1 1 AIPLA Firm Logo American Intellectual Property Law Association U.S. Patent Exhaustion Update Ron Harris, The Harris Firm AIPLA Mid-Winter Institute, IP Practice in Japan Committee Phoenix, AZ January 28, 2014

2 2 AIPLA Firm Logo U.S. Patent Exhaustion The first sale common law doctrine: –Bargained for compensation (no double profits) –Certain authorized, unrestricted sales of an article “substantially embodying” a US patent exhausts the patentee’s right to control a purchaser’s use or sale of that article thereafter –Triggered only by a sale of a “particular item” (1) authorized sale (2) improperly restricted sale (3) component or article that substantially embodies patent(s) (4) sold under a US patent

3 3 AIPLA Firm Logo Authorized Sale Not authorized for self-replication –Monsanto v. Bowman (2013) (limited to facts) Authorized via sale of unpatented component or patented device substantially embodying method or product claims –Motion Pic. v. Univer (1917) (sold patented device) –U.S. v. Univis (1942) (sold unfinished device) –Quanta v. LG (2008) (sold unpatented component) –Keurig v. Sturm (Fed. Cir. 2013)(sold patented device) Authorized via covenant not to sue or settlement –Transcore (Fed. Cir. 2009) / PSN Illinois (N.D. Ill. 2011)

4 4 AIPLA Firm Logo No Authorized Sale Monsanto v. Bowman (2013) –Exhaustion of rights does not cover self-replicating articles harnessed by accused. –Sale allows the purchaser to use or resell, not to make new copies. –“the doctrine restricts a patentee’s rights only as to the ‘particular article’ sold; it leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.” Bowman v. Monsanto Co., Docket No , May 13, –Holding is limited to the facts, not every case involving a self-replicating product.

5 5 AIPLA Firm Logo Authorized Sale Motion Picture Patents v. Universal Film (1917) –Requiring purchasers of patented invention to use only patentee’s unpatented other products cannot be enforced by patent infringement cause of action. –MPP required movie theaters that bought their patented film projector to only use MPP’s films, Universal was sued by MPP and that provision was thereafter invalidated.

6 6 AIPLA Firm Logo Authorized Sale U.S. v. Univis Lens Co. (1942) –5 patents covering lens blanks and methods of making but not finishing them, 8 patents for the finished blanks –A sale of an unfinished article may still exhaust a patent if: it embodies [all] essential features of the patent, is within protection of the patent, and has destined the article to be finished in conformity to the patent. “where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent, and has destined the article to be finished by the purchaser in conformity with the patent, he has sold his invention so far as it is or may be embodied in that particular article.”

7 7 AIPLA Firm Logo Authorized Sale Quanta Computer v. LG Electronics, Inc. (2008) –Exhausted if sold article[’s] (1) “only reasonable and intended use was to practice the patent” and (2) “embodies essential features” of the patented invention (1) Only reasonable and intended use was to practice the larger system and method claims and (2) Chipsets embodied essential features of the patented larger computer system and method inventions. –“The exhaustion analysis is not altered by the fact that more than one patent is practiced by the article” “The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B”

8 8 AIPLA Firm Logo Authorized Sale Keurig v. Sturm (Fed. Cir. 2013) –When a patent covers a machine and method to use the machine, an authorized sale of the machine provides exhaustion of the method to use that machine. –“[W]here a person ha[s] purchased a patented machine of the patentee or his assignee, this purchase carrie[s] with it the right to the use of the machine so long as it [is] capable of use.” (quoting, Adams v. Burke (1873)). “Substantial embodiment” test not applicable because patented device was authorized, despite non-infringing uses of cartridges In dicta, “substantially embodies” line drawn patent-by-patent, not claim-by-claim (O’Malley, concurring)

9 9 AIPLA Firm Logo Authorized Sale Transcore v. ETC (Fed. Cir. 2009) –An unconditional covenant not to sue authorizes sales by the covenantee for the purposes of patent exhaustion –There were no express limitations in the settlement agreement between Transcore (the owner of the patent) and Mark IV Agreed not to “bring any demand, claim, lawsuit or action against Mark IV for future infringement.” Therefore without any apparent restrictions or limitation, it authorizes acts that would otherwise be infringements: marking, using, offering for sale, selling or importing. It did not include a restriction on sales. Therefore, Mark IV’s had the right to sell the patent to Electronic Transaction Consultants, and because of the unrestricted terms in the settlement agreement between Transcore and Mark IV, the court found that Transcore’s rights had been exhausted.

10 AIPLA Firm Logo Authorized Sale PSN Illinois v. Abbot Laboratories (N.D. Ill 2011) –Settlement agreements allowing for release of patent infringement and unrestricted licenses for future use prevents future claims of infringement for purchasers. –PSN entered into a settlement agreement & settled claims against Discover Rx, LTC and Genscript. Settlement agreement included an unrestricted release for prior use of PSN’s patents and extended a license to the parties to make and sell the patent. Thus, patent exhaustion applied because authorized sale of patent to Abbot Labs.

11 AIPLA Firm Logo Allowable Conditions Mallinckrodt v. Medipart Inc. (Fed. Cir. 1992) –Allowed restriction of single-use for a patented product. –Restriction on use is valid and enforceable (e.g., field of use, can only make and use but not sell), as long as it does not violate patent misuse or antitrust laws (e.g., unlawful tying, price restraints). –Mallinckrodt sued Medipart asserting inducement Nebulizer that had a “single use only” limitation. Hospitals would ship the used nebulizers to Medipart who would sterilize and send them back to hospitals for second use, bearing Mallinckrodt’s “single use labels”. Fed. Cir. found Mallinckrodt’s restriction reasonably within the patent grant which includes the right of the inventor to exclude others from making, using, or selling the invention throughout the United States. See also Static Control v. Lexmark (Dky 2009) (single use)

12 AIPLA Firm Logo Under a US Patent Not under a US patent  no int’l exhaustion –Fujifilm Photo Film Co. Cases (Fed. Cir. 2001, 2003, 2005, 2011) (territoriality requirement withstands Quantas at CAFC) –Ninestar v. ITC (first sale authorized outside US) Under a US patent  int’l exhaustion –Multimedia (N.D.Cal. 2012) (global license to one party) –Tessera v ITC (Fed. Cir. 2011) (global license to one…) –LG v. Hitachi (N.D. Cal. 2011) (same facts as Quantas but first sales from Intel to Hitachi in Japan) –STMicroelectronics (Fed. Cir. 2006) (global license…)

13 AIPLA Firm Logo (Not) Under a US Patent Fujifilm Corp. v. Benun (Fed. Cir. 2010) (D.NJ) –Territoriality requirement withstands Quantas in court –Benun bought used single-use cameras legally sold in China, refurbished, then sold in the US. –Foreign sales of the patented invention did not allow for a defense of exhaustion Ninestar v. ITC (Fed. Cir. 2012) –Territoriality requirement withstands Quantas at ITC

14 AIPLA Firm Logo Under a US Copyright Kirtsaeng v. John Wiley & Sons, Inc. (2013) –First Sale Doctrine for copyright applies to copies of a copyrighted work lawfully made abroad, and Kirtsaeng’s U.S. resale and importation of such copyrighted books made in Thailand were permissible. –Despite Omega v. Costco (2008) (split decision; non- precedentially affirmed territoriality requirement) –But see U.S. v Univis Lens (1942), “where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent, and has destined the article to be finished by the purchaser in conformity with the patent, he has sold his invention so far as it is or may be embodied in that particular article.”

15 AIPLA Firm Logo Tips for Patentees Do not expect two payments for the same article Place constraints on sale/license with second party, not third party (esp., non-party) A mere 3 rd party notice constraint (as opposed to a notice constraint on sale) is insufficient. Draft applications –so that additional patents each contain independently patentable subject matter not embodied in the first sold core technology component –emphasize the surprising effects of the combination as a whole, of claimed in larger article, not simply due to core technology components.

16 AIPLA Firm Logo Thanks for your attention. Questions? Ron C. Harris, Jr. The Harris Firm 922 N Street, NW, Suite 101 Washington, DC T: F: Higashiazabu, 3F Minato-ku, Tokyo 106–0044 T: F: