Exhaustion doctrine

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This article is about the exhaustion doctrine as applied to patents. For the analogous doctrine applicable to copyright and trademark, see First-sale doctrine.

The exhaustion doctrine, also referred to as the first sale doctrine, is a U.S. common law patent doctrine that limits the extent to which patent holders can control an individual article of a patented product after an authorized sale. Under the doctrine, once an unrestricted, authorized sale of a patented article occurs, the patent holder’s exclusive rights to control the use and sale of that article are exhausted, and the purchaser is free to use or resell that article without further restraint from patent law. However, under current law, the patent owner retains the right to exclude purchasers of the articles from making the patented invention anew, unless it is specifically authorized by the patentee.[1]

Procedurally, the patent exhaustion doctrine operates as an affirmative defense, shielding authorized purchasers from infringement claims concerning the use or sale of a patented good after the patent owner authorized its sale.

Because the doctrine is only triggered by a sale authorized by the patentee, it is often difficult to figure out if the exhaustion doctrine applies in a particular case: for example, when the patentee restricts or conditions the sale itself, or restricts the use or sale of the patented article once purchased and in the hands of an end user (post-sale restrictions). The 2008 Supreme Court decision in Quanta Computer, Inc. v. LG Electronics, Inc., leaves unclear the extent to which patentees can avoid the exhaustion doctrine through limited licenses. Since its development by the courts in the late 19th century, the patent exhaustion doctrine has raised questions regarding the scope of exclusive rights granted by patents and the extent to which a patent owner may extend those rights to control downstream use and sales of patented articles.

Overview[edit]

A patent gives the patent owner the right to exclude others from making, using, selling, offering for sale, or importing into the U.S. the patented invention during the term of the patent.[2] The conventional rationale behind providing these exclusive rights is to “promote the Progress of Science and useful Arts”[3] by providing inventors the incentive to invest their time, labor, and funds in researching and developing innovative technology.[4] Providing these protections, however, comes with social costs and limits the public’s ability to freely alienate patented goods. Thus, public policy dictates that the patent owner’s exclusive rights be limited in scope. Generally, when a patent owner receives compensation for the use of his or her invention through sale of a patented product, the purpose of patent law is fulfilled with respect to that procuct.[5] Upon receiving compensation, the patent owner's rights to exclude others are exhausted and “the patent law affords no basis for restraining the use and enjoyment of the thing sold.”[6] Accordingly, a patent owner's voluntary introduction of a patented product into commerce without restriction prevents the patent owner from exercising his or her right to exclude others from using or reselling that product.

Unlike the analogous first-sale doctrine in copyright, the patent exhaustion doctrine has not been codified into the patent statute, and is thus still a common law doctrine. It was first explicitly recognized by the Supreme Court in 1873 in Adams v. Burke.[7] In that case, the patentee authorized a licensee to make, use, and sell patented coffin lids only within a ten-mile radius of Boston. A customer of the licensee (an undertaker) bought the coffin lids within the ten-mile radius, but later used (and effectively resold) the lids outside of the ten-mile radius in the course of burying a person. The patentee sued the customer, but the Supreme Court found no infringement: Once the coffin lids were 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.” Because the sale was authorized (bought from an authorized seller within the ten-mile radius), the defendant acquired the right to use the coffin lids free from any claim of the patentee, even though he used it outside the ten-mile radius.

Limitations of the Exhaustion Doctrine[edit]

The exhaustion doctrine is triggered only by a sale authorized by the patent holder.[8] Thus, there are circumstances where it is difficult to determine whether the exhaustion doctrine is triggered, in light of the restrictions that the patentee has placed on the sale or use of the patented invention. Two general questions arise in these situations: (1) Was the sale authorized by the patentee? This can often be a complex factual question. (2) Even if not authorized by the patentee, are those restrictions valid and recognizable under the law?

Generally, these cases involve one or more of the following scenarios: the patent owner: (1) sells one or more components of a multi-component patented product;[9] (2) licenses another to make and sell patented product with certain restrictions on field in which the sale may be made;[10] or (3) sells the article with restrictions directly on the purchasers or end-users (post-sale restraint).[11]

Sale of Incomplete Articles[edit]

One scenario in which the exhaustion doctrine may or may not be triggered is when the patent holder sells an incomplete article that does not directly practice or embody the patent. In this situation, exhaustion is applicable to the authorized sale of an incomplete article if: (1) its “only reasonable and intended use was to practice the patent, and (2) it “embodies essential features” of the patented invention.[12] Even if the exhaustion doctrine is applicable to the sale of an incomplete article, however, there is a separate analysis of whether the sale of that article was actually authorized, and therefore whether exhaustion was actually triggered.[13]

The applicability of exhaustion to the sale of an incomplete article was recognized by the Supreme Court in 1942 in United States v. Univis Lens Co.. In that case, the patent holder sold lens blanks which had to be ground into finished lenses--the patented invention. The Court held that this sale exhausted the patents on the finished lenses because the lens blanks substantially “embodi[ed] essential features of the patented device and [were] without utility until . . . ground and polished as the finished lens of the patent.”[14] The Court noted that the grinding process was standard (conventional) and not central to the patents, indicating further that the lens blanks constituted a material part of the patented invention and all but completely practiced the patent, since only conventional further processing steps were needed to complete the invention.

In Quanta, the Supreme Court applied the same test to determine whether exhaustion is triggered by the licensing of a portfolio of product and method patents. In that case, the patent holder (LGE) authorized the licensee (Intel) to manufacture and sell microprocessors and chipsets that (unless licensed) infringed LGE product and method patents, as well as patents on computer systems containing the licensed microprocessors and chipsets. The Court found that, even though the Intel products did not directly practice the system patents, they sufficiently embodied the patents, making the exhaustion doctrine applicable. First, the Court found that there was no reasonable use for the Intel products other than incorporating them into a computer system that practiced the LGE patents.[15] Second, the Intel products embodied essential features of the patented processes because the only necessary step to practice the patents was the addition of standard computer parts, like memory and buses.[16] In addition, there was nothing inventive about the systems other than that they contained the inventive microprocessors and chipsets.[17] Thus, under the Univis test, the Intel products sufficiently embodied the patents, making the exhaustion doctrine applicable.

Limitations on Sale[edit]

Another scenario in which it may be difficult to determine if the sale of a patented article was authorized, and therefore if exhaustion is triggered, is when the patentee grants a license to make and sell with specific limitations on the field in which the seller may be located, such as customer type, territorial, duration, or field-of-use limitations. If these limitations (or "restrictions") have been imposed, the licensee’s sale to a purchaser only exhausts the patentee’s rights to restrict use and resale when the restrictions have not been exceeded ("violated").[18] The theory is that if Alice owns Blackacre but not Whiteacre, she cannot convey good title to Bob by purporting to sell him Whiteacre. She can sell only what she owns.[19] If the license limitations ("restrictions") are exceeded ("violated"), then exhaustion cannot occur and therefore is not triggered, and the patentee can successfully sue the licensee and any downstream customers for patent infringement.[20]

The Supreme Court has specifically upheld the legitimacy of field-of-use limitations in patent licensing. See General Talking Pictures doctrine. A licensee who exceeds ("violates") a field-of-use limitation by selling an article outside of the permissible field commits patent infringement. The exhaustion doctrine would provide no protection because the "violation" makes the sale “unauthorized” for the purposes of the exhaustion doctrine.[21]

The limitations on sale (those imposed on the licensee in selling the patented articles) are different from post-sale restrictions or limitations (those that purpose to restrict the use or sale of the patented article once purchased and in the hands of an end user). Patentees can avoid the exhaustion doctrine by imposing the former, but it is questionable that patentees can do so through the latter.[22] Limitations on sale must very explicitly bind the licensee or seller. For example, in Quanta, LGE licensed Intel to make products using LGE’s method patents. The license expressly stated that LGE was not licensing third parties to combine licensed product with any non-Intel products, and it required Intel to notify customers of that. Intel sold products to Quanta, who combined the Intel products with non-Intel products. LGE sued Quanta for patent infringement. The Supreme Court found that the licensing agreement failed to explicitly impose a field-of-use limitation, and therefore found that there were no conditions limiting whom Intel could sell to. The sale was thus “authorized,” and exhaustion was triggered. In the Court’s words, “The License Agreement authorized Intel to sell products that practiced the patents. No conditions limited Intel’s authority to sell products substantially embodying the 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.”[23]

Because the contractual documents in the Quanta case were insufficiently explicit, the Court applied the exhaustion doctrine, finding the sale "authorized" and unconditional, even though LGE attempted to impose some restrictions on use of the products. Therefore, purchasers of the patented product were free to use them without restrictions that the patentee sought to have imposed on them.

The Court found that the licensing agreement did not impose any limitations on who the licensee could sell to. The Court did not address, however, whether the restriction in the licensing agreement could constitute a valid post-sale limitation to make the sale “unauthorized” for the purposes of the exhaustion doctrine. This is discussed in the next section.

Post-Sale Limitations[edit]

The most difficult and unsettled area of the law regarding patent exhaustion involves cases in which a patentee imposes post-sale restrictions. Post-sale restrictions are those that purport to restrict the use or sale of the patented article once purchased and in the hands of an end user customer, rather than a manufacturer-licensee. Common post-sale restrictions include “single use only” and “refill only with proprietary ink” notices. Whether violations of such restrictions make a sale “unauthorized,” and therefore make patent exhaustion inapplicable, is still unclear or at least controversial.[24]

In 1992, the Federal Circuit approved the use of post-sale restrictions in Mallinckrodt, Inc. v. Medipart, Inc.. Specifically, the court held that patent owners could condition the sale of patented goods with a restrictive notice and thereby restrict the disposition of the goods by the purchasers, with the exception of such antitrust law violations as price-fixing and tie-in restrictions, or violations of "some other law or policy."[25] The plaintiff in the case owned a patent on a medical device, which it sold to hospitals with a “single use only” notice label. The defendant purchased the used devices from hospitals, refurbished them, and resold them to hospitals. The Federal Circuit held that the single use restriction was enforceable in accordance with the 1926 General Electric case,[26] because the restriction was “reasonably within the patent grant. . . .”[27]

The Supreme Court did not discuss the Mallinckrodt case in Quanta. As one commentator noted: “The Supreme Court, in Quanta, was widely expected to rule on whether Mallinckrodt was good law. But the Court sidestepped the issue by narrowly interpreting the license agreement so that it was not a conditional license. . . . Because the Supreme Court sidestepped the issue, it remains unclear to what extent a patentee can use a conditional license to impose restrictions on downstream purchasers.”[28]

At least two district courts have concluded that Mallinckrodt is no longer good law after Quanta.[29] In Static Control Components, Inc. v. Lexmark Int’l, Inc., the court concluded that the Supreme Court implicitly overruled Mallinckrodt. At issue in Static Control was Lexmark’s so called “prebate” program, in which customers could buy cartridges that were subject to a single use for a discounted price. In its original order, before Quanta was decided, the court rejected Static Control’s argument that Lexmark’s patent rights were exhausted as a result of the authorized sale of the cartridges. Relying heavily on Mallinckrodt, the court found that the sales were valid post-sale restrictions that avoided exhaustion. After Quanta was decided, however, the court reversed its original order and concluded that Lexmark’s single use restriction was not enforceable under patent law because the court was “persuaded that Quanta overruled Mallinckrodt sub silentio.”[30] The court explained, “The Supreme Court's broad statement of the law of patent exhaustion simply cannot be squared with the position that the Quanta holding is limited to its specific facts. Further, the Federal Circuit relied in part on Mallinckrodt in reaching its decision in LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369 (Fed. Cir. 2006), the decision the Supreme Court reversed in Quanta. It is also worth noting that the Quanta decision did not mention a single Federal Circuit case.”[31]

The district court’s conclusion, however, that Quanta overruled Mallinckrodt reflects the ambiguity in Quanta itself. The Static Control court noted that “[s]ales of Lexmark Prebate cartridges were unconditional” because “[n]o potential buyer was required to agree to abide by the Prebate terms before purchasing a cartridge. Thus, sales of Lexmark's Prebate toner cartridges were authorized and unconditional, just like sales of LGE's patented products in Quanta.”[32]

Therefore, both Quanta and Static Control can be seen as either cautionary tales about failed attempts to comply with the General Talking Pictures doctrine[33] or to explicitly condition sales, without need to rule on whether the post-sale restrictions were valid, or as overruling Mallinckrodt’s approval of post-sale restrictions. Which interpretation is correct remains to be seen. The Federal Circuit's decision in the en banc reargument of Lexmark Int'l v. Impression Prods. should provide a more definitive answer, subject of course to possible further review in the Supreme Court.[34]

International Exhaustion[edit]

An emerging issue is whether U.S. patent exhaustion is international or strictly national. Until recently, most U.S. courts simply assumed that a sale outside the United States, even if made by the U.S. patent owner or its parent, subsidiary, or affiliate, or by the U.S. patent owner’s licensee, did not trigger the exhaustion doctrine within the United States. Usually, the basis for the assumption was (1) the Supreme Court so held in Boesch v. Graff,[35]; (2) a foreign patent is a different property right that is not the same as a corresponding U.S. patent because foreign patent law is different from U.S. patent law and gives different scope to such a foreign patent; and (3) many cases hold that U.S. patent law has no extraterritorial application.[36]

None of these points is on firm, sound ground. In the Boesch case, the sale abroad was by a German company entirely unrelated to the U.S. patent owner; the German seller had a right to sell the product under German law because it had begun preparation to manufacture the product before the U.S. patent owner applied for its patent. The U.S. company had no complicity in the sale and did not profit from it; and could not possible be accused of “double dipping.” This is quite unlike the usual U.S. situation, such as that in the Lexmark case, in which the U.S. patent owner was responsible for the foreign sale, and therefore profited from it. The Boesch case is therefore not a proper precedent to support the general international exhaustion situation.

Whether foreign patents are comparable to U.S. patents is a factual issue that may differ from case to case, or nation to nation, and cannot be assumed one way or the other. Furthermore, 35 U.S.C. § 119(a), the U.S. patent statute governing when a U.S. patent can be based on a filing of a foreign patent application, provides that the U.S. patent and the corresponding foreign patent must be “for the same invention.” Therefore, there may be far more similarity than the cases assume.

Finally, the statement that U.S. patent law is without extraterritorial application occurs universally in cases holding that liability for patent infringement under U.S. law should not be based on acts and conduct occurring outside the United States. And even that generality is suspect, for sometimes patent infringement liability in the United States is based on conduct outside the United States.[37]

The point is now pending decision in the Federal Circuit, because that court has ordered en banc rehearing on that issue in the Lexmark case.[38] The reason that the issue has come to the fore is that the Supreme Court, in its recent copyright decision in Kirtsaeng v. John Wiley & Sons, Inc.,[39] held that a foreign sale authorized by the copyright owners exhausts U.S. copyright. The Supreme Court rested its decision mainly on common-law authority, quoting extensively from Coke's Institutes (Coke on Littleton), and saying that this stated the general rule from which any exception must be proved. Some have thought, therefore, that the same principle applies at least as forcefully in in patent law as in copyright law, so that patent exhaustion should be international just as copyright exhaustion is.

See also[edit]

References[edit]

  1. ^ See, e.g., Monsanto Co. v. Scruggs, 459 F.3d 1328, 1336 (Fed. Cir. 2006) (holding the patent exhaustion doctrine inapplicable in self-replicating seed case in part because the second generation of seeds were never sold). See also Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961); Morgan Envelope Co. v. Albany Perforated Wrapping Paper Co., 152 U.S. 425 (1894); Cotton-Tie Co. v. Simmons, 106 U.S. 89 (1882); Husky Injection Molding Sys. v. R&D Tool & Eng'g Co., 291 F.3d 780 (Fed. Cir. 2002).
  2. ^ 35 U.S.C. § 271(a)(2006).
  3. ^ U.S. Const., art. I, § 8, cl. 8
  4. ^ William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law 294 (2003).
  5. ^ See, e.g., Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666-67 (1895) (“The conclusion reached does not deprive a patentee of his just rights, because no article can be unfettered from the claim of his monopoly without paying its tribute. The inconvenience and annoyance to the public that an opposite conclusion would occasion are too obvious to require illustration.”).
  6. ^ United States v. Univis Lens Co., 316 U.S. 241, 251 (1942).
  7. ^ 84 U.S. (17 Wall.) 453 (1873).
  8. ^ United States v. Univis Lens Co., 316 U.S. at 249.
  9. ^ See, e.g., United States v. Univis Lens Co., 316 U.S. 241 (1942) (sale of incomplete lens blank embodying essential features of invention exhausts patent rights in finished, patented lens).
  10. ^ See, e.g., General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 179 (1937) (license limited to making and selling in "noncommercial" field held effective).
  11. ^ See, e.g., Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) (permitting post-sale restraint); Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (holding "downstream" restraint legally ineffective).].
  12. ^ See, e.g., United States v. Univis Lens Co., 316 U.S. 241 (1942); Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 631-32 (2008).
  13. ^ See, e.g., id. at 635-37 (first considering whether exhaustion applies, then separately analyzing whether the sale actually triggered exhaustion).
  14. ^ Univis, 316 U.S. at 249.
  15. ^ Quanta, 553 U.S. at 631-32.
  16. ^ Id. at 632-33.
  17. ^ Under present U.S. patent law it is possible to obtain a patent on a superset of elements simply because a subset within it is patentable. See Richard H. Stern, Quanta Computer Inc v LGE Electronics Inc—Comments on the Reaffirmance of the Exhaustion Doctrine in the United States, [2008] Eur. Intell. Prop. Rev. 527, 529-30.
  18. ^ Technically, the terms "restrict" and "violate" are inappropriate in the context of field-of-use limitations pursuant to the General Talking Pictures doctrine, because the Supreme Court has held that the presence of a field-of-use limitation does not imply a promise not to exceed the field limitation without a further, special promise to that effect. Automatic Radio Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950) ("This limited license for 'home' use production contains neither an express nor implied agreement to refrain from production for 'commercial' or any other use as part consideration for the license grant.").
  19. ^ General Talking Pictures, 304 U.S, 175, 181 ("The Transformer Company could not convey to petitioner what both knew it was not authorized to sell.").
  20. ^ See, e.g., General Talking Pictures.
  21. ^ See, e.g., General Talking Pictures, 304 U.S. at 181-82 (“The Transformer Company could not convey to petitioner what both knew it was not authorized to sell. By knowingly making the sales to petitioner outside the scope of its 182*182 license, the Transformer Company infringed the patents embodied in the amplifiers.”) (citations omitted).
  22. ^ Compare Mallinckrodt, Inc. v. Medipart, Inc. with Quanta Computer, Inc. v. LG Electronics, Inc.. A case in now pending before the Federal Circuit, to be reargued en banc, in which the court directed the parties to brief and argue the issue whether Quanta overruled Mallinckrodt. Lexmark Int'l, Inc. v. Impression Prods., Inc., Nos. 2014-1617 and 1619, Order of Apr. 15, 2015.
  23. ^ Quanta, 553 U.S. at 637. This point is discussed in Richard H. Stern, Quanta Computer Inc v LGE Electronics Inc — Comments on the Reaffirmance of the Exhaustion Doctrine in the United States, [2008 Eur. Intell. Prop. Rev. 527].
  24. ^ See, e.g., Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).
  25. ^ 976 F.2d 700, 708 (Fed. Cir. 1992).
  26. ^ United States v. General Electric Co., 272 U.S. 476 (1926).
  27. ^ Id. at 708.
  28. ^ Steven Seidenberg, Patent Predicament, Sept. 2008.
  29. ^ See Static Control Components, Inc. v. Lexmark Int’l, Inc., 615 F. Supp. 2d 586 (E.D. Ky. 2009); accord Egrowerx Int’l, LLC v. Maxell Corp., 18 F. Supp. 3d 430 (S.D.N.Y. 2014) ("[A] majority of commentators have adopted the view that Quanta overturned the conditional sales doctrine.").
  30. ^ Id. at 585.
  31. ^ Id.
  32. ^ Id. at 584.
  33. ^ Actually, Lexmark could not have complied with the General Talking Pictures doctrine because it was not imposing a limitation on the field in which a manufacturer-licensee of Lexmark could operate, which is all that the doctrine addresses, but rather a restriction on what customers might do with the product that Lexmark itself sold them.
  34. ^ See supra note _.
  35. ^ 133 U.S. 697 (1890).
  36. ^ See, e.g., Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001).
  37. ^ See, e.g., 35 U.S.C. § 271(f) and (g); Honeywell, Inc. v. Metz Aparatewerkex, 509 F.2d 1137, 1141 (7th Cir. 1975) (“although the patent laws of the United States do not have extra-territorial effect, ‘active inducement’ may be found in events outside the United States if they result in a direct infringement here.”); Akzona Inc. v. E.I. du Pont de Nemours & Co., 662 F. Supp. 603, 613 (D. Del. 1987) (“inducing activity may take place outside of the United States, so long as the direct infringement occurs within the United States”).
  38. ^ Supra note _.
  39. ^ 133 S. Ct. 1351 (2013).

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