2014 IPIC Annual Meeting, October 16, 2014 Mark A. Chapman - Kenyon (New York) Kenneth D. McKay - sim. (Toronto) Isabelle Chabot - Fasken Martineau (Québec) Keurig Perks Up the Topic: Canadian and U.S. Perspectives on Patent Exhaustion

2014 © Intellectual Property Institute of Canada Introduction 2 Isabelle Chabot Fasken Martineau

2014 © Intellectual Property Institute of Canada Outline Introduction to patent exhaustion in Canada and the United States Recent developments Implications for licensors and licensees 3

2014 © Intellectual Property Institute of Canada U.S. Perspective Mark A. Chapman Kenyon & Kenyon LLP 4

2014 © Intellectual Property Institute of Canada Basic principles o The unconditional, authorized sale of a patented item terminates the patent rights to the item o An authorized sale is a sale by o the patent owner o a patent licensee o a recipient of a covenant not to sue (equivalent to a license) 5

2014 © Intellectual Property Institute of Canada Basic principles o If exhaustion applies, the downstream use or sale of a patented item is not infringement of the patent o Exhaustion is typically pled as an affirmative defense to a patent infringement allegation o Exhaustion is treated as a question of law amenable to summary judgment 6

2014 © Intellectual Property Institute of Canada Basic principles o A rationale for exhaustion is that the patent owner has already received consideration for the sale of the patented item o The patent owner should not be permitted to use its patent to impose restrictions on the downstream use of the item o The doctrine grew out of the common law doctrine that disfavors restraints on the alienation of chattels 7

2014 © Intellectual Property Institute of Canada Basic principles o Exhaustion should not be triggered if the sale or license is expressly conditional, e.g. a field of use limitation o A condition must not result in patent misuse by impermissibly broadening the physical or temporal scope of the patent 8

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) o The U.S. Supreme Court confirmed that patent exhaustion applies to method patents o A method patent is exhausted by the authorized sale of an item if: o The only reasonable and intended use of the item is to practice the patented method o The item “substantially embodies” the patented method, i.e. it includes all the inventive aspects of the patented method 9

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) o LG owned patents with method claims directed to functions performed by processors and chipsets with other standard components such as memory and buses o LG licensed Intel to manufacture and sell processors and chipsets embodying the patented technology o Intel sold processors and chipsets to Quanta 10

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) o Quanta combined the Intel processors and chipsets with non-Intel memory and buses to create computer systems that practiced the patented methods o LG argued that Quanta infringed by making and selling computer systems that combined the licensed Intel processors and chipsets with non- Intel memory and buses 11

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) o The Supreme Court held that Intel’s authorized sale of processors and chipsets to Quanta pursuant to Intel’s license from LG exhausted LG’s method patent o The only reasonable and intended use of Intel’s licensed processors and chipsets was incorporating them into computer systems that practice the patented method 12

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Quanta Computer v. LG Electronics, 553 U.S. 617 (2008) o Intel’s licensed processors and chipsets “substantially embodied” the patented method because the processors and chipsets included everything inventive about the patented method 13

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Keurig v. Sturm Foods, 732 F.3d 1370 (Fed. Cir. 2013) o Keurig owned two patents with apparatus claims to brewers and method claims to the use of brewers with cartridges o Keurig sold brewers and cartridges o Sturm sold cartridges for use with Keurig brewers o Keurig alleged that Sturm induced infringement of Keurig’s method claims by selling Sturm cartridges for use with Keurig brewers 14

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Keurig v. Sturm Foods, 732 F.3d 1370 (Fed. Cir. 2013) o Keurig conceded that the sale of brewers exhausted its apparatus claims but argued the brewer sales did not exhaust method claims o The Federal Circuit disagreed, holding that the sale of brewers exhausted the entire patent o Each unconditional sale of a Keurig brewer gave the user the right to use the brewer with any cartridge 15

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Keurig v. Sturm Foods, 732 F.3d 1370 (Fed. Cir. 2013) o The Federal Circuit panel was unanimous in concluding that exhaustion applied o Judge Lourie, writing for the majority, stated that exhaustion applies to all claims of a patent and is not analyzed on a claim-by-claim basis o Judge O’Malley concurred in the result but dissented on this issue, reasoning that exhaustion should be analyzed on a claim-by-claim basis 16

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o Lifescan owned a patent with method claims to the use of a blood glucose meter with a test strip o Lifescan sold blood glucose meters below cost or for free (through health care providers) with the intent that users would also purchase its test strips o Shasta sold test strips for use with Lifescan meters o Lifescan alleged that Shasta induced infringement of Lifescan’s method claims by selling Shasta test strips for use with Lifescan meters 17

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o Lifescan argued its meter sales did not exhaust the patent because the meters did not “substantially embody” the patented method o The Federal Circuit disagreed, finding that Lifescan’s sale of meters exhausted the patent because the meters embodied the inventive features of the patent 18

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o The Federal Circuit concluded that the inventive features were the steps carried out by the meter, not the configuration of electrodes on the test strip o The Federal Circuit based this conclusion on its review of the claim language, specification and prosecution history 19

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o Lifescan also argued that exhaustion could not apply to the meters that it did not sell but instead distributed for free o The Federal Circuit disagreed, concluding that exhaustion applies to any authorized and unconditional transfer of title in a patented product, regardless of whether the transfer is a sale or a gift 20

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o Judge Reyna dissented, concluding that exhaustion did not apply to sales of the meter because the test strips, not the meter, substantially embodied the essential features of the patent o Quanta held that a product embodies the essential features of a method patent when the product contains or is involved in the inventive, as opposed to the standard, processes of the patented method 21

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Lifescan Scotland v. Shasta Technologies, 734 F.3d 1361 (Fed. Cir. 2013) o Judge Reyna concluded that the test strips are essential to the patented method because they enable the meter to carry out the method 22

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, 965 F. Supp. 2d 971 (N.D. Ill. 2013) o Helferich owned patents directed to sending and receiving website hyperlinks to and from an electronic device, such as a mobile phone o Helferich licensed its patents to mobile phone manufacturers o Helferich alleged that content providers infringed by sending hyperlinks and content to licensed mobile phones 23

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, 965 F. Supp. 2d 971 (N.D. Ill. 2013) o The content providers argued that Helferich’s licenses to mobile phone manufacturers exhausted its patent rights as to customers using phones o Helferich argued mobile phone manufacturers are licensed only under a subset of the patent claims (“handset” claims) and that exhaustion did not apply for the unlicensed claims (“content” claims) 24

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, 965 F. Supp. 2d 971 (N.D. Ill. 2013) o Judge Durrah rejected Helferich’s argument that exhaustion should be analyzed claim-by-claim and held that exhaustion applied to each patent o The licenses granted to mobile phone manufacturers exhausted patent rights as to the phones for all claims (“handset” claims and “content” claims) o The licensed mobile phones “substantially embodied” the patents because the phones received content from the content providers as required by the claims 25

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, 965 F. Supp. 2d 971 (N.D. Ill. 2013) o Helferich received a royalty for its license to the mobile phone manufacturers and should not be permitted to collect another royalty from the content providers o To analyze exhaustion claim-by-claim would create uncertainty for third parties and end users 26

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, Appeal No (Fed. Cir.) o Helferich has appealed to the Federal Circuit o The appeal has been briefed and will be argued on November 5 th, so the appeal court should issue its decision later this year or early next year 27

2014 © Intellectual Property Institute of Canada Patent Exhaustion – United States Helferich v. New York Times, Appeal No (Fed. Cir.) o Helferich argues on appeal that its licenses to mobile phone manufacturers cannot exhaust its patent claims covering use by content providers o The content providers argue all the patents are exhausted because they all claim the same two-way communication system that includes a handset 28

2014 © Intellectual Property Institute of Canada Canadian Perspective Kenneth D. McKay Sim Lowman Ashton & McKay LLP 29

2014 © Intellectual Property Institute of Canada Canadian Patent Law 30 Differences between the Canadian approach and the US approach to the doctrine of patent exhaustion: o Terminology: Canadian courts do not use the term “exhaustion”; o Rationales behind the doctrine (contract law vs public policy); o Rights of suppliers and persons claiming “under the patentee”; and o The Competition Act and potential limits on restrictive licensing conditions

2014 © Intellectual Property Institute of Canada Canada: Implied Licence versus Public Policy The underlying rationale of Patent Exhaustion in the US: Keurig Incorporated v Sturm Foods, Inc., [2013] 732 F.3d 1370 at 1373: o “because the patentee has bargained for and received full value for the goods.” o Restraint on alienation of chattel This is not the case in Canada! Different approaches to property law 31

2014 © Intellectual Property Institute of Canada Canada: Implied Licence versus Public Policy Legislatures have more freedom to create laws that interfere with private property in Canada: US Constitution, Fifth Amendment: “No person shall be… deprived of life, liberty, or property, without due process of law” Canadian Charter of Rights and Freedoms, s. 7: “Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.” 32

2014 © Intellectual Property Institute of Canada Canada: Following the British Approach Freedom to use patented article based on theory of implied licence - Betts v Willmott, (1871) LR 6 App Ch 239: “When a man has purchased an article he expects to have the control of it, and there must be some clear and explicit agreement to the contrary to justify the vendor in saying that he has not given the purchaser his license to sell the article, or to use it whenever he pleases as against himself.” 33

2014 © Intellectual Property Institute of Canada Canada: Implied Licence versus Public Policy Canadian Approach: Implied Licence Signalisation de Montréal Inc. v Services de Béton Universels Ltée, [1992] FCJ No 1151 (FCA): “…the purchaser of a patented article from a patentee acquires, at the same time, the right to use the article and the right to sell it, together with the same “right of use”, to another person. As long ago as 1871, this right was described as a ‘licence.’” 34

2014 © Intellectual Property Institute of Canada Canada: Implied Licence versus Public Policy Implied Licence in the USA: A Separate Concept Anton/Bauer, Inc, v PAG, Ltd., 329 F.3d 1343 (CAFC) …it is well settled that all or part of a patentee's right to exclude others from making, using, or selling a patented invention may be waived by granting a license, which may be express or implied. (Carborundum Co. v Molten Metal Equip. Innovations, Inc., 72 F.3d at 878, 37 USPQ2d at 1172). A patentee grants an implied license to a purchaser when (1) the patentee sells an article that has no noninfringing uses and (2) the circumstances of the sale plainly indicate that the grant of a license should be inferred 35

2014 © Intellectual Property Institute of Canada Canada: Do we Recognize Patent Exhaustion? Eli Lillly & Co. v Novopharm Ltd.; Eli Lilly & Co. v Apotex Inc., [1998] 2 SCR 129 A unique situation: 1993 Amendments to Patent Act bring an end to compulsory licensing regime that favours generic drug manufacturers; Novopharm and Apotex each agree to purchase bulk medicine under existing licences at the direction of the other, and to sell the bulk medicine at cost to one another + 4% royalty; Eli Lilly argues Novopharm and Apotex agreement constitutes a sublicence, in violation of the Novopharm’s compulsory licence; Apotex’s reformulation of bulk medicine is infringing. 36

2014 © Intellectual Property Institute of Canada Canada: Patent Exhaustion? Three Reasons why the Eli Lilly decision does not appear to import the American doctrine of patent exhaustion: The lack of non-infringing uses for bulk medicine sold to Novopharm under licence was a relevant factor (unlike in Keurig). The fact that the compulsory licence contemplated the sale of bulk medicine indicated that Novopharm had an implied licence to sell the product to other drug companies. Apotex was found not to be “using” the patented process owned by Eli Lilly; the Eli Lilly decision entertains the idea that a downstream purchaser can infringe upon a patented method; Rights of an owner of property to deal with that property “as he or she see fit” is immediately followed by a statement of potential limitations on this right imposed by the law of contract. 37

2014 © Intellectual Property Institute of Canada Canada: Implied Licence – Why does it Matter? There are two possible unique effects of viewing this concept as an implied licence in Canada, rather than exhaustion: Patent Act, s 55(1): persons claiming “under the patentee” – can provide a cause of action for non- licensee members of a supply chain (Signalisation de Montreal v Services de Beton Universels Ltee) Unlike USA, summary judgment does not appear to be available where this concept is raised as a defence: Genpharm Inc v Gambro Lundia AB and the “Reverse- Keurig” 38

2014 © Intellectual Property Institute of Canada Canada: Licensing and the Competition Act, s (1) In any case where use has been made of the exclusive rights and privileges conferred by one or more patents for invention, by one or more trade-marks, by a copyright or by a registered integrated circuit topography, so as to (a) limit unduly the facilities for transporting, producing, manufacturing, supplying, storing or dealing in any article or commodity that may be a subject of trade or commerce, (b) restrain or injure, unduly, trade or commerce in relation to any such article or commodity, (c) prevent, limit or lessen, unduly, the manufacture or production of any such article or commodity or unreasonably enhance the price thereof, or (d) prevent or lessen, unduly, competition in the production, manufacture, purchase, barter, sale, transportation or supply of any such article or commodity, the Federal Court may make one or more of the orders referred to in subsection (2) in the circumstances described in that subsection. 39

2014 © Intellectual Property Institute of Canada Competition Bureau: Intervention in Licensing 1.Whether the mere refusal (typically a refusal to license) has adversely affected competition to a degree that would be considered substantial in a relevant market that is different or significantly larger than the subject matter of the IPR or the products or services which result directly from the exercise of the IPR. This step can only be satisfied where the following two conditions are present: The holder of the IPR is dominant in the relevant market; and The IPR is an essential input or resource for firms participating in the relevant market (the refusal prevents other firms from effectively competing). 2.Whether invoking a special remedy against the holder of the IPR would not adversely alter the incentives to invest in research and development in the economy. 40

2014 © Intellectual Property Institute of Canada Questions? Kenneth D. McKay Sim Lowman Ashton & McKay LLP 41 Mark A. Chapman Kenyon & Kenyon LLP