Covenant not to Sue Divests Court of Jurisdiction of Bankrupt Plaintiff’s Case, Finds Judge McMahon

Commercial Recovery Corporation v. Bilateral Credit Corp., LLC

Case Number: 1:12-cv-05287-CM (Dkt. 68)

Judge McMahon dismissed plaintiff’s infringement case with prejudice and defendant’s invalidity counterclaim in light of patentee’s covenant not to sue, consistent with Super Sack (57 F.3d 1504 (Fed. Cir. 1995)) and its progeny. Defendant made two arguments opposing dismissal. First, it said that the covenant not to sue did not adequately address the patent-in-suit’s (U.S. Patent No. 7,167,839, entitled “Collection agency data access method”) method claims. As the patentee had amended the covenant to include “methods or business methods” as well as “products,” the court found the covenant to be sufficiently broad. Second, defendant argued that the bankruptcy receiver and a secured creditor, having a present interest in the patent, could later sue it. The court said that (1) a party with only a present interest in a patent “hold[s] less than all substantial rights to the patent and lack[s] exclusionary rights under the patent statute,” and so lacks standing to sue for infringement, and (2) if the secured creditor forecloses its security interest in the patent, then it will become a successor in title to the patent, and thus will be bound by the covenant. Third, the defendant argued that it might change its practices, and so would be vulnerable to suit in the future. The court rejected this argument, stating that defendant had not shown that it had taken “significant, concrete” steps towards changing its potentially-infringing practices.

Defendant asked for attorney fees, but Judge McMahon rejected the request. With respect to Fed. R. Civ. P. Rule 41(a)(2), the court denied attorney fees. “[C]ourts often award attorney’s fees upon voluntary dismissal without prejudice, the purpose of fees in such situations is ‘generally to reimburse the defendant for the litigation costs incurred, in view of the risk (often the certainty) faced by the defendant that the same suit will be refiled and will impose duplicative expenses upon him. In contrast, when a lawsuit is voluntarily dismissed with prejudice under Fed. R. Civ. P. 41(a)(2), attorney’s fees have almost never been awarded.’” The court also rejected the argument that the case was exceptional under 35 U.S.C. § 285.   

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