Misuse and Exhaustion Intro to IP – Prof Merges

What can a patentee legitimately do to exercise control over a technology? Licensing restrictions: conditions on use of a patented item Misuse: does such a restriction exceed the market power appropriate to the patent? Exhaustion: is such a restriction prevented by initial sale of the patented item?

Defenses: Antitrust/Misuse Patents confer market power Market power can be abused When it has been, this may provide a defense for an infringer

Antitrust/Misuse Centers on how the patentee deploys the technology Numerous potential ways to abuse the market power conferred by a patent

Examples Use of patents to mask or hide a cartel – “Horizontal” abuse Use of patents to exert control over dealers or customers – “Vertical” abuse

Misuse/Antitrust Counterclaim Plaintiff/Patentee Defendant

Misuse/Antitrust Counterclaim Plaintiff/Patentee Defendant Counterclaim

Misuse/Antitrust Counterclaim Plaintiff/Patentee Defendant Licensing Agreement

Misuse/Antitrust Counterclaim Plaintiff/Patentee Defendant Licensing Agreement Defendant asserts patent is unenforceable due to anticompetitive licensing agreement

Typical Counterclaims Anticompetitive acquisition of patent – Walker Process Equipment, Inc. v. Food Machinery Chemical Corp., 382 U. S. 172 (1965); Handgards, Inc. v. Ethicon, Inc. 743 F. 2d 1282 (9th Cir. 1984) Illegal tie-in – Morton Salt

Motion Picture Patents Co. Projector may only be used with Edison brand films.

Holding: P. 334 Patent is limited to film feeding device for projectors Patentee should not be allowed to extend patent to cover film not claimed in the patent Injury to the public interest

Illinois Tool Trident, a wholly-owned subsidiary of Illinois Tool Works, is a manufacturer of printheads and owns U.S. Patent No. 5,343,226 covering the ink jet print head. Trident also manufactures ink for use with the patented printheads. Although the ink is not protected by any of Trident’s patents, their standard license agreements grant the right to “manufacture, use and sell… ink jet printing devices…” to other printer manufacturers ONLY “when used in combination with ink and ink supply systems supplied by Trident.”

Misuse/Antitrust Counterclaim Plaintiff/Patentee Defendant Licensing Agreement Defendant asserts patent is unenforceable due to anticompetitive licensing agreement

Independent Ink also manufactures ink useable in Trident’s patented printheads. Independent filed suit in the Central District of California against Trident and Illinois Tool Works alleging, among other things, an illegal tying arrangement in violation of section 1 of the Sherman Act. The district court, however, dismissed the case on summary judgment.

Sherman Act: Section One 15 U.S.C. § 1 Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

Sherman Act: Section One 15 U.S.C. § 2 Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.

Theoretical basis “Leverage theory” – Patents being improperly leveraged by various licensing practices For example, a tie-in

Tie-in example If you want my patented machine, you must buy (unpatented) materials used in the machine

Morton Salt case

“[R]espondent is making use of its patent monopoly to restrain competition in the marketing of unpatented articles, the salt tablets, for use with the patented machines...”

Leverage theory “Leveraging” monopoly in machine into (separate) market for salt

Chicago Critique No such thing as “leverage” Cannot charge more for [Tying + Tied] product bundle than buyers are willing to pay

More Chicago critique Look for more “positive” explanation of licensing practices – Patentees deserve a monopoly How might it be good for the patentee and consumers?

“Metering” Concept Relates back to price discrimination idea: charge effectively different price for different classes of users: – High-value vs. low-value users

Patent Exhaustion To exhaust: to run out of, use up What is “used up”? The “power” of a patent When is it used up? When an item covered by the patent is sold on the market

LG Electronics (Patent Owner) Intel (Licensee) Computer Cos.

LG Electronics (Patentee) Intel (Licensee) Master License (required non- coverage notice to Intel Customers) Specific product license (no customer restrictions)

Intel (Licensee) Computer Cos. LG’s right to Sue?

End Users LG Electronics (Patentee) Intel

Intel (Licensee) End Users License? +

LG Sued End Users – Bizcom, Quanta, etc. End Users defended by claiming that they were protected against suit by virtue of the LG-Intel license agreement, and Intel’s sale of chips to them

District Court LG argued that end users were not protected by exhaustion, since the chips sold by Intel did not completely embody any claims in the asserted patents District Court disagreed: held, sales of chips by Intel exhausted LG’s rights vis-à-vis end users

Federal Circuit Partial reversal No exhaustion: LG did not authorize Intel to authorize end- users to combine Intel products with non-Intel products

Quanta Computer, Inc. v. LG Electronics, Inc. 128 S.Ct (2008) Held: licensee's sale of component computer parts that substantially embodied method patents held by patentee was “authorized” by patent holder, and had effect of exhausting patent holder's patents.

Supreme Court: Holdings 1.Method claims are subject to exhaustion 2.Embodiments substantially containing claimed technology exhaust a patent 3.Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

128 S.Ct. 2109, 2020 [I]f [a] device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B. For example, if the Univis lens blanks had been composed of shatter-resistant glass under patent A, the blanks would nonetheless have substantially embodied, and therefore exhausted, patent B for the finished lenses. This case is no different.

Supreme Court: Holdings 1.Method claims are subject to exhaustion 2.Embodiments substantially containing claimed technology exhaust a patent 3.Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

Third holding: important for future cases We can learn from the LG – Intel – End User arrangement Drafting tips

Basic exhaustion principles “Exhaustion is triggered only by a sale authorized by the patent holder.” – > 128 S.Ct. 2109, 2121

Two elements here [1] SALE only – > Licensing is outside this holding – > Creative licensing arrangements are still permissible

[2] Authorized by the patent holder – > Principles of implied licensing come into play

LG Electronics (Patentee) Intel (Licensee) Master License (required non- coeverage notice to Intel Customers) Specific product license (no customer restrictions)

No restriction on customers’ use of patented technology “[T]he provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intel's authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in that notice.” S.Ct. 2109,

Patentee Licensee Quanta strongly suggests that effective restrictions/not -ice in license agreement might bind downstream users End users

LG Electronics (Patentee) Intel (Licensee) Specific product license WITH requirement to restrict customers; to give notice of no license

Remedies in licensing agreement “We note that the authorized nature of the sale to Quanta does not necessarily limit LGE's other contract rights. LGE's complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.” – 128 S.Ct. at 2122

Important issues post- Quanta Contractual remedies for Licensee’s breach of license, including unauthorized infringement by Licensee’s customers Patentee Licensee End users