Post Sales Rights Post Lexmark Implications for U.S. and Foreign Licensors and Licensees With an emphasis on what rights a restricted licensee can grant when it does not have those rights in the first place. Brian W Gray Toronto, Canada

Lexmark sale from “authorized licensee In Lexmark, the Supreme Court addressed the position of the “authorized licensee” A sale from an “authorized” licensee is the same as the sale from the patentee itself and the rights of the patentee are exhausted. However the distinction between “authorized’ vs “unauthorized” seems artificial.

An authorized licensee A licensee has whatever right it has been given: typically a subset of the patentee’s rights. Possibly limited by territory or field of use or product category or by a right to manufacture and not sell or to sell and not manufacture or any number of restrictions. In this sense, all licensees are “authorized” to grant rights to purchasers consistent with their license and all are “unauthorized” to grant rights to purchasers beyond their license grant.

An authorized licensee What makes the license unauthorized is the actions of the purchaser from the licensee, not the licensee grant. Did the purchaser buy from a licensee which has a license under the patent for that use or not ? Is their a basis for distinguishing between an authorized license of which exhaustion applies and an unauthorized license for which there is no exhaustion? An “unauthorized” license is simply no license at all. More relevant is to look at the license restrictions and their effect on the justified or unjustified concern about post-sale restraint on alienation.

Tale of two “authorized” Restricted licensees 1. Licensee A is authorized to sell only in country A and does sell in country A. Purchaser from this restrictive licensee has purchased from someone “authorized’ in the country, but this licensee otherwise had no license for any other country. Purchaser from an “authorized” licensee restricted in country A now can sell anywhere free of patent infringement claims in any other country? 2. Licensee B is authorized to sell only for non-commercial use and sells to purchaser for that purpose. Sale by licensee is “authorized’ for that purpose but purchaser ignores the restrictions and uses the products for commercial purposes or sells to others who use the product for commercial purposes. Are these two restrictions to be treated differently? In both cases the licensee has restricted rights and was authorized to grant the license it gave. Does it make sense to distinguish between these two types of restricted “authorized” licensees? Brian Gray Law

Tale of two “authorized” Restricted licensees In both cases the sale from the restricted licensee was “authorized” at the point of sale but unauthorized by the subsequent actions of the purchaser or if not the first purchaser by some downstream purchaser. Just like in the case of stolen goods or goods for which there is no good title, a subsequent even innocent purchaser should not acquire a right to use what was never given in the first place. Can any “authorized license” (however restricted) grant to the purchaser from such licensee rights that are free and clear of any patent infringement claim? Brian Gray Law

Talking Pictures U.S. Lexmark court considers a field of use license restriction violated at the time of sale to be an unauthorized license and therefore there is no exhaustion. But what about a field of use restriction violated by a purchaser from the restricted licensee after the time of sale? If no exhaustion the restriction runs with the goods As to territorial limitations for instance where licenses are granted by a licensee authorized to grant licenses for that country, the court considers them “authorized” in the territory specified and therefore the limitation/ restriction does not attach or run with the goods when sold onward by a purchaser from the licensee into another country where the licensee had no license.

Talking Pictures Are field of use restrictions different in principle from territorial restrictions? Is one a pre-sale restriction which runs with the goods and the other an impermissible post-sale restriction? If the field of use restriction is “authorized” by the restricted license and the licensee sells within its license to a purchaser who buys to use according to the license term, does it still continue to run with the goods for the next purchaser who violates the field of use restriction whether innocently or not?

Licensing decisions Based on Talking Pictures, where a purchaser has purchased goods from a licensee who had no authority to sell such goods in the first place, the nemo dat rule should apply, at least with respect to field of use restrictions. Does the concept that goods can be freely used and dealt with, once alienated, apply to exonerate an innocent purchaser who acquired goods from a licensee without a license to grant such rights?

Licensing decisions Scrapping the nemo dat rule in such circumstances is inconsistent with the normal principles of chain of title. A party cannot acquire rights from a licensee who did not have them to give in the first place If that were the case, the only recourse would be in contract against the rogue licensee. The licensee under some exhaustion theory would be able to provide a defense to a purchaser to do what the licensee, itself, had no authority to do. To say it in these terms is clearly to expose the difficulty of abandoning the nemo dat rule entirely in respect of such licenses.

Implications and Lessons In addition, preventing international exhaustion seems still a possibility if patent ownership is divided territorially. However how different must the ownership be. Is a different but affiliated company sufficient? What about an element of common ownership with or without control?

APPENDIX Licensees - Nemo Dat rule triumphant in the UK However the sale by a licensee is different. While “commercial convenience” may mandate no restraints on alienation (unless with express notice) when a patentee itself sells; such policy considerations do not apply to a sale from a limited licensee. Notwithstanding Betts v. Willmott, the licensee of a foreign patent has no right to sell outside of the territory of its license. (Société Anonyme des Manufactures de Glaces v. Tilghman’s Patent Sand Blast Company (1883) 25 Ch. D. 1 CA) The Court of Appeal in Tilghman’s Patent concluded that the grant was simply the grant of a license to exercise the invention in Belgium and granted no rights to use or sell the invention in the UK.

Licensees - Nemo Dat rule triumphant in the UK The rights of a purchaser from a licensee were considered in New Zealand in Briscoe v. Washburn and Moen Manufacturing Company (1891). The defendant imported wire into New Zealand that had been purchased in the United States from a licensee of the United States patent. That licensee had no rights to the New Zealand patent. The purchaser from the US patent licensee was infringing in New Zealand. At least one of the judges invoked the nemo dat rule. Since the licensee had no rights to grant under the New Zealand patent it could not convey greater rights than it possessed.

Licensees - Nemo Dat rule triumphant in the UK Similarly in Beecham Group Limited v. International Products Limited ([1968] RPC 129), the court in Kenya concluded that the grant by Beecham of a patent license to make and sell in the United States did not grant any rights under the Kenyan patent and that therefore a purchaser of products from a licensee of the U.S. patent had no right to sell in Kenya. A license to the U.S. patents conferred only immunity from infringement in the U.S. and not in Kenya. A Singapore and Australian court thought likewise in related cases. (Sime Darby Singapore Ltd. v. Beecham Group Ltd [1968] 2 MLJ 161; Beecham Group Limited v. Bristol Laboratories Pty Limited (1968) 118 CLR 618; [1968] RPC 301. )

Licensees - Nemo Dat rule triumphant in the UK In Minnesota Mining and Manufacturing Company v Geerpres Europe Limited ([1974] RPC 35), 3M had licensed Union Carbide under its US patent only. Union Carbide sold to a company in the U.S. which then sold to Geerpres in the Netherlands. When Geerpres attempted to sell the products onward into the UK, 3M sued under its UK patent.

Licensees - Nemo Dat rule triumphant in the UK Finally in HTC Corporation v. Nokia Corporation ([2014] R.P.C. 19, p, 577), the Patents Court in 2014 (Arnold J) again reiterated that the law of England was clear: a purchaser from a licensee can only acquire such rights as the licensee had. The court followed the Court of Appeal’s reasoning in the Tilghman case. “There was a fundamental distinction between a sale of a product and a licence under a patent. Where a product was sold, the purchaser acquired all rights that were not expressly reserved. When a patent was licensed, the licensee acquired only those rights which were expressly or necessarily granted.”

Licensees - Nemo Dat rule triumphant in the UK In the HTC case, HTC has purchased chips in Taiwan from Qualcomm, who was a licensee of Nokia. The Nokia license did not allow for sales in the UK, although HTC had no knowledge of this restriction. The court concluded that HTC could not have acquired greater rights on purchasing the chips from Qualcomm than Qualcomm was granted by Nokia under the Agreement between Qualcomm and Nokia. Therefore it was immaterial that HTC was not notified of one of the provisions in the Agreement.

Questions ? Brian W Gray April 2018 Brian Gray Law