1. Patent Exhaustion & Implied License
KAIST MIP October 31, 2017
Christopher Bezak
Peter S. Park
( )
Sughrue Mion, PLLC.

2. Topics The Law – Patent Exhaustion Example Cross Licensing Scenario
– Implied Licenses
Example Cross Licensing Scenario
Questions and Discussions

3. Law of Patent Exhaustion
Legal Standard
Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct (2017)
Quanta Computer, Inc. v. LG Elecs., 553 U.S. 617 (2008)
United States v. Univis Lens Co., Inc., 316 U.S. 241 (1942)
Recent Decisions
Avoiding exhaustion may require separate, distinct patents, as well as a thorough discussion of the patents in a license
Helfrich Patent Licensing, LLC v. New York Times Co., 778 F.3d 1293 (Fed. Cir 2015)
Selling an item covered by one patent can exhaust a related patent
Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370 (Fed. Cir. 2013)
Implied Licenses
An express license with a manufacturer can create an implied license with purchasers
Zenith Elecs. v. PDI Commc’n Sys., 522 F.3d 1348 (Fed. Cir. 2008)
Jacobs v. Nintendo of Am., Inc., 370 F.3d 1097 (Fed. Cir. 2004)
Impression v. Lexmark: Return cartridge program (Impression bought from consumers used cartridge, refile and sold) … authorized sale triggers exhaustion. 1st sale doctrine (authorized sale) exhausts patent rights
Quanta v. LG: Microprocessor related patent (w/ memory and bus) ; Wang  LG  Intel sold  Quanta: Q’s only reasonable and intended use was to practice the LGE patent, and embodied essential features of the patent to mfg computers
Univis Lens: Lens blanks
Helfrich: Distinguishing handset claims (handset makers) and content claims (content providers) among patents having the same specification … complementary but distinguishing from Quanta  so no exhaustion
Lifescan: Test strip and Meter. Shasta made its own test strip and let client use in combination with meter. … no other use.  selling or giving meters free of charge exhausts patent covering both the test strips and meters …. analogous to Quanta. Also noted that meter along practice key features of invention.
Keurg: had a patent for a coffee brewer and a method of brewing coffee. K sold a brewer with a single-use cartridge. Strum sold a cartridge for users to practice K’s patent. Court held that selling a coffee brewer exhaust patent rights to the method.
Zenith: Z  express-licensed mfger (remote control system)  PDI (combined with other brand TVs) … no non-infringing use, so implied license
Nintendo: The no non-infringing use requirement is lifted when the patentee expressly licenses a manufacturer to sell its products for infringing uses

4. Impression Prods., Inc. v. Lexmark
“An authorized sale of an item exhausts all patent rights on that item.”
"In sum, 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, either directly or through a license."
"A license may require the licensee to impose a restriction on purchasers … But if the licensee does so … the sale nonetheless exhausts all patent rights in the item sold."

5. Patent Law v. Contract Law
Remedy for non-compliance on restriction under contract law
"We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions or the location of the sale."
"The single-use/no-resale restrictions in Lexmark’s contracts with customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell."
" Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law."
“The inconvenience and annoyance to the public that an opposite conclusion would [produce] are too obvious to require illustration.”

6. Quanta Computer v. LG Elecs.
Sales of non-patented components can exhaust patent rights
Sale of (non-patented) computer processor exhausts (patented) combination of processor, computer memory (RAM), and bus
"The authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article."
"Intel’s microprocessors and chipsets substantially embodied the LGE Patents because they had no reasonable noninfringing use and included all the inventive aspects of the patented methods. "

7. Test for Exhaustion
United States v. Univis Lens Co., Inc., 316 U.S. 241 (1942)
". . . exhaustion was triggered by the sale of the [components] because their only reasonable and intended use was to practice the patent and because they ‘embodie[d] essential features of [the] patented invention.’" Quanta (quoting Univis Lens)

8. Test for Exhaustion (cont.)
Possible uses of the component
". . . the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold." Univis Lens.
"Here, LGE has suggested no reasonable use for the Intel Products other than incorporating them into computer systems that practice the LGE Patents … “
“A microprocessor or chipset cannot function until it is connected to buses and memory … the only apparent object of Intel’s sales to Quanta was to permit Quanta to incorporate the Intel Products into computers that would practice the patents.“ Quanta

9. Test for Exhaustion (cont.)
The "essential" requirement
" where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent He has thus parted with his right to assert the patent monopoly with respect to it and is no longer free to control the price at which it may be sold either in its unfinished or finished form." Univis Lens (1942).

10. Avoiding Exhaustion
Helfrich Patent Licensing, LLC v. New York Times Co. (Fed. Cir 2015)
Granting a license on one Invention (handset claims) does not necessarily exhaust rights in a separate and distinct invention (content claims) useful in practicing the licensed invention
Manufacture of devices covered by patent A does not necessarily exhaust method covered by patent B
"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.“ Quanta

11. Sale Exhausts All Patent Claims
Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370 (Fed. Cir. 2013)
Selling a commercial embodiment of an apparatus claim exhausts the rights for associated method claims. Id. at
Exhaustion applies to the entire patent. Id. at (citing Univis Lens)

12. Implied Licenses A license followed by a downstream sale by a licensee
Implied license defense
Typically presented “when a patentee or its licensee sells an article and the question is whether the sale carries with it a license to engage in conduct that would infringe the patent owner's rights.”  Jacobs v. Nintendo of Am., Inc., (Fed. Cir. 2004).

13. Test for Implied License
Met-coil Systems Corp. v. Korners Unlimited, Inc. (Fed. Cir. 1986)
A patent owner's unrestricted sale of a machine useful only in practicing the claimed invention presumptively carries an implied license under the patent
First, equipment involved must have no non-infringing uses
Second, the circumstances of the sale must "plainly indicate that the grant of a license should be inferred." Bandag, Inc. v. Al Bolser's Tire Stores, Inc., (Fed. Cir. 1984).

14. Express License to Implied license
Zenith Elecs. v. PDI Commc’n Sys. (Fed. Cir. 2008)
A manufacture with an express license sold a patented item (remote control system) to PDI which combined with other brand TVs
No non-infringing use, so an implied license
Jacobs v. Nintendo of Am., Inc. (Fed. Cir. 2004)
Jacobs’ patent practiced by Nintendo
An express license to a manufacturer to sell the patented product for infringing use lifts the no non- infringing use requirement
Zenith: Z  express-licensed mfger (remote control system)  PDI (combined with other brand TVs) … no non-infringing use, so implied license
Nintendo: The no non-infringing use requirement is lifted when the patentee expressly licenses a manufacturer to sell its products for infringing uses

15. Unauthorized Sales
If a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee's rights
Impression Prods. (discussing General Talking Pictures Corp. v. Western Elec. Co., 305 U.S. 124 (1938))
If a sale is made before obtaining the rights to do so, that sale is unauthorized, even the rights are later obtained.
Honeywell Int’l, Inc. v. United States (Fed. Cir. 2010).

16. Authorized Sales Giving away a product for free
LifeScan Scotland, ltd. v. Shasta Techs. (Fed. Cir. 2013)
Licensees failing to pay royalties or falling behind on payments does not convert an authorize sale to an unauthorized sale.
Tessera, Inc. v. Int’l Trade Comm’n (Fed. Cir. 2011)
A covenant not to sue can authorize a sale.
TransCore v. Elec. Transaction Consultants Corp. (Fed. Cir. 2009)

17. Example - 1
Company A licenses patent X to Company B, and Company B sells product Y to Company C
Product Y is covered by patent X
Can A assert infringement of patent X against Company C

18. Example – 1 (cont)
Company A is unable to assert infringement of patent X against Company C because:
Patent X is exhausted due to (1) license from Company A to Company B and (2) sale from Company B to Company C
"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." Impression Prods., Inc. v. Lexmark Int’l, Inc.

19. License Terms
Drafting license agreement cannot negate exhaustion of patent X for authorized sale
"Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law." Impression Prods., Inc. v. Lexmark Int’l, Inc., 137 S. Ct (2017)
Assertion of patent exhaustion defense could result in revocation of license between Company A and Company B, if provided in the license

20. “Unauthorized Sale”
Drafting a license agreement can negate exhaustion of patent X for unauthorized sale
"If a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee's rights.“ Impression Prods., Inc. v. Lexmark Int’l, Inc
Intel’s sale to Quanta?

21. Example - 2 Company A licenses Patent X to Company B
Patent X covers a combination of HW and SW
Company B sells HW to Company C (authorized sale under license)
Company C combines HW with SW
Can Company C assert patent exhaustion?

22. Example - 2
Yes, if HW is essential (embodies essential/inventive features of Patent X) and is intended to only practice Patent X
No, if HW is inessential (SW embodies essential/inventive feature of Patent X) or has noninfringing uses
HW may be inessential (i.e., generic processor) when SW is essential

23. Conclusion
An authorized sale of an item exhausts all patent rights on that item
An unauthorized sale does not trigger patent exhaustion
Sales of non-patented components can exhaust patent rights if:
No non-infringing use of component, and
Component embodies essential features of patent
Implied license from sale of non-patented components may exist if
Grant of a license should be inferred from sale of non-patented component