Hall Law School.

At the end of March 2011, intellectual property brokerage firm, ICAP Ocean Tomo, is planning to auction off four “covenants not to sue” covering Round Rock Research LLC’s portfolio of approximately 4,200 patents and pending applications. Though an intriguing proposition, interested parties ought to weigh the merits of such covenants against traditional licensing agreements before bidding.

Round Rock is a non-practicing entity (NPE) that acquired its voluminous catalogue from Micron Technologies in 2009. According to the press release for the auction, Round Rock’s patents and applications span the United States, much of Europe and Asia, and encompass key technologies that include computer graphics, microprocessors and telecommunications. Though the exact coverage of the four covenants has yet to be announced, a source reveals that one will be for a five-year term and the other three will be in perpetuity.

The press release suggests that, as intellectual property becomes a more important and complex business consideration, the covenant not to sue “may well be on its way to becoming one of the key instruments in an [intellectual property] portfolio.” However, as several bloggers (see here and here) have observed, there is good reason to pause and consider the benefits of such covenants against those of traditional patent licences.

Marc Malooley of Brooks Kushman, an American intellectual property law firm, explains that, although covenants not to sue and patent licences are closely related and are often treated similarly by US courts, they nonetheless have different effects in certain situations. For instance, licencees hold some proprietary rights of a patent and can grant covenants not to sue of their own, whereas covenant-holders have no such right of alienation. In addition, future patent-holders are automatically bound by pre-existing licences but not necessarily by covenants not to sue. Similarly, US bankruptcy rules protect licencees if the grantor goes bust, but no such specific protections have been identified for covenant-holders. Further uncertainty looms over whether covenants can even be granted for a pending patent application, given that even the applicant does not yet have a right to sue on alleged infringements.

At best, there is a great deal of uncertainty surrounding the legal protections afforded to covenants not to sue; at worst, they are significantly less protected than patent licences. Nevertheless, a sufficient difference in price may justify any such disparity in protection in the minds of potential buyers. The prices of the covenants not to sue won’t be decided until the auction is held on March 31, 2011. In the interim, one wonders if current licencees of the Round Rock portfolio – including Apple, Sony, Samsung, and Nokia – have made the smarter choice.