Covenants Not to Sue: Strategic Applications and Legal Considerations
Pine IP
April 3, 2025
In today's corporate environment, patents have evolved from mere exclusive rights into complex strategic assets. Among the advanced tools of modern IP strategy, the 'Covenant Not to Sue' has gained prominence. This is a commitment to selectively refrain from enforcing a patent right, allowing a company to pursue broader strategic interests.
In this column, Pine IP Firm will analyze the various strategic applications and legal implications of Covenants Not to Sue.
A public declaration to selectively not enforce patent rights can be a strategic decision to establish a technology as a de facto standard and thereby expand the entire market. Tesla's 2014 announcement is a prime example. The company pledged that it would "not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." This move was intended to foster the growth of the electric vehicle industry as a whole while cementing Tesla's position as a standard-setter.
From a legal practice perspective, this is a bolder strategy than a standard FRAND (Fair, Reasonable, and Non-Discriminatory) declaration made to a standards-setting organization, as it often involves unilaterally opening up technology royalty-free. However, it is a strategy we can only recommend when a company is supremely confident in its competitive edge and technological superiority.
A Covenant Not to Sue can be a powerful tool for reshaping competitive dynamics. The 2006 collaboration between Microsoft and Novell is a textbook example of a selective patent covenant. Microsoft promised not to sue customers of Novell's SUSE Linux for patent infringement. This had the effect of sowing division within the Linux camp.
While this strategy of using selective alliances to create rifts in the market can be highly effective, it requires careful legal risk management. If such an agreement could be interpreted as a form of market division or collusion, it may raise significant antitrust concerns.
Companies with platform-based business models often use Covenants Not to Sue to build and nurture their ecosystems. The Open Invention Network (OIN), founded by industry leaders like IBM, Google, and Sony, is a defensive patent community created to protect the Linux platform. OIN members grant royalty-free licenses to each other for their Linux-related patents, fostering an environment where developers and companies can innovate without the fear of patent litigation.
For our clients pursuing a platform strategy, it is worth considering a selective Covenant Not to Sue for patents essential to platform adoption, while continuing to protect core proprietary technologies. This provides legal certainty to ecosystem participants and maximizes the platform's network effects.
From a game theory perspective, a Covenant Not to Sue is not a simple relinquishment of rights but a calculated strategic move. Google's Open Patent Non-Assertion (OPN) Pledge, which promises not to sue users of open-source software, also includes a critical condition: the pledge can be revoked against any entity that first attacks Google with a patent lawsuit. This is a classic 'Tit-for-Tat' strategy, responding to cooperation with cooperation and aggression with aggression to incentivize mutual collaboration.
A well-drafted covenant with appropriate conditions and limitations is a balanced approach that encourages market cooperation while retaining leverage against malicious actors.
When designing a Covenant Not to Sue, its legal enforceability, scope, and limitations must be clearly defined. Courts generally interpret a covenant not to sue as being similar to a non-exclusive license, so the terms and scope must be drafted with meticulous care.
Furthermore, antitrust implications are paramount. Open patent initiatives like Tesla's pledge or the OIN are likely to be viewed as pro-competitive actions that foster innovation. However, if a covenant is used to exclude specific competitors or divide a market—such as the "Pay-for-Delay" agreements sometimes seen in the pharmaceutical industry—it can constitute a serious antitrust violation.
The Covenant Not to Sue marks a shift from an era where patents were seen only as weapons to a modern IP strategy where they can be shared selectively to create greater value. Patent holders must learn to use this strategy flexibly, adapting it to their unique business models and market conditions.
The paradoxical wisdom of securing a greater competitive edge by not enforcing a right is becoming a new paradigm in patent strategy. At Pine IP Firm, we are here to help our clients formulate optimal IP strategies that are perfectly aligned with their business goals.
