Exhaustion Is Triggered (Now) By Conditional Sales Restricting Reuse/Resale, Even If Customer Violates Those Restrictions: “The patent laws do not include the right to ‘restrain[ ] . . .further alienation’ after an initial sale; such conditions have been ‘hateful to the law from Lord Coke’s day to ours’ and are ‘obnoxious to the public interest.’” Impression Products (U.S. 05/30/2017) (8-0) (exhaustion blocks patent infringement suit against company buying used (and patented) printer cartridges from consumers; the express “single-use/no-resale restrictions in Lexmark’s contracts with customers [of printer cartridges] 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.”), rev’g, Lexmark (Fed. Cir. 02/12/16) (en banc) (10-2) (“[A] patentee, when selling a patented article subject to a single-use/no-resale restriction that is lawful [e.g., not patent misuse] and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied [so no exhaustion] . . . [A] patentee may preserve its § 271 rights when itself selling a patented article, through clearly communicated, otherwise-lawful restrictions, as it may do when contracting out the manufacturing and sale.”; approving Mallinckrodt (Fed. Cir. 09/24/92) (“If the sale of the [product] was validly conditioned under the applicable law such as the law governing sales and licenses, and if the restriction on reuse was within the scope of the patent grant or otherwise justified, then violation of the restriction may be remedied by action for patent infringement.”)).
Exhaustion Is Triggered (Now) By Authorized Sales By Licensee So Long As Licensee Complied With Restrictions In License Agreement, Even If Customer Violates Those Restrictions: “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 Products (U.S. 05/30/2017). “A license may require the licensee to impose a restriction on purchasers, like the license limiting the computer manufacturer to selling for non-commercial use by individuals. But if the licensee does so—by, perhaps, having each customer sign a contract promising not to use the computers in business—the sale nonetheless exhausts all patent rights in the item sold. The purchasers might not comply with the restriction, but the only recourse for the licensee is through contract law, just as if the patentee itself sold the item with a restriction.” Impression Products (U.S. 05/30/2017) (distinguishing General Talking Pictures (U.S. 05/02/1938) as meaning only “if a patentee has not given authority for a licensee to make a sale, that sale cannot exhaust the patentee’s rights.”).
Note: To the extent licensing software or another product does not pass title to the product it may not exhaust the patent right. Impression Products (U.S. 05/30/2017) (“Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers…. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.”)
Exhaustion Is Triggered (Now) By Authorized Sales Anywhere In World: “An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act.” Impression Products (U.S. 05/30/2017) (7-1) (in part relying on Kirtsaeng (U.S. 03/19/2013) (copyright’s first sale doctrine applies to foreign sales also): “differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense”; distinguishing Boesch (U.S. 03/03/1890) as merely holding that “a sale abroad does not exhaust a patentee’s rights when the patentee had nothing to do with the transaction”), rev’g, Lexmark (Fed. Cir. 02/12/16) (en banc) (10-2) (“[A] U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority. . . . [T]here is no legal rule that U.S. rights are waived, either conclusively or presumptively, simply by virtue of a foreign sale, either made or authorized by a U.S. patentee. . . . A patentee cannot reasonably be treated as receiving that reward from sales in foreign markets, and exhaustion has long been keyed to the idea that the patentee has received its U.S. reward.”; approving Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094 (Fed. Cir. 2001) and Ninestar (Fed. Cir. 02/08/12) (this rule not altered by Quanta)). SeeKirtsaeng (U.S. 03/19/2013) (books published abroad included notices prohibiting their import into U.S.).) Cf. Lifescan (Fed. Cir. 11/04/13) (2-1) (citing Kirtsaeng on a different point and analogizing patent exhaustion to copyright’s first sale doctrine). Foreign sale may support an express or implied license. Lexmark (Fed. Cir. 02/12/16) (en banc) (10-2), rev’d (U.S. 05/30/2017) (on other grounds).
Exhaustion Does Not Require a Sale: “in the case of an authorized and unconditional transfer of title, the absence of consideration is no barrier to the application of patent exhaustion principles.” Lifescan (Fed. Cir. 11/04/13) (2-1) (patentee gave most of its meters away for free, hoping to sell test strips for use in the meters).
Covenant Not To Sue (For Sales) Triggers Exhaustion: “[A]n unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion…. [and] the parties’ intent with respect to downstream customers is of no moment.” Transcore (Fed. Cir. 04/08/09) (exhaustion extended to a broader (blocking) patent acquired after the covenant not to sue was granted, via implied license and “legal estoppel” doctrine); cf. Protecht (Fed. Cir. 07/08/11) (a covenant not to sue that certain products infringe certain patents impliedly licenses later continuation patents, even if they have narrower claims, as to those particular products, absent a clear indication of mutual intent to the contrary). Subsidiary’s sales “authorized” where its parent had received right to grant it a sub-license even when did not formally do that until later. High Point Sarl (Fed. Cir. 02/18/16 (non-precedential). ButseeEndo Pharm. (Fed. Cir. 03/31/14) (2-1) (asserting narrow view of Transcore; no implied license or legal estoppel where newly acquired patents had same priority date as licensed pats. but were not continuations thereof, and implied license disclaimed).
Authorized Sale Of “Component” Used In Patented Method May Exhaust Claimed Method: The patent-owner authorized sale of a component of a combination exhausts patent claims directed to a method of using that combination, if that component includes all of the inventive aspects of the patented method and the component’s “features partially practicing the patent” have no reasonable (substantial?) non-infringing use: “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 post sale use of the article. Here, LGE licensed Intel to practice any of its patents and to sell products practicing those patent 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. Nothing in the License Agreement limited Intel’s ability to sell its products practicing the LGE Patents. Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta.” Quanta (U.S. 06/09/2008) (Pursuant to Intel’s license agreement with patent owner, Intel customer Quanta received notice that LG license did not extend to any combination of Intel products with other products; but license agreement said that it did not alter rules of exhaustion. S. Ct. Opinion does not address extent, if any, to which parties may limit application of exhaustion by contract, but does imply that patent owner may restrict authority to sell a component.) High Point Sarl (Fed. Cir. 02/18/16) (non-precedential) (aff’g Summ. J. of exhaustion where components sold by patent-licensed suppliers fell within scope of broad licenses: “‘What is ‘inventive’ about patent claims in the patent exhaustion context is what distinguishes them from the prior art.’”)
Non-Infringing Uses Must Be Intended Uses: “Alternative uses are relevant to the exhaustion inquiry under Quanta only if they are both ‘reasonable and intended’ by the patentee or its authorized licensee.” Lifescan (Fed. Cir. 11/04/13) (2-1) (exhaustion of method-of-use claims as a matter of law; patentee’s distributed blood-glucose meters “‘control’ and ‘carry out’ the inventive functions described in the method claims;” patentee intended its meters be used with test strips using the patented method); accordHelferich (Fed. Cir. 02/10/15).
“Inventive Aspects” Inquiry May Analyze Validity of Another Patent: “if one item in the patented combination is either unpatented or if the patent on it is invalid, and the inventive concept resides in a second item, then the sale of the second item exhausts a product patent in the combination.” Lifescan (Fed. Cir. 11/04/13) (2-1) (describing old S. Ct. case).
“Substantial Embodiment” Test Bypassed If Item Sold is Patented: The “substantial embodiment” test (i.e., “method claims are exhausted by an authorized sale of an item that substantially embodies the method if the item (1) has no reasonable noninfringing use and (2) includes all inventive aspects of the claimed method”) applies only if sold item itself is unpatented. Keurig (Fed. Cir. 10/17/13) (aff’g Summ. J. of exhaustion; exhaustion determined on patent-by-patent not claim-by-claim basis. Unconditional sale of patented coffee brewer exhausted entire patent, including method-of-use claims for particular way of using those brewers, even though not only way of using them, so no infringement by seller of competing cartridges for use in that brewer).
Exhaustion Does Not Necessarily Extend To Patentably Distinct But Complementary Invention In Same Patent (or Patent Family) Usable With Licensed Products: “The doctrine has never applied unless, at a minimum, the patentee’s allegations of infringement, whether direct or indirect, entail infringement of the asserted claims by authorized acquirers—either because they are parties accused of infringement or because they are the ones allegedly committing the direct infringement required by the indirect infringement charged against other parties. Here, as noted, that is not so, because infringement of the content claims has not been asserted or shown to require that handset acquirers are practicing those claims.” Helferich (Fed. Cir. 02/10/15) (long discussion; rev’g Summ. J. of exhaustion: Licenses to handset makers under claims directed to handsets and certain uses thereof do not (vis-à-vis content providers accused of direct infringement by delivering content to handsets) exhaust method and system claims (some in same patents as handset claims and all based on same original Spec. as handset claims) directed to content delivery to handsets, regardless of practical effects on value of handsets and their license, where (1) content claims patentably distinct (some divisionals; no terminal disclaimers) from licensed handset claims, (2) no contention that handset possessors (“authorized acquirers”) practice any of the steps of the content claims or put into service the claimed systems, (3) no showing that only reasonable use of content claims is with handsets that practice licensed handset claims, and (4) no contention that defendants are inducing or contributing to authorized acquirers’ infringement of the claims asserted against defendants.) Dictum in Morgan (U.S. 03/19/1894) “indicated that, even though an authorized buyer of product X was free of the patent owner’s patent on that product, the buyer could not, by virtue of his purchase, prevent the patent owner from enforcing his patent as to product Y, even though Y was specifically designed to be used with X and, at a minimum, made X more useful than it otherwise would be and, indeed, was essential to X’s utility.” Id.
Exhaustion Does Not Extend To Progeny Of Self-Replicating Seed: Authorized sale of patented seed gave purchasers right to use that seed, but not right to replicate (make) a second-generation patented seed: “the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission (either express or implied). . . . Bowman planted Monsanto’s patented soybeans solely to make and market replicas of them, thus depriving the company of the reward patent law provides for the sale of each article. Patent exhaustion provides no haven for that conduct” Bowman (U.S. 05/13/2013) (unanimous), aff’g, Monsanto (Fed. Cir. 09/21/11) (because seeds could be used for feed, replanting was not their “only reasonable and intended use” under Quanta.)
Licensee’s Failure To Pay Royalties Does Not Negate Authorization Of Its Sales: Licensee’s sale was still authorized even if it later failed to make timely royalty payment, so exhaustion applies to those sales. Tessara (Fed. Cir. 05/23/11).
“First Sale Doctrine”: Does Not Apply To Sales By Patent Owner Made Before It Owned Patent: Authorization granted before owning the patent is not sufficient. Honeywell (Fed. Cir. 02/18/10) (2-1) (patent owner’s sale of product before acquiring rights to the patent does not “retroactively authorize the earlier sale. As such, the first sale doctrine does not preclude Honeywell from recovering damages against the government.” “First sale doctrine” does not apply where initial patent owner (Allied) merged into the plaintiff (Honeywell) after Honeywell had sold components of the patent invention to the defendant.)