Honey, I Shrunk the Patent Rights David Kagan Kagan Binder, PLLC Intellectual Property Attorneys © David Kagan How Implied Licenses and the Exhaustion Doctrine Limit Patent and Licensing Strategies

A Harsh Reality Implied License Patent Exhaustion Repair v. Reconstruction

Topics Does this impact me? Implied Licenses Exhaustion Doctrine Repair v. Reconstruction You’re darn right this impacts me!

Does this impact me?  Patent preparation and prosecution  Client counseling  Opinions  Agreements  Dispute resolution  Implied license and exhaustion

Policies at play  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices 4

Policies at play  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices 4 Mistakes, ambiguity, gaps Benefit of bargain

Policies at play  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices 4 Patent term Overextend claims

Policies at play  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices 4 Double recovery by patentee Too much profit Customer double dips

Implied licenses are brutal. Met-Coil (1986) Anton Bauer (2003) New developments

Met-Coil Systems Corp. v. Korners Unlimited, Inc. (Fed. Cir. 1986) Patent owners Customers Classic tension

Just the facts, please. Met-Coil Duct Special corners The Met Coil Products

Just the facts, please. Met-Coil Duct Patent on the Equipment Patented Method A: Shape ducts B: Snap on corners C: Bolt together The Met Coil Patents

Just the facts, please. Met-Coil Duct The Met Coil Business Model Equipment patent Patented Method of making duct systems Sell equipment Sell ducts Sell corners Generate fabulous $$$$$$ Selling consumables is key revenue source.

Just the facts, please. Met-Coil Duct Plans foiled! Customers buy corners from Korners Unlimited. Why would Met Coil customers do this? Equipment patent Patented Method of making duct systems

Epic Patent Battle Erupts Met-Coil Patented Method A: Shape ducts B: Snap on corners C: Bolt together MC: only my corner customers licensed MC: Korners’ customers directly infringe MC: Korners induces or contributes to infringement

Epic Patent Battle Erupts Met-Coil Korners defends: Equipment customers have implied license Patented Method A: Shape ducts B: Snap on corners C: Bolt together MC: only my corner customers licensed MC: Korners’ customers directly infringe MC: Korners induces or contributes to infringement Crazy!

Held: Implied License !!! Met-Coil Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: The item has no non-infringing uses; and The facts plainly indicate that a license should be implied. 1 2 Patented Method A: Shape ducts B: Snap on corners C: Bolt together

The “plain” facts: Met-Coil Unrestricted sale of equipment Equipment has one use Corners have one use No contract restrictions After the fact notice irrelevant Corners unpatented Implied: equipment was very expensive

Policies at play in Met Coil Met-Coil  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices

Amazing impact! Met-Coil IMPLIED LICENSE Patent remnants

The Met-Coil rule is circular. Met-Coil Implied license exists legally if Implied license exists factually

What we learn: Met-Coil Triggered by sales Patents and business complementary Patent key components, consumables, equipment, methods, not just complete systems

Anton-Bauer Inc. v. PAG, Ltd (Fed. Cir. 2003)  17 years have passed  Expands Met Coil  Narrows Met Coil  Impacts business strategies  Impacts patent strategies

Just the facts, please Anton-Bauer (M) Male plate/battery (F) Female plate/charger M+F Combination patented, but M, F individually not patented.

More facts, please Anton-Bauer (F) (M) (M+F) combination patented Customers buy F from Anton Bauer Customers buy M from PAG Anton Bauer sues PAG for violating (M+F) patent Held: Sale of F gave implied license to buy M from anybody and then practice (M+F) patent.

Let’s quickly review Met Coil rule: Anton-Bauer (F) (M) Patented equipment has no noninfringing uses Facts plainly indicate license should be implied Patentee’s unrestricted sale of patented equipment carries implied license to use equipment in patented method when:

What’s the new AB/PAG rule? Anton-Bauer (F) (M) Patentee’s unrestricted sale of patented or unpatented item carries implied license to use item in patented method or patented combination when: Patented item has no noninfringing uses Facts plainly indicate license should be implied Sold item is material to patent

What if... Met-Coil Original Met Coil machine Paper weight Sailboat ballast Industrial sculpture Scrap/recyclable Paint and varnish experiments Door stop Projectile in neighbor disputes

What if... Met-Coil Machine/blender Original Met Coil machine

What if... Met-Coil Physically and conceptually separable... Machine/blender Original Met Coil machine

What if... Met-Coil What if Met Coil had patent protection for the special corners themselves? Implied license. No implied license Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: The item has no non-infringing uses The facts plainly indicate that a license should be implied.

What if... Met-Coil What if Met Coil had patent protection for the special corners themselves?  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices Implied license. No implied license

What if... Met-Coil Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: The item has no non-infringing uses The facts plainly indicate that a license should be implied. What if Met Coil gave the equipment away and earned revenues from duct and corner sales only? Implied license. No implied license

What if... Met-Coil  Fixing/enforcing contracts fairly  Proper patent scope  Unjust enrichment  Antitrust and unfair trade practices What if Met Coil gave the equipment away and earned revenues from duct and corner sales only? Implied license. No implied license

35 Would Met-Coil be different if: Met-Coil Met coil licenses the equipment License to use equipment under method patent Royalty based on equipment output Royalty included in sales price of components procured from Met Coil 10% royalty on duct systems when components obtained from third parties OPTION A: Equipment license

36 Would Met-Coil be different if: Met-Coil Toll manufacturer licensed for $$$ to use equipment to shape ducts and assemble duct systems for Met Coil only Met Coil supplies components to be used by toll manufacturer for Met Coil Met Coil sells finished, assembled duct systems to the toll manufacturer (title transfer) OPTION B: Toll manufacture; then title transfer

37 Would Met-Coil be different if: Met-Coil Met Coil happy being equipment supplier Accepts that consummables to be obtained from 3d parties OPTION C: Equipment supplier

Implied license developments Met-Coil Implied licenses can be derived from express licenses (not just sales). Proof of no noninfringing uses not required! Policy: benefit of bargain. Zenith Electronics Corp. v. PDI Communications Systems Inc., 522 F3d 1348, 86 USPQ2d 1513 (Fed. Cir. 2008); Jacobs v. Nintendo of America, Inc., 370 F3d 1097, 71 USPQ2d 1055 (Fed. Cir. 2004).

Implied license developments Met-Coil Implied license extended to continuations having same disclosure as expressly licensed patent. General Protecht Group Inc. v. Leviton Mftg., 651 F3d 1355, 99 USPQ2d 1275 (Fed. Cir. 2011).

Implied license developments Met-Coil Intent is relevant to implied license, but not to exhaustion. Transcore LP v. Electronic Transaction Consultants, 563 F3d 1271, 90 USPQ2d 1372 (Fed. Cir. 2009).

Implied license developments Met-Coil Licensee sales can still be “authorized” even if Licensee breached its royalty obligations where right to sell not conditioned on royalty payments. Tessera Inc. v. ITC, 646 F3d 1357, 98 USPQ2d 1868 (Fed. Cir. 2011).

Implied license developments Met-Coil Speakers sales triggered implied license to TV’s but not to remote controls. Zenith Electronics Corp. v. PDI Communications Systems Inc., 522 F3d 1348, 86 USPQ2d 1513 (Fed. Cir. 2008).

Patent exhaustion is brutal. Background Quanta (2008) New developments Man, all that implied license talk made me exhausted!

Exhaustion background Make, use, sell, offer to sell, import Exhausted after a patented item is sold Making is the exception Post sale restrictions ineffective and possibly improper

Exhaustion background Classically, triggered by sale of completed item Applies to thing sold, not other items Univis (US 1942) applied doctrine to precursors Did not apply to method claims Quanta (US 2008) applied doctrine to other items and method claims 5

Exhaustion background Univis rule: Authorized sale Precursor has one use Precursor sufficiently embodies essential features of the patent I’m exhaustion. I’m implied license.

Quanta Computer Inc. v. LGE, Inc. (US 2008) Bad news: complicated facts Good news: simplified facts work.

Key Issues under investigation Can method claims be exhausted? If yes, what’s the rule? 1 2

Just the facts, schematically please. Intel as licensee (LGE is patent owner) Quanta Third parties Sells chips and microprocessors Standard stuff Quanta customers Computers

Just the facts, schematically please. Intel as licensee (LG is patent owner) Quanta Third parties Quanta customers Computers Common stuff (X and Y) Special stuff (M and C) Sells chips and microprocessors Standard stuff

51 Just the facts, schematically please. Intel as licensee (LG is patent owner) Quanta Third parties Quanta customers Computers Common stuff (X and Y) Special stuff (M and C) Computers built from M, C, X and Y Sells chips and microprocessors Standard stuff

52 Just the facts, schematically please. Intel as licensee (LG is patent owner) Quanta Third parties Quanta customers Computers M, C, X, and Y all used to practice LG patented methods when computers are used Common stuff (X and Y) Special stuff (M and C) Computers built from M, C, X and Y Sells chips and microprocessors Standard stuff

Battle erupts, similar to Met Coil and Anton Bauer except exhaustion at issue. LGE: Only M and C purchased from Licensee. LGE: X and Y purchased from third parties. LGE: Method claims infringed unless all M, C, X and Y obtained from LGE (Intel).

Battle erupts, similar to Met Coil and Anton Bauer except exhaustion at issue. LGE: Only M and C purchased from Licensee. LGE: X and Y purchased from third parties. LGE: Method claims infringed unless all M, C, X and Y obtained from LGE (Intel). Quanta defense: sale of M and C exhausted the method claims. So I can buy X and Y from anybody I want.

Quanta defense is crazy talk? District court : method claims cannot be exhausted (after opinion revised). Federal Circuit : method claims cannot be exhausted. Even if exhausted, applies only to M&C items sold under patent, not to X and Y items.

Supreme surprise Method claims can be exhausted or we face parade of evils: Exhaustion negated by method claims in every patent. (claim scope policy) Patentee could control chain of distribution too much (unjust enrichment policy) Precedent supports Broad definition of exhaustion makes sense

57 Key Issues under investigation Can method claims be exhausted? If yes, what’s the rule? 1 2 Yes!

How to exhaust method claims: Authorized sale of product (or equipment); Only reasonable use is in the patented method The product sold substantially embodies the patented method There can only be ONE NEW

Only reasonable use is in patented method “ without utility ” unless used in the patented method No alternative use proposed, nor can the court discern one Univis: Fused lens blanks had no use but to be turned into finished lenses Quanta: chips and processors have no utility unless connected to buses and memory.

Factors to show “product embodies patent” Additional components or finishing steps not unique; off the shelf components No patents protect the extra features needed to complete the combination All novelty resides in the M&C products sold, not the extra X&Y features added to complete the combination Patents themselves say the extra features are standard, conventional, and little detail provided further indicating commonness Extra features incidental to invention No independent creativity or innovation needed to complete the combination Products used as is without modification; followed sellers specs.

Exhaustion developments Sale in violation of license is not an authorized sale. Monsanto Co. v. Scruggs, 459 F3d 1328, 79 USPQ2d 1813 (Fed. Cir. 2006).

Exhaustion developments Second generation seeds grown by buyer from first generation seeds have never been “sold” for purposes of triggering exhaustion. Sales of first generation of self-replicating product could exhaust patent rights as to second and subsequent generations if the only use of the product was to replicate itself. Monsanto Co. v. Bowman, 657 F3d 1341, 100 USPQ2d 1224 (Fed. Cir. 2011); Monsanto Co. v. Scruggs, 459 F3d 1328, 79 USPQ2d 1813 (Fed. Cir. 2006); Monsanto Co. v. McFarling, 302 F.3d 1291, 64 USPQ2d 1161 (Fed. Cir. 2002).

Exhaustion developments Based on language used, a covenant not to sue authorized sales for purposes of the exhaustion doctrine. Sales authorized by earlier covenant not to sue exhausted rights in a future patent. Transcore LP v. Electronic Transaction Consultants, 563 F3d 1271, 90 USPQ2d 1372 (Fed. Cir. 2009).

Exhaustion developments To invoke exhaustion doctrine, the authorized sale must have occurred under the U.S. Patent at issue. Hence, sale in foreign territory does not trigger exhaustion. Quanta (2008) did not eliminate the territory requirement that a sale must occur under a U.S. Patent to trigger exhaustion. Ninestar Technology Co. v. ITC, 667 F3d 1373, 101 USPQ2d (Fed. Cir. 2012); Jazz Photo Corp. v. ITC, 264 F3d 1094, 59 USPQ2d 1907 (Fed. Cir. 2001).

Repair v. Reconstruction You have to know about this if your business involves: Used equipment competition Replacement parts Servicing products

Repair v. Reconstruction System patents protect new equipment, but not equipment or replacement parts or service or consumables Component patents key to protect against used equipment and to protect consumables/replacement parts/service business Caution: Hewlett Packard case

Be careful when trying to repel implied license and exhaustion. Avoid business and patent strategies whose foundation is based on anticompetitive conduct or unfair trade practices.

Doctrines not always evil.

Does this impact me?  Patent preparation and prosecution  Client counseling  Opinions  Agreements  Dispute resolution  Implied license and exhaustion We need to fix our perspective...

Does this impact me?  Does my client sell a product?  Is the product used in combination with other products?  Does my client sell equipment?  Does my client compete with used equipment refurbishers?  Does my client sell replacement parts or sell repair services? FOCUS ON THE CLIENT’S CONDUCT

71 We can deal with this reality Implied License Patent Exhaustion Repair v. Reconstruction

72 Thank you. K B Ag A N Boron Silver Atomic Mass Nitrogen Protons and Neutrons Potassium I Iodine Nd Neodymium Er Erbium Intellectual Property Attorneys All the right elements.