Shades of Gray Exhaustion and IP Enforcement in a Global Marketplace

First-Sale Doctrine “[T]he right to vend is exhausted by a single, [authorized,] unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.” Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 516 (1917). “[W]here 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 to the patent, he has sold his invention so far as it is or may be embodied in that particular article.” United States v. Univis Lens Co., 316 U.S. 241, (1942).

LGE’s Patents Originated with Wang Laboratories Managing memory (DRAM), maintaining cache coherency, and prioritizing requests for access to the system bus Wang went bankrupt in LGE purchased the patents. Accused systems used SDRAM and other features that were not developed until 3-4 years after the patents’ priority dates

LGE’s License to Intel LGE granted Intel a broad license to make, use, or sell products that practice the LGE patents. LGE placed no conditions on Intel’s rights. Authorized sale?

LGE and Third Parties LGE disclaimed any license to third parties (Intel’s buyers) to combine the Intel products with non-Intel products. LGE required Intel to send its buyers notice of LGE’s disclaimer Quanta ignored the notice from Intel. Did Quanta infringe on the LGE patents? Did Quanta breach an implied contract with LGE?

Unanswered Questions Substantial Embodiment Foreign Sales Authorization Covenants not to Sue & Implied License Compulsory Licenses

Substantial Embodiment Easy in Quanta – No other uses for accused products. Harder Question Pfizer Discovery: Atorvastatin causes a 10-fold boost in the effectiveness of PPAR-γ agonists in lowering blood-glucose Claim: A method of treating type 2 diabetes comprising: administering to a subject 10 to 80 mg/day of atorvastatin or a pharmaceutically acceptable salt thereof in combination with a suboptimal daily dose of a PPAR-γ agonist. Atorvastatin calcium is available in generic form on Thursday The generic drug is being sold pursuant to a license agreement from Pfizer to Ranbaxy; Ranbaxy’s sales are authorized sales. Pfizer partners with GSK to launch AVANDIATOR If I buy Ranbaxy’s atorvastatin and Takeda’s ACTOS, exhaustion?

Foreign Sales Subdivided Sales Regions Adams v. Burke, 84 U.S. 452 (1873) Patentee licensed carpenter to sell coffin lids only within 10-mile radius of Boston. Carpenter sold a coffin lid to undertaker within the 10-mile radius, but carpenter took the lid outside of the radius and used it. Result: No Infringement – “[T]he patentee had received his consideration and the [coffin lid] was no longer within the monopoly of the patent grant.” Keeler v. Standard Folding-Bed Co., 157 U.S. 659 (1895) “[O]ne who buys patented articles from one authorized to sell them becomes possessed of an absolute property right in such articles, unrestricted in time or place.”

Foreign Sales, contd. Lower Courts and Foreign Sales Curtiss Aeroplane & Motor Corp., 266 F. 71 (2d Cir. 1920) Patentee had identical patents in Canada and United States. Patentee authorized X to sell planes in Canada. Patentee authorized Y to sell planes in United States. Z buys a plane from X in Canada and flies it to the United States. Did Z’s “importing” of the plane infringe the U.S. patent? NO. District court cases held similarly as late as Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001) Court reached opposite result…without citing a single case that squarely addressed exhaustion. Cited Boesch v. Graff – dealt with authorization not territoriality

Reversal by Quanta? LGE attempted to argue that the Intel chipsets could not “substantially embody” the patents because the chipsets could be used in ways that don’t infringe the patents (e.g., never imported into the U.S., used as replacement parts). LGE: The scope of exhaustion cannot exceed the scope of infringement; exhausting sales must be infringing sales SCOTUS: “But Univis teaches that the question is whether the product is capable of use only in practicing the patent, not whether those uses are infringing. Whether outside the country or functioning as replacement parts, the Intel Products would still be practicing the invention, even if not infringing it.” Quanta, n.6.

Additional Thoughts Exhaustion is broader than infringement But what about induced infringement? Omega v. Costco? Is a license a sale for purposes of exhaustion?

Authorization TransCore v. ETC Earlier settlement agreement: TransCore “agrees and covenants not to bring any demand, claim, lawsuit or action against Mark IV for future infringement.” Court: covenant not to sue = license = authorization Mark IV’s sales were authorized, and downstream purchasers could not be liable for patent infringement Implied license – patentee is equitably estopped from asserting other patents—whether earlier- or later-issued—against the product that was the subject of the exhausting sale

Authorization wrinkles Monsanto v. Bowman, Case No (Fed. Cir. 2011) Agreement authorized farmers to sell second-generation seeds back to the grain elevator as commodity seed. Bowman planted second-generation commodity seed purchased from the elevator. Court: No exhaustion…and even if there is, the third-generation seed is a new article outside of the ambit of the exhausting sale Regulated Products Does purchase of an regulated product include an implied geographical limitation on its use? Compulsory licenses Is a compulsory license authorization?