Failure to Pay Royalties Does Not Convert Authorized Sale of Licensed Product into Unauthorized Sale Under Exhaustion Doctrine
May 23, 2011
Last Month at the Federal Circuit - June 2011
Judges: Lourie, Linn (author), Dyk
[Appealed from: ITC]
In Tessera, Inc. v. International Trade Commission, No. 10-1176 (Fed. Cir. May 23, 2011), the Federal Circuit affirmed the ITC’s determination of noninfringement, validity, and exhaustion of U.S. Patent No. 5,633,106 (“the ’106 patent”). The Court also vacated and remanded the ITC’s determination that there is no section 337 violation with respect to U.S. Patent Nos. 5,679,977 (“the ’977 patent”) and 6,133,627 (“the ’627 patent”).
Tessera, Inc. (“Tessera”) owns the ’106 patent, which is directed to preventing contamination of exposed terminals on semiconductor packages during encapsulation by using an encapsulant barrier and a protective barrier during the encapsulation process. Each semiconductor package accused of infringing the ’106 patent includes a chip and a package substrate layer. The accused products are divided into two groups: the “µBGA” products, which have a polyimide-based package substrate; and the “wBGA” products, which use a laminate-based package substrate. Only Elpida Memory, Inc. and Elpida Memory (USA) Inc. (collectively “the Elpida intervenors”) import the accused µBGA products, whereas all intervenors import the accused wBGA products.
The accused wBGA products consist of a stack of layers. The bottom layer is a laminate substrate layer. A copper wiring layer is applied on top of the laminate substrate layer. A solder mask layer is applied on top of the copper wiring layer. Holes in the solder mask expose the terminals of copper wiring layer, which are the terminals of the accused wBGA products. During encapsulation, a “protective barrier” contacts the solder mask and prevents the encapsulant from flowing into the holes and contaminating the terminals.
Tessera licenses each of the asserted patents in the so-called “TCC Licenses.” Each TCC License contains a grant clause substantially identical to the following: “Subject to the terms and conditions [of this agreement], Tessera hereby grants Licensee a . . . license to the Tessera Patents . . . and to sell . . . and/or offer for sale such TCC Licensed Products.” Slip op. at 8 (alterations in original) (citation omitted). Each TCC License also contains an “Exclusion from License” provision stating that “Licensee is licensed only to Licensed Products for which Licensee or a third party has satisfied a royalty obligation to Tessera.” Id. (citation omitted). All of the intervenors purchase some portion of their accused packages from parties to the TCC Licenses.
Tessera brought suit in the ITC asserting the ’106, ’977, and ’627 patents. The ALJ’s Initial Determination found that there was no section 337 violation because (1) Tessera failed to meet its burden to show that the accused products infringed the ’106, ’977, and ’627 patents; (2) the ’106 patent was not invalid for anticipation, obviousness, or indefiniteness; (3) the ’977 and ’627 patents were not invalid for anticipation or indefiniteness; and (4) Tessera’s patent rights are exhausted as to those accused products purchased from Tessera’s licensees.
Upon review, the ITC affirmed the finding of no section 337 violation. Specifically, the ITC (1) modified the ALJ’s construction of “top layer” and “thereon” in claim 1 of the ’106 patent; (2) reversed the ALJ’s finding of noninfringement for the μBGA products, but affirmed the finding of patent exhaustion; and (3) affirmed the ALJ’s finding that the accused wBGA products do not infringe the asserted claims of the ’106 patent. Thus, the ITC found that the μBGA products infringe, but are exhausted, and that the wBGA products do not infringe. Tessera appealed the ITC’s construction of claim 1 of the ’106 patent, the finding of no infringement by the wBGA products, and the finding of patent exhaustion. Finally, Tessera sought a vacatur of the ITC’s decision as it pertains to the expired ’977 and ’627 patents. A few other intervenors also challenged the validity of the ’106 patent as anticipated by numerous prior art references.
On appeal, the Federal Circuit first considered the construction of claim 1 of the ’106 patent and Tessera’s argument that the ITC adopted a new construction during the infringement analysis. The Court concluded that Tessera could not argue that the ITC applied an incorrect claim construction because the ITC adopted Tessera’s proposed construction. Thus, the Court concluded that Tessera was in fact challenging the ITC’s infringement determination, noting that the Court reviews the infringement determination for substantial evidence and claim construction de novo.
The Court next turned to Tessera’s argument that the ITC erred in finding that the accused wBGA products do not infringe claim 1 of the ’106 patent. Specifically, Tessera argued that the ITC erred when it found that the “top layer” of claim 1 cannot include the solder mask layer of the wBGA products. Under the construction adopted by the ITC, the “top layer” is the layer that “carries the terminals.” The Federal Circuit found substantial evidence to support the ITC’s determination that the laminate substrate layer of the accused wBGA products is the “top layer” and, as such, the products do not infringe claim 1 of the ’106 patent. In so doing, the Court noted that the solder mask comprises the preferred material for the “protective barrier,” and the patent specification depicts the “protective barrier” as separate and distinct from the “top layer.”
The Federal Circuit next addressed the intervenors’ anticipation arguments, holding that the ’106 patent was not anticipated by any of the asserted prior art references. The Court determined that two of the references failed to teach at least a “protective barrier in contact with said top layer,” and a third reference failed to disclose at least “exposed terminals,” as required by claim 1 of the ’106 patent.
The Court turned next to the issue of patent exhaustion, considering both a jurisdictional question and the application of the exhaustion doctrine. The ITC and the Elpida intervenors challenged the Court’s jurisdiction to hear Tessera’s appeal as to patent exhaustion because Tessera did not timely appeal the issue. Tessera filed its Notice of Appeal within sixty days of the ITC’s Final Determination, but more than sixty days after the ITC issued its Notice to Review, stating that it would not review the ALJ’s exhaustion findings. The ITC argued that when it decided not to review the ALJ’s determination on patent exhaustion, the ALJ’s decision became the final decision of the ITC and Tessera’s appeal was thus untimely. The Federal Circuit found that, because the ITC issued a notice to review certain issues of the Initial Determination related to the ’106 patent, whether Tessera could obtain an exclusion order based on the ’106 patent was still before the ITC. Accordingly, the Court held that it had jurisdiction because Tessera filed the Notice of Appeal within sixty days of the ITC’s Final Determination.
Turning to the applicability of the exhaustion doctrine, the Court considered whether the patentee authorized certain sales of products embodying the ’106 patent. Tessera argued that the ITC improperly found patent exhaustion without an authorized sale because, under the terms of the TCC Licenses, sales by its licensees are not licensed, and are therefore unauthorized until royalties are paid. Because royalties were allegedly not paid or paid late, Tessera argued that sales by those licensees did not trigger exhaustion of its patent rights. The ITC and the Elpida intervenors responded that patent exhaustion is triggered “by a sale authorized by the patent holder,” quoting Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 636 (2008). They argued that Tessera authorized these sales when it granted its TCC Licensees the authority to sell and that the payment of royalties is immaterial.
The Federal Circuit held that the licenses expressly authorized the sale of the licensed products and payment of the royalties at the end of the reporting period. Any subsequent nonpayment of the royalties under the TCC Licenses would give rise to an action with Tessera’s licensees, but not with the licensees’ customers. The Court observed that adopting Tessera’s argument would create uncertainty over every sale and every product in possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion. The Court, therefore, held that Tessera’s patent rights were exhausted by the sale of the accused products by Tessera’s licensees.
Finally, the Federal Circuit turned to the issue of whether the ITC’s determination that there is no section 337 violation with respect to the ’977 and ’627 patents should be vacated as moot. The Court determined that because the ’977 and ’627 patents expired during the course of the proceedings and the ITC has a limited statutory mandate and can only issue exclusion orders barring future conduct, nothing remained pending before the ITC with respect to these patents. Noting that the ’977 and ’627 patents had expired through happenstance and not Tessera’s voluntary actions, the Court held that the issues regarding noninfringement of the ’977 and ’627 patents were moot. The Court therefore vacated this portion of the Final Determination and remanded with instructions to dismiss this portion of the complaint.
Summary authored by Kevin D. Rodkey, Esq.