Agreement That Only Released Liability for Past Sales, but Did Not Retroactively Authorize Such Sales, Did Not Exhaust Patent Rights, and Did Not Protect Downstream Resellers From Being Sued for Infringement

Abstract

A New York court found that a settlement agreement releasing a defendant from liability for past infringing sales did not retroactively authorize those sales and therefore did not exhaust the patent rights in the products at the time of the past sales.

Background

Dr. Berall owned a patent covering a laryngoscope. Aircraft Medical Ltd. (“Aircraft”) manufactured the McGrath Laryngoscope. LMA was Aircraft’s exclusive U.S. distributor of this product. Dr. Berall sued Aircraft and LMA for patent infringement. Aircraft and Dr. Berall entered into a settlement agreement that included the following release language:

Berall releases Aircraft and its Affiliates from any claim or demand, whether now known or unknown, arising out of or related to (i) infringement of the ’178 patent; (ii) the claims and counterclaims asserted in, and the conduct of, the Litigation; (iii) any acts and conduct prior to the Effective Date of this Agreement that would have been released under this Agreement if performed after the Effective Date; and (iv) the conduct of settlement negotiations (except for representations or obligations expressly included in this Agreement).

No provisions of the agreement expressly released LMA from liability and LMA was not an “Affiliate,” as defined in the agreement. After executing the settlement agreement, Dr. Berall and Aircraft submitted a joint stipulation to dismiss Aircraft, and the case continued against LMA. Subsequently, LMA merged into a third party Teleflex and the district court substituted Teleflex for LMA.

Teleflex moved for summary judgment asserting that the Berall-Aircraft settlement agreement retroactively authorized Aircraft’s sales of the McGrath Laryngoscope to LMA, thus exhausting any patent rights to Dr. Berall’s patent. Specifically, Teleflex argued that the agreement released Aircraft from all claims of patent infringement, including for sales made to LMA before the effective date of the agreement. Thus, according to Teleflex, patent exhaustion prevented Dr. Berall from seeking recovery from a downstream user, such as LMA.

The Berall Decision

The district court denied Teleflex’s motion for summary judgment holding that patent exhaustion did not apply. Patent exhaustion is an affirmative defense to patent infringement. When the patent owner authorizes the sale of a patented item, patent exhaustion prevents the patent owner from using its patent to control the further use and resale of the product. Thus, the purchaser or acquirer of the item has the right to use or sell the item as she sees fit. Importantly, the sale at issue must have been authorized by the patent owner at the time it was made.

The district court noted that the agreement merely released Aircraft from liability from past infringing sales but did not establish that Aircraft’s previous sales were authorized at the time those sales were made.  It also distinguished TransCore, LP v. Electric Transaction Consultants Corp., in which the Federal Circuit held that a covenant not to sue the defendant for future infringement constituted an authorization for the defendant to engage in future sales. In this case, unlike Transcore, the allegedly infringing sales involving LMA were made before the effective date of the agreement.  Ultimately, noting that “timing of any sales authorization is crucial to the patent exhaustion analysis,” the district court denied Teleflex’s motion.

Strategy and Conclusion

Agreements that release liability for patent infringement for past sales may still retain liability by downstream purchasers.

The Berall decision can be found here.