Authored by D. Brian Kacedon, John C. Paul, and Daniel T. Sharpe III
Under the doctrine of patent exhaustion, a patent holder's ability to control the further use and resale of a patented product typically ends after the first authorized sale of that product. Exhaustion can occur whether the patented product is sold by the patent owner or by someone authorized by the patent owner, such as licensee. Often, patent owners attempt to craft their licenses in a manner intended to limit the scope of patent exhaustion that occurs when their licensees sell products under the license.
In Helferich Patent Licensing, LLC v. New York Times Co.,1 a district court in the Northern District of Illinois addressed one such situation where a patent owner attempted to license only certain claims of its patents, while preserving others as unlicensed and thus, nonexhausted. After discussing the policy rationale underlying the doctrine of patent exhaustion, the court determined that allowing such a licensing agreement would improperly allow multiple royalties from the same patents for a single sale and effectively vitiate the patent-exhaustion doctrine.
Helferich Patent Licensing, LLC ("HPL") owns a large portfolio of patents that relate to mobile communication devices and methods of providing content to those devices. At a high level, the claims relate to sending to a device an identifier of content, which the device may use to request delivery of the content when desired. Helferich has commonly asserted the claims against SMS messages (mobile-phone text messages) that contain hyperlinks to Web content. As Helferich has widely publicized, it has licensed its patents to the entire industry of cell-phone manufacturers. The licenses include a provision that HPL will not assert any claim against a third party; but some agreements ostensibly withhold certain claims from this clause.
HPL also sought to license its patents to content providers. While some of them took a license, others (including the defendants in this case) declined. As a result, HPL filed suit, alleging that the content providers who did not take a license infringe HPL's patents. The parties filed cross motions for summary judgment on the issue of patent exhaustion.
The Helferich Decision
Ruling on the motions for summary judgment, the court granted the defendants' motion and dismissed HPL's claims of patent infringement. Applying Quanta Computer v. LG Electronics, the court held that a license agreement may not be used to avoid patent exhaustion by licensing only certain claims of a patent.
The court began with a discussion of the rule established in Quanta, concluding that "[t]he focus of Quanta is that the sale of the product results in the exhaustion of the patent in its entirety, rather than the exhaustion of certain claims." HPL contended that its patents were distinguishable from those in Quanta, because they had "handset" (i.e., cell phone) claims, which were distinct from the patents' "content" claims. It argued that the licenses granted to the cell-phone manufacturers included only the handset claims, whereas the defendants' activities infringed the nonlicensed content claims.
In opposition, the defendants argued that a patent owner cannot license only a portion of a patent in order to collect multiple royalties on the same patent for one use or sale. They supported this view by noting that a patent covers only the totality of the elements in the claim.
The court found no genuine issue of material fact regarding the fact that HPL licensed its patents to the entire cell-phone industry. By HPL's own admission, every manufacturer of cell phones had a license to practice, without limitation, any and all inventions in the licensed patents. As a result, every cell phone has been licensed to practice the inventions in HPL's patents. The court concluded that because every cell phone had been licensed, none could infringe those patents.
Next, the court turned to the question of whether or not the cell phones sufficiently embodied the patents-in-suit because, to trigger patent exhaustion, the item sold needs only to sufficiently embody the patent rather than completely practice the patent by itself. In this case, the cell phones practiced the claims of the patent when used as designed, so the court found no genuine issue of material fact that the cell phones sufficiently embodied the patents in-suit.
Finally, the court considered HPL's attempts to carve out rights from the handset licenses. The license agreements sought to reserve causes of action against third parties for the "withheld claims." The court, however, rejected this reservation and held that such attempts to avoid patent exhaustion must fail in light of Quanta. Under Quanta, the court pointed out, "[t]he right of Defendants and other third parties here to practice HPL's patents is based on exhaustion, not on an implied license from a covenant in other agreements." The court determined that HPL's attempt to reserve causes of action on some claims would restrict postsale activities of third parties, therefore violating the principles underlying patent exhaustion. Thus, the court concluded that HPL's carve-out provision could not prevent exhaustion.
The district court granted the defendants' motion for summary judgment and held that HPL exhausted its patent rights when it licensed the portfolio to the cellular-handset manufacturers. Accordingly, it dismissed HPL's claims of patent infringement against the defendant content providers.
Strategy and Conclusion
While this decision is likely to be appealed, licensors should be aware that some courts may view license agreements that seek to license only some claims of a patent as exhausting rights in the entire patent. In its decision, the Helferich court stated that a patent owner wishing to avoid this result would need to obtain separate patents for those claims it wishes to withhold from the license. This suggests that an alternative strategy for licensing a broad portfolio might start with patent prosecution, clearly separating families of patents that could then be separately licensed to different industries.
1 The Federal Circuit's Helferich decision may be found at http://www.finnegan.com/files/upload/LES_Insights_Column/2013/Helferich_v_NYT.pdf.
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.