Honey, I Shrunk the Patent Rights
How Implied Licenses and the
Exhaustion Doctrine Limit Patent and
Licensing Strategies
David Kagan
Kagan Binder, PLLC
Intellectual Property Attorneys
dkagan@kaganbinder.com
651-275-9804
© David Kagan 2011-2013
A Harsh Reality
Patent
Exhaustion
Implied
License
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
Mistakes, ambiguity,
gaps
Benefit of bargain
4
Policies at play




Fixing/enforcing contracts fairly
Proper patent scope
Unjust enrichment
Antitrust and unfair trade practices
Patent term
Overextend claims
4
Policies at play




Fixing/enforcing contracts fairly
Proper patent scope
Unjust enrichment
Antitrust and unfair trade practices
Double recovery by
patentee
Customer double dips
Too much profit
4
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
Met-Coil
Just the facts, please.
Special corners
Duct
Duct
The Met Coil
Products
Met-Coil
Just the facts, please.
Duct
Duct
The Met Coil
Patents
Patented Method
A: Shape ducts
Patent on the
Equipment
B: Snap on corners
C: Bolt together
Met-Coil
Just the facts, please.
Duct
Duct
Equipment
patent
Patented
Method of
making duct
systems
The Met Coil
Business Model
•
•
•
•
Sell equipment
Sell ducts
Sell corners
Generate fabulous $$$$$$
Selling consumables is key
revenue source.
Met-Coil
Just the facts, please.
Duct
Plans foiled!
Duct
• Customers buy corners from
Korners Unlimited.
Equipment
patent
Patented
Method of
making duct
systems
Why would Met Coil
customers do this?
Met-Coil
Epic Patent Battle Erupts
• MC: only my corner
customers licensed
• MC: Korners’ customers
directly infringe
• MC: Korners induces or
contributes to infringement
Patented Method
A: Shape ducts
B: Snap on corners
C: Bolt together
Met-Coil
Epic Patent Battle Erupts
• MC: only my corner
customers licensed
• MC: Korners’ customers
directly infringe
• MC: Korners induces or
contributes to infringement
Patented Method
A: Shape ducts
B: Snap on corners
C: Bolt together
Korners defends: Equipment customers have
implied license
Crazy!
Met-Coil
Held: Implied License !!!
Patentee’s unrestricted sale of patented item carries an
implied license to practice a patented method when:
1
The item has no non-infringing uses; and
2
The facts plainly indicate that a license should be
implied.
Patented Method
A: Shape ducts
B: Snap on corners
C: Bolt together
Met-Coil
The “plain” facts:
• 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
Met-Coil
Policies at play in Met Coil




Fixing/enforcing contracts fairly
Proper patent scope
Unjust enrichment
Antitrust and unfair trade practices
Met-Coil
Amazing impact!
Patent remnants
Met-Coil
The Met-Coil rule is circular.
Implied license
exists legally if
Implied license
exists factually
Met-Coil
What we learn:
• 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
Anton-Bauer
Just the facts, please
(F) Female
plate/charger
(M) Male
plate/battery
M+F Combination patented, but M, F
individually not patented.
Anton-Bauer
More facts, please
(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.
Anton-Bauer
Let’s quickly review Met Coil rule:
(F)
(M)
Patentee’s unrestricted sale of
patented equipment carries implied
license to use equipment in patented
method when:
• Patented equipment has no
noninfringing uses
• Facts plainly indicate license should be
implied
Anton-Bauer
What’s the new AB/PAG rule?
Patentee’s unrestricted sale of patented or
(F) unpatented item carries implied license to
use item in patented method or patented
combination when:
(M)
•
•
•
Patented item has no noninfringing uses
Facts plainly indicate license should be
implied
Sold item is material to patent
Met-Coil
What if . . .
•
•
•
•
•
Original Met
Coil machine
Paper weight
Sailboat ballast
Industrial sculpture
Scrap/recyclable
Paint and varnish
experiments
• Door stop
• Projectile in neighbor
disputes
Met-Coil
What if . . .
Original Met
Coil machine
Machine/blender
Met-Coil
What if . . .
Original Met
Coil machine
Machine/blender
Physically and conceptually separable . . .
Met-Coil
What if . . .
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.
Met-Coil
What if . . .
What if Met Coil had patent protection for
the special corners themselves?
Implied license.
No implied license




Fixing/enforcing contracts fairly
Proper patent scope
Unjust enrichment
Antitrust and unfair trade practices
Met-Coil
What if . . .
What if Met Coil gave the equipment away and
earned revenues from duct and corner sales only?
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.
Met-Coil
What if . . .
What if Met Coil gave the equipment away and
earned revenues from duct and corner sales only?
Implied license.
No implied license




Fixing/enforcing contracts fairly
Proper patent scope
Unjust enrichment
Antitrust and unfair trade practices
Met-Coil
Would Met-Coil be different if:
OPTION A: Equipment license
• 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
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Met-Coil
Would Met-Coil be different if:
OPTION B: Toll manufacture; then title transfer
• 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)
36
Met-Coil
Would Met-Coil be different if:
OPTION C: Equipment supplier
• Met Coil happy being equipment supplier
• Accepts that consummables to be
obtained from 3d parties
37
Met-Coil
Implied license developments
• 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).
Met-Coil
Implied license developments
• 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).
Met-Coil
Implied license developments
• 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).
Met-Coil
Implied license developments
• 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).
Met-Coil
Implied license developments
• 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:
I’m
exhaustion.
• Authorized sale
• Precursor has one use
• Precursor sufficiently
embodies essential
features of the patent
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
1
Can method claims be
exhausted?
2
If yes, what’s the rule?
Just the facts, schematically please.
Third parties
Intel as licensee
(LGE is patent
owner)
Quanta
Computers
Quanta customers
Just the facts, schematically please.
Special stuff (M and C)
Intel as licensee
(LG is patent
owner)
Quanta
Computers
Quanta customers
Third parties
Common stuff (X and Y)
Just the facts, schematically please.
Special stuff (M and C)
Intel as licensee
(LG is patent
owner)
Quanta
Third parties
Common stuff (X and Y)
Computers
Computers built from M, C,
X and Y
Quanta customers
51
Just the facts, schematically please.
Special stuff (M and C)
Intel as licensee
(LG is patent
owner)
Quanta
Computers
M, C, X, and Y all used
to practice LG patented
methods when
computers are used
Third parties
Common stuff (X and Y)
Computers built from M, C,
X and Y
Quanta customers
52
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
Key Issues under investigation
Yes!
1
Can method claims be
exhausted?
2
If yes, what’s the rule?
57
How to exhaust method claims:
NEW
• 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
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
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
We can deal with this reality
Patent
Exhaustion
Implied
License
Repair v.
Reconstruction
71
Thank you.
Boron
Potassium
19
K
Atomic Mass
Silver
39.098
Ag
47
107.87
A
Protons and
Neutrons
Nitrogen
N
7
14.007
5
B
10.811
Iodine
53
I
126.90
Neodymium
Nd Er
60
68
Erbium
144.24
167.26
Intellectual Property Attorneys
All the right elements.
72