June 14, 2016
Commercial Times
By E. Robert Yoches; Kelly Lu
Authored by E. Robert Yoches and Kelly Lu
Over the past year, the Court of Appeals for the Federal Circuit addressed several issues that strike at the heart of patent licensing, such as patent exhaustion and equitable estoppel. Patent exhaustion prevents a patent owner from exercising control over an article after an unrestricted sale, and equitable estoppel prevents a patent owner from suing for patent infringement when its actions or lack of expected action induced another party to take steps that put it in jeopardy for patent infringement. The Supreme Court considered a different issue: Can a patent owner collect royalties after the patent expired?
In Kimble v. Marvel Entertainment, LLC, 135 S.Ct. 2401 (2015), the Supreme Court examined the continued propriety of a forty-year-old doctrine from Brulotte v. Thys Co., 379 U.S. 29 (1964), which prevented a patentee from receiving royalties for use of a patent after the term of that patent expired. Marvel purchased Kimble’s patent for a Spider-Man toy, the Web Blaster, in exchange for a fixed amount and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products, presumably until the end of time. 135 S.Ct. at 2405-06. Marvel stopped paying royalties after the patent expired, and moved for a declaratory judgment that it owed no post-patent royalties. Id.
Kimble urged the Court to overturn Brulotte because the economic underpinnings of the decision—post-patent royalty arrangements are anticompetitive—was not correct. Id. at 2412. The Court did not accept that premise, and noted that Congress had several times failed to amend the patent laws to change the Brulotte decision, so it declined to overrule Brulotte and instead follow stare decisis, the principle in American law that directs courts to decide cases consistent with prior decisions. Id. at 2410, 2413. In doing so, the Court noted that licensees had several alternatives to post-patent royalties, so the Brulotte rule was not a significant economic impediment. Id. at 2408.
In Lexmark Int’l, Inc. v. Impression Prods., Inc., 816 F.3d 721 (Fed. Cir. 2016), the defendant resold discounted Lexmark printer cartridges in the U.S. despite an express single-use/no-resale restriction. 816 F.3d at 727-29. Non-discounted cartridges did not have this restriction. The defendant argued that patent exhaustion (or the “first sale” doctrine) gave an authorized purchaser of a patented article the authority to do what it liked with the article, including resale. Id. at 726, 729. Impression’s resale raised two questions: (1) can a patentee preserve its right through single-use/no-resale restriction, and (2) can a foreign sale of a patented item exhaust U.S. patent rights?
The Federal Circuit looked at two lines of cases to resolve the first question. One began with Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), and held a patentee that manufactured articles could enforce a single-use/no-resale restriction on the products it sold. Id. at 726. The court determined a later Supreme Court decision, Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008), did not affect this holding. Id. at 731. In Quanta, the Supreme Court held that a manufacturer that gave a buyer unrestricted authority to sell could not place restrictions on activities after the sale. Id. at 726. The Federal Circuit held that the situations in Mallinckrodt and Lexmark did not involve an unrestricted sale, so the post-sale restrictions in both cases were lawful. Id. at 737-38, 753.
On the second question, in Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), the Federal Circuit held a U.S. patentee’s sales of a U.S.-patented article abroad did not exhaust the U.S. patent rights in the article. 264 F.3d at 1105. After that case, the Supreme Court issued its decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S.Ct. 1351 (2013), holding such foreign sales exhausted the copyright protection for works because 17 U.S.C. § 109(a) of the Copyright Act gives “the owner of a particular copy . . . lawfully made under this title . . . [the right] to sell or otherwise dispose of the possession of that copy” without the authority of the copyright owner. The Federal Circuit distinguished Kirtsaeng, and affirmed its decision that a foreign sale did not exhaust U.S. patent rights, by noting the patent laws had no provision similar to § 109 of the Copyright Act. 264 F.3d at 756-60.
In High Point SARL v. T-Mobile USA, Inc., No. 2015-1235, 2016 WL 670402 (Fed. Cir. Feb. 18, 2016), the Federal Circuit considered whether licenses taken by prior owners of the patents-in-suit exhausted the patent rights the current owners were trying to enforce. Id. at *3-*4. The court did, finding patent exhaustion was proper because the licensed equipment “substantially embodied all purportedly inventive elements in the asserted claims.” Id. at *11. The court cited Quanta, 553 U.S. at 637, in holding, “[M]aking a product that substantially embodies a patent is, for exhaustion purposes, no different from making the patented article itself.”
That patentee fared no better in High Point SARL v. Sprint Nextel Corp., No. 2015-1298, 2016 WL 1320782 (Fed. Cir. Apr. 5, 2016), where the Federal Circuit found equitable estoppel. Id. at *5-*7. The prior owners of the patents-in-suit, AT&T and Lucent, helped defendant build a communications network for many years before the suit. Id. at *1. Defendant bought equipment from predecessors with a limited license to the patents-in-suit that required the defendant to comply with certain interoperability standards and specifications to be met by the vendors. Id. The plaintiff sued many years after the defendant purchased unlicensed equipment from other vendors. Id. at *6.
The court found equitable estoppel prevented any recovery. Equitable estoppel requires (1) misleading conduct (or silence) that leads the alleged infringer to infer that the patentee does not intend to enforce its patent against the alleged infringer; (2) reliance on that conduct; and (3) material prejudice. Id. at *5. In this case, the Federal Circuit found the prior owners knew of the defendants’ plans and not only failed to challenge them, but instead encouraged them. Id. at *6. The court also found the defendants relied on this inaction by choosing the technology of the predecessors-in-interest over alternatives. Id.
These decisions suggest that litigants may be using license defenses more often, so the number of such cases may continue to increase.
Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.
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