IP Law Daily, PATENT—10th Cir.: Covenant not to sue between automated fuel delivery companies upheld in patent dispute, (Oct 23, 2024)

By Saurabh Kashyap, B.A., LL.B., LL.M.

District court correctly interpreted that the covenant extended to downstream users and the patent exhaustion doctrine applied after authorized sales.

The U.S. Court of Appeals for the Tenth Circuit upheld a federal district court’s ruling that Energera Inc. breached a covenant not to sue Fuel Automation Station, LLC, by pursuing infringement lawsuits against downstream users of its equipment. The court found that the covenant’s language extended to third parties, and the patent exhaustion doctrine applied, preventing Energera from asserting further claims after Fuel Automation’s authorized sales and leases. It also affirmed the jury’s finding that a settlement agreement between the parties included a Canadian patent owned by Energera, reasoning that the patent shared a familial relationship with the U.S. patents in the agreement, making its inclusion a reasonable interpretation of the ambiguous terms (Fuel Automation Station, LLC v. Energera, Inc., No. 23-1123 (10th Cir. Oct. 21, 2024)).

Background. The plaintiff/appellee, Fuel Automation Station, LLC, and the defendant/appellant, Energera Inc., are competitors in the automated fuel delivery industry. Both companies manufacture and supply fuel distribution equipment and related services to the fracking sector, providing automated fuel delivery systems designed for high-volume industrial applications.

Energera asserted a Canadian patent, CA2,693,567 (the ’567 patent), covering automated fuel distribution technologies designed for industrial operations. Additionally, the dispute involved U.S. Patent Nos. 9,346,662 (the ’662 patent), 10,029,906 (the ’906 patent), and a U.S. patent derived from Application No. 15/997,340 (the ’340 patent). These patents collectively encompass innovations in automated fuel delivery systems, including methods for precise fuel dispensing and monitoring in fracking operations. All asserted patents are part of the same family, sharing priority claims and reflecting related technological advancements.

The dispute began in 2020, following a 2019 settlement agreement between the parties that resolved two earlier lawsuits involving U.S. patents. As part of the settlement, Energera agreed not to sue Fuel Automation Station or its affiliates for patent infringement. The covenant not to sue was designed to prevent future litigation involving patented technologies. However, Energera later initiated legal action against KVA Fuel Services Ltd., a subcontractor using Fuel Automation Station’s equipment in Canada, alleging that KVA infringed the ’567 patent.

Fuel Automation intervened in the Canadian lawsuit, asserting that the covenant barred the suit. It subsequently filed a declaratory action in the district court seeking confirmation that the covenant extended to downstream users and prohibited Energera from suing KVA. The district court granted partial summary judgment, holding that the covenant encompassed downstream users. Additionally, the case proceeded to trial on whether the ’567 patent was included in the scope of the settlement agreement. The jury concluded that the ’567 patent was included in the agreement, leading to a final judgment against Energera. In response, Energera appealed the district court's decision, disputing both the covenant coverage and the inclusion of the ’567 patent within the agreement’s scope.

Contract ambiguity and interpretation. The Tenth Circuit first addressed whether the district court correctly found the settlement agreement ambiguous regarding the inclusion of the ’567 patent. The court emphasized that ambiguity exists when contract language is open to more than one reasonable interpretation, as outlined in Sanpete Water Conservancy Dist. v. Carbon Water Conservancy Dist., 226 F.3d 1170 (10th Cir. 2000). It found that Fuel Automation Station’s interpretation, treating the ’567 patent as part of the same patent family as the U.S. patents, was reasonable. Consequently, it upheld the jury’s decision, resolving the ambiguity to include the ’567 patent under the agreement’s scope.

Scope of the covenant. The appellate court examined the covenant not to sue and its applicability to third-party users of Fuel Automation’s equipment. Energera argued that the covenant applied exclusively to Fuel Automation and not to downstream users like KVA. However, the Tenth Circuit upheld the district court’s broader interpretation, finding that the covenant extended protection to downstream users. The court relied on TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271 (Fed. Cir. 2009), which holds that a covenant not to sue, when tied to authorized sales, implicitly protects downstream users from patent infringement claims.

Patent exhaustion doctrine. The appellate court applied the doctrine of patent exhaustion, which provides that the authorized sale of a patented product terminates the patentholder's control over its use or resale. Citing Impression Products, Inc. v. Lexmark Int’l, Inc., 581 U.S. 360 (2017), the Tenth Circuit reasoned that the sale or lease of Fuel Automation Station’s equipment exhausted Energera’s patent rights, precluding further infringement actions against users like KVA. The court concluded that since Fuel Automation had authorization to sell its equipment under the agreement, Energera’s subsequent lawsuits violated the covenant not to sue.

License disclaimer. Energera contended that the settlement agreement's license disclaimer, which stated that no licensor-licensee relationship existed between the parties, precluded protection for downstream users. The Tenth Circuit rejected this argument, holding that the disclaimer merely clarified the parties' legal relationship without limiting the covenant's scope. The court emphasized that covenants not to sue differ from licenses and that when tied to authorized sales, such covenants inherently protect downstream users.

Jury’s findings. The appellate court affirmed the jury’s determination that the settlement agreement covered the ’567 patent. It found that the jury reasonably interpreted the agreement's language in light of the patent family relationship between the U.S. patents and the ’567 patent. The Tenth Circuit emphasized that both parties had presented plausible interpretations, and it was within the jury’s purview to resolve the ambiguity.

Post-trial motions. Energera also challenged the district court's denial of its post-trial motions for judgment as a matter of law. The Tenth Circuit found that the district court correctly denied these motions, as the legal issues were adequately resolved at trial, and the jury's findings were consistent with the evidence presented.

The Case is Nos. 23-1123 and 23-1358.

Judge: Carson, J.

Attorneys: Steven Craig Susser (Carlson, Gaskey & Olds, P.C.) for Fuel Automation Station, LLC. Robert P. Greenspoon (Dunlap Bennett & Ludwig PLLC) for Energera Inc.

Companies: Fuel Automation Station, LLC; Energera Inc.

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