Using Doctrine of Patent Exhaustion Defense in IP Cases

Using Doctrine of Patent Exhaustion Defense in IP Cases Wendy Reczek

As many intellectual property paralegals know, unless one works in areas such as litigation or licensing, a typical business day revolves around attorneys and paralegals striving to secure IP ownership rights for their clients or employers. Consequently, it may be easy to forget that this phase is often just a portion of a patent or copyright life cycle. Indeed, once IP ownership rights are granted, the possibility of licensing or distribution may require further legal analysis.

In copyright law, for instance, the U.S. government grants a copyright owner, inter alia, the right “to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending” (17 U.S.C. §106(3)), which is considered a “distribution” right. (This should not be confused with the right of “reproduction.”)

In 1908, however, the U.S. Supreme Court addressed an exception, called the first-sale doctrine, to this distribution right in Bobbs-Merrill v. Straus, 210 U.S. 339 (1908). In this case of first impression, the copyright owners sold their books at wholesale to Macy’s department store. The owners had also included a notice in the book that read: “The price of this book at retail is one dollar net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright.” Macy’s, indifferent to the notice, sold the book at a price lower than $1, thereby prompting an infringement suit against them. The lower courts found in favor of the defendants.

Upon review, the Supreme Court held the following: “In our view, the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice … a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract.” The first-sale doctrine was later codified in the Copyright Act, 17 U.S.C. §109(a).

Just recently, more than 100 years after Bobbs-Merrill, the Supreme Court addressed in Kirtsaeng v. John Wiley & Sons, 133 S.Ct. 1351, 1355-1356 (2013), “whether the ‘first sale’ doctrine applies to protect a buyer or other lawful owner of a copy (or a copyrighted work) lawfully manufactured abroad. Can that buyer bring that copy into the United States (and sell it or give it away) without obtaining permission to do so from the copyright owner? Can, for example, someone who purchases, say at a used bookstore, a book printed abroad subsequently resell it without the copyright owner’s permission? In our view, the answers to these questions are, yes.”

But these types of matters are not restricted only to copyright law. Similar, yet perhaps more complicated, issues arise in patent law. Clearly put, a patent owner has the right “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States for a limited time in exchange for public disclosure of the invention when the patent is granted,” according to the U.S. Patent and Trademark Office.

A patentee may decide, however, to give others permission—a license—to make, use or sell the invention. A patent owner may choose an exclusive license (contracts with only one licensee, thereby excluding all parties, including the patentee, from exercising the rights outlined in the license), or a nonexclusive license (may license to more than one party, with each party able to exercise the rights outlined in a given license).

But, “when the patentee … sells [or licenses] a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use,” as in Adams v. Burke, 84 U.S. 453, 456 (1873). In this case, a patent was granted for an improvement to coffin lids with specific geographical restrictions placed upon the manufacture and sale of the lids. The patent was licensed, and a customer of the licensee sold the lids outside of the specified geographical region. The patentee considered this act as infringement and sued the customer. After making its way through the court system, Adams was decided by the Supreme Court: “The question … has never been decided by this court. … We hold that in the class of machines or implements we have described, when they are once lawfully made and sold, there is no restriction on their use to be implied for the benefit of the patentee or his assignees or licensees.” This holding is the foundation of the doctrine of patent exhaustion.

Throughout the years, patent exhaustion has been weighed in many courts, and although it has not yet been codified, its impact in common law is felt just as powerfully. For instance, in the recent cases of Quanta Computer v. LG Electronics, 128 S.Ct. 2109 (2008), and Keurig v. Sturm Foods, 732 F.3d 1370 (2013), both courts cite Adams in their rationales.

In Quanta, LG Electronics Inc. licensed computer technology patents to Intel Corp. for manufacture and sale of components described in the LGE patents. Intel was also required, in a separate agreement, to notify its customers that the license did not include any products that combined Intel products with non-Intel products. Quanta Computer Inc. purchased components from Intel to manufacture computers, but combined them, without alteration, with non-Intel parts for the finished product. LGE believed this process was patent infringement and sued Quanta. The district court found no infringement. LGE then appealed to the U.S. Court of Appeals for the Federal Circuit, which found that, inter alia, patent exhaustion did not apply in this case, leading Quanta to appeal to the U.S. Supreme Court.

The court concluded that “because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents.”

In Keurig, said manufacturer owned method patents for coffee brewers, for which Sturm manufactured and sold cartridges. “Keurig filed suit against Sturm, alleging, inter alia, that the use of Sturm’s … cartridges in certain Keurig brewer models directly infringed [specific] method claim[s], and that Sturm induced and contributed to that infringement.” The district court found no infringement, based on the doctrine of patent exhaustion.

In this appeal, “Keurig did not assert its cartridge patent against Sturm and does not dispute that its rights in its brewers were exhausted with respect to the apparatus claims of the asserted patents. Instead, Keurig alleges that purchasers of its brewers infringe its brewer patents by using Sturm cartridges to practice the claimed methods and therefore that Sturm is liable for induced infringement.” The court of appeals held that “Keurig’s rights to assert infringement of [certain] method claims [in the] patents were exhausted by its initial authorized sale of Keurig’s patented brewers.”

It should not be concluded, however, that the “first-sale or patent exhaustion” doctrine defense presents a clear-cut path for either party in a possible IP infringement case. Issues arise daily that present global and technological challenges to legal precedent. Nevertheless, for those of us in the legal field who work to breathe life into and anticipate questions surrounding a copyright or patent, the courts’ expanding decisions clearly assist both attorneys and paralegals to better serve our clients.

Wendy Reczek is the office manager and paralegal for IP Legal Services LLC in Philadelphia. She is also an adjunct faculty member of Villanova University’s post-baccalaureate paralegal program. Reczek is the former chair of both the Keystone Alliance of Paralegal Associations and the Chester County Paralegal Association. She is currently the IP committee chair for The Philadelphia Association of Paralegals.

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