Patent Law

This guest post is authored by  Michael J. Kasdan, Esq. and  Charles R. Macedo , Esq. (Mr. Macedo is a Partner and Mr. Kasdan is an Associate with Amster, Rothstein & Ebenstein, LLP.  They can be reached at cmacedo@arelaw.com and mkasdan@arelaw.com )

The doctrine of patent exhaustion has long acted as a measure to prevent patent owners from "double-dipping" by collecting patent licensing royalties from multiple entities in a supply chain for use of the same patented invention.  For example, assume that a patent owner has a patent that covers a computer processing chip.  The patent exhaustion doctrine is the rule that prevents that patent owner from collecting a first license payment from the chipmaker, and then collecting additional licensing payments from computer makers that make end-products that incorporate the licensed chipmaker's chip.  In such a circumstance the patent is said to be "exhausted," by the authorized first sale of the patented article.  Once the patent owner licenses the chipmaker, and thus authorizes the chipmaker to sell the patented article, the patent owner cannot collect a second time from downstream users who purchase the chip from the licensed chipmaker.

But over the past fifteen years, this fundamental doctrine has been eroded in a number of significant ways by the U.S. Court of Appeals for the Federal Circuit.  As a result, the doctrine of patent exhaustion has become a less effective tool for preventing double-dipping, and downstream purchasers of products from licensed manufacturers have found themselves subject to paying a second royalty to patent owners who have already collected a first royalty from the upstream manufacturer.  Here are some significant ways that the patent exhaustion doctrine has been eroded by the Federal Circuit:

First, in seeming contradiction to Supreme Court precedent, the Federal Circuit now allows parties to "contract around" exhaustion.  See LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364 (Fed. Cir. 2006); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); cf. United States v. Univis Lens Co., 316 U.S. 241 (1942) (finding that once an authorized first sale occurs, exhaustion applies in spite of any attempt to contract around it).  Savvy patent owners have been taking advantage of this by drafting license agreements that the Federal Circuit has interpreted as preserving their rights to pursue infringement claims against downstream users who purchase and use the licensed product.

Second, and also in seeming contradiction to Supreme Court precedent, the Federal Circuit also has held that method claims are not subject to patent exhaustion.  See LG Electronics, 453 F.3d 1364; Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903 (Fed. Cir. 1984); cf. Univis, 316 U.S. 241 (applying exhaustion doctrine to method claims).  By limiting the patent exhaustion doctrine to only apparatus claims, the Federal Circuit has severely weakened its usefulness.

Third, the Federal Circuit has held that sales outside of the United States cannot "exhaust" a U.S. Patent.  See Fuji Photo Film Co., Ltd. v. Jazz Photo Corp.,394 F.3d 1368 (Fed. Cir. 2005); Jazz Photo Corp. v. U.S. ITC, 264 F.3d 1094 (Fed. Cir. 2001).  Therefore, in the common situation where components (such as chipsets) are sold abroad for incorporation into end-products (such as personal computers) that are then sold in the United States, sales by a licensed component- maker will not trigger the exhaustion doctrine, and a patent owner will not be precluded from also seeking patent royalties from the end-product maker.

Having considered a host of important patent law issues over the past two years (reversing the Federal Circuit on each such occasion), the Supreme Court has now indicated its intent to revisit the patent exhaustion doctrine and to address the first two of the three above issues.

The central question that the Supreme Court will now address in Quanta is whether, by attaching conditions to the license and notifying downstream purchasers of these conditions, a patent-owner may preserve infringement claims against downstream users of licensed products or components.  How the Supreme Court resolves this issue will determine whether the patent exhaustion is simply a default rule that a patent-owner can contract around and therefore avoid, or whether the patent exhaustion is an iron-clad rule of patent law that may not be avoided.

For a more detailed analysis of the Supreme Court precedent, the Federal Circuits departure from that precedent, the arguments being raised by the appellants in Quanta, and the other issues left open regarding the Exhaustion Doctrine, please see Michael J. Kasdan, Quanta Computer V. LG Electronics: Will The Supreme Court Revive The Exhaustion Doctrine? (available here)