Feeling Exhausted? Patent Exhaustion after Lexmark November 9, 2017 Peter Stewart, Suzanne Gainey

Overview Introduction to Patent Exhaustion Post-Sale Restrictions & Sales Outside the U.S. Practical Tips for Patent Holders 1

INTRODUCTION TO PATENT EXHAUSTION 2

Patents Generally Patents provide the right to exclude others from making, using selling, offering for sale, or importing the claimed invention. Standards for patentability: Patent eligible subject matter; Process, machine, manufacture, or composition of matter. Generally, cannot patent a thing occurring in nature, mental processes, or abstract ideas. Novel; and Non-obvious. 3

Patent Infringement Direct Infringement “whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.” 35 U.S.C. § 271(a) Doctrine of Equivalents Inducement Contributory Infringement 4

Patent Exhaustion Generally Patentee’s sale of a patented product “exhausts” the patentee’s patent rights. Patentee cannot bring a patent infringement lawsuit based on the use or resale of the patented product by the purchaser or a subsequent owner. Only authorized sales result in exhaustion. 5

Authorized Sales An authorized sale may be by: Patentee; or Licensee. A sale outside the scope of the license would not result in exhaustion. For example, in General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175 (1938), selling patented amplifiers for commercial use did not result in exhaustion where the seller was only licensed for making and selling the patented amplifiers for private use. 6

First Sale Doctrine The First Sale Doctrine, applicable to copyrighted works, is analogous to Patent Exhaustion. “the owner of a particular copy or phonorecord lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” 17 U.S.C. § 109(a) “the owner of a particular copy lawfully made under this title . . . is entitled, without the authority of the copyright owner, to display that copy publicly . . . to viewers present at the place where the copy is located.” 17 U.S.C. § 109(c) Does not “extend to any person who has acquired possession of the copy or phonorecord from the copyright owner, by rental, lease, loan, or otherwise, without acquiring ownership of it.” 17 U.S.C. § 109(a) 7

Which Patents are Exhausted? Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) LG Electronics licensed various computer technology patents to Intel Corporation, including system and method claims directed to memory management and data processing. Intel had a license to make, use, sell, offer to sell, import, and otherwise dispose of its products embodying these patents; however, the License Agreement stated that no license is granted “to any third party for the combination by the third party of Licensed Products of either party with items, components, or the like acquired . . . from sources other than a party hereto, or for the use, import, offer for sale or sale of such combination.” Quanta Computers purchased microprocessors and chipsets from Intel, and then combined these with non-Intel memory and buses in ways that practiced the LG Electronics patents. 8

Which Patents are Exhausted? Intel’s sale of chipsets and microprocessors to Quanta Computers exhausted LG Electronics’ patents. Method claims are exhausted by the sale of an item that “embodies” the method. Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940) - Sale of motor fuel exhausted patent for a method of using the fuel in combustion motors. United States v. Univis Lens Co., 316 U.S. 241 (1942) - Sale of optical lens blanks exhausted method patents that were not completely practiced until the blanks were ground into lenses. 9

Which Patents are Exhausted? Intel’s products “embodied” LG Electronics’ patents even though Intel’s products did not meet every element of such patents. The Court found no reasonable use for Intel’s products other than being incorporated into computer systems that infringed LG Electronics’ patents. The Court further found that Intel’s products embodied essential features of LG Electronics’ patents “because the only step necessary to practice the patent is the application of common processes or the addition of standard parts”. 10

POST-SALE RESTRICTIONS & SALES OUTSIDE THE U.S. 11

Post-Sale Restrictions Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ___ (2017). Lexmark offered consumers two options for purchasing toner cartridges: (1) buy a cartridge at full price, with no restrictions, or (2) buy a cartridge at a discount through Lexmark’s “Return Program”. Customers who bought through the Return Program must sign a contract requiring that such cartridges be used only once and prohibiting the transfer of the cartridges to third parties. Impression Products acquired empty cartridges that were sold under the Return Program, refilled them, and then resold them. 12

Post-Sale Restrictions The Court held that Lexmark’s sale of the cartridges exhausted its patent rights, regardless of the contractual restrictions required for participation in the Return Program. The Court emphasized the common law principle against restraints on alienation in finding that patent rights cannot be used to impost post-sale restrictions on purchasers. The Court distinguished post-sale restrictions from unauthorized sales. Although a patent infringement lawsuit cannot be used to enforce post-sale restrictions, such restrictions might be enforceable under contract law. 13

Sales Outside the United States Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ___ (2017). Lexmark sold toner cartridges outside the United States. Impression Products acquired empty cartridges that were sold outside the United States, refilled them, and then imported them into the United States. 14

Sales Outside the United States Lexmark’s sales outside the United States exhausted its United States patent rights. The Court analogized the case to Kirtsaeng v. John Wiley & Sons, Inc., 568 U.S. 519 (2013), in which the Court held that the First Sale Doctrine applies to copies of copyrighted works sold outside the U.S. In both cases, the Court emphasized the common law principle against restraints on alienation. 15

Sales Outside the United States Only sales authorized by the U.S. patentee are exhausted. Boesch v. Graff, 133 U.S. 697 (1890): German manufacturer had the right under German law to make and sell lamp burners. Owners of the U.S. patent rights had no ties to the German manufacturer. The Court held that sales by the German manufacturer did not exhaust the rights of the owners of the U.S. patent rights. 16

Patent Exhaustion Summary When does Patent Exhaustion occur? Worldwide sales. Sale must be authorized by U.S. patent holder. Sales outside the scope of a license do not result in exhaustion. Post-sale restrictions do not prevent exhaustion. Product sold must “embody” the patent in question. 17

PRACTICAL TIPS FOR PATENT HOLDERS 18

Implications of Lexmark An authorized sale outside the United States, exhausts all of the patent holders rights under the Patent Act. Patent holders will need to consider the scope and terms of sales outside the U.S. (e.g., the price at which products are sold abroad). 19

Implications of Lexmark Patent holders will no longer be able to rely on infringement claims to enforce post-sale restrictions. In other words, patent holders will need to find other legal bases for bringing claims against licensees or purchasers that violate post-sale restrictions. 20

Implications of Lexmark “…patent exhaustion is uniform and automatic. Once a patentee decides to sell – whether on its own or through a licensee – that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license.” 21

Other Legal Bases Limit the scope of the license granted to the licensee to practice the patent. Impose contractual restrictions on licensees and/or purchasers of patented products. Consider leasing instead of selling. 22

License Scope The Court made clear in Lexmark that a sale by a licensee of a patented product will exhaust the patent holder’s rights. “So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. That licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself.” 23

License Scope Instead of relying on post-sale restrictions imposed on the use or resale by the customers of the licensee, limit the scope of the license granted to the licensee May consider limiting the scope by: Territory Industry/customer type 24

License Scope The Court recognized that a purchaser of products sold outside of the scope of the license will still face liability for patent infringement, along with the licensee, “as if no license whatsoever had been granted”. Note, however, it is not clear whether a party that purchases from a licensee acting outside of the scope of its license must have knowledge of such fact to be held liable as an infringer. See General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 124, 127 (1938). 25

Contractual Restrictions Require licensees to enter into agreements with each customer to which it sells the patented product. Require that each agreement include provisions in contracts with their customers that restrict use or resale of the patented product. Consider requiring that the patent holder be named in the customer agreement as a third party beneficiary. 26

Contractual Restrictions “A license may require the licensee to impose a restriction on purchasers, like the license limiting the computer manufacturer to selling for non-commercial use by individuals. But if the licensee does so…the sale nonetheless exhausts all patent rights in the item sold. The purchasers might not comply with the restriction, but the only recourse…is through contract law...” 27

Lease/License of Product A patent holder may consider leasing or licensing the patented product instead of selling the product. The Court recognized that a license “does not implicate the same concerns about restraints on alienation as a sale” and that the patent holder is “free to relinquish only a portion of its bundle of patent protections” in the context of a license. 28

Key Points for Patentees Can no longer rely on patent infringement claims to enforce post-sale restrictions. May be able to rely on other legal bases, such as contractual restrictions, limiting the scope of licenses granted, and leasing/licensing products instead of selling. Remember that an authorized sale outside of the U.S. also exhausts patent rights. 29

QUESTIONS? 30