The Impact of the Patent Exhaustion and Implied License Doctrines on License Negotiations

Nothing should be left to chance when drafting patent licenses. Indeed, the parties on both sides of the transaction have a keen interest in eliminating ambiguities. This is particularly true with respect to the scope of the license grant. The licensor must be reasonably assured that it has not inadvertently given away more than what was bargained for. On the other side, the licensee must be reasonably assured that it may use the patent as it intended without being sued for infringement.

Beyond the language of the grant, a key consideration for both parties is the impact of the patent exhaustion and implied license doctrines. Both doctrines operate similarly. In essence, they limit the licensor's right to claim infringement against downstream users of its patent or sellers of devices that embody the patent. Although these doctrines are often applied with indistinguishable results, the requirements for each are different. Moreover, these doctrines also differ in scope.

Patent exhaustion results from an authorized, unconditional sale or license of a patented device. Subsequent sales and uses cannot infringe the patent covering the device. If the device had only been licensed for use in a particular product, however, the licensor would have a cause of action for any subsequent sale or use of the device apart from the product. An implied license arises when the licensor sells or licenses articles that have no reasonable, non-infringing uses, other than practicing the patent, and the circumstances plainly indicate that the grant of a license should be inferred. Significantly, it should be recognized that the scope of the implied license doctrine is somewhat broader than what is permissible under the patent exhaustion doctrine because the licensee would also have the right to make the patented article.

Nonetheless, there is some discrepancy among the courts over which doctrine controls the disposition of any particular case. In Anton/Bauer, Inc. v. PAG Ltd., 329 F.3d 1343 (Fed. Cir. 2003), the Federal Circuit held that an implied license permitted consumers to practice a claimed invention with no liability for infringement. The patent involved a battery pack connection, composed of a patented female and unpatented male plate, used in conjunction with video cameras. Anton/Bauer sold the female plates directly to video camera manufacturers, who sold the cameras to consumers with the female plate incorporated into the camera. When the defendant began selling compatible battery packs fitted with the male plate, Anton/Bauer sued for contributory infringement on the grounds that PAG had induced consumers to violate its rights in the patented combination. The court held that there was no underlying infringement because the female plate had been sold without restriction and was useful only in performing the claimed combination. Thus, Anton/Bauer had granted an implied license.

By contrast, the Northern District of California has taken a slightly different tack under a similar fact pattern. In LG Electronics v. Asustek, 248 F.Supp.2d 912 (N.D. Cal. 2003), the defendants had purchased microprocessors and chipsets from a licensee of LG and installed them in computers. LG claimed that the combination of these items infringed its patents. However, the court found that LG's patent rights in the combination were exhausted by the unconditional sale of the microprocessors and chipsets. Based on a synthesis of Supreme Court and Federal Circuit cases, the court held that the patent exhaustion doctrine also applied to the unrestricted sale of the essential components comprising a patented article. Since the microprocessors and chipsets were essential components of LG's patented combination, and these components would have been inoperable unless used in the combination, LG had exhausted its patent rights in the combination.

Although these cases are similar in outcome, they also highlight some key issues for licensors. First and foremost, the licensor must determine whether the nature of the patent poses risks for licensing arrangements. In the Anton/Bauer case, the licensor could not prevent others from making compatible battery packs because the patented aspects of the locking mechanism resided solely on the female plate. Anton/Bauer might have protected its patented combination had the patented aspects of the locking mechanism been divided among the female and male plates. Likewise, Anton/Bauer might have placed restrictions on the use of the plates or otherwise taken steps to negate the inference of a license.

Second, the licensor must determine whether the sale or license of separately patented components has implications for patented combinations. In the LG Electronics case, the licensor was not able to prevent computer manufacturers from combining microprocessors and chipsets purchased from LG's licensee because the components had no reasonable non-infringing uses on their own. Had LG placed conditions on the sale and use of these components, through its licensee, downstream purchasers would have been required to seek a license from LG in order to combine the components.

However, licensors are not the only parties that need to calculate the impact of these doctrines. One important limitation of both doctrines is the concept of unrestricted sale or license. In the exhaustion context, this is particularly critical for those who take licenses from a licensee. Unless the grant from the patentee to the licensee is unrestricted with respect to subsequent sales and uses of articles or combinations thereof, the restrictions will flow downstream. Similarly, since most agreements disclaim all licenses not expressly granted, the implied license defense will be unavailable to the licensee.

Licensees should also be aware of licensing arrangements that involve method patents because the patent exhaustion doctrine may not be applicable. As the LG Electronics court held, the sale of a device does not exhaust the licensor's rights under a separate method patent. Thus, even if the licensor sells equipment that practices a patented method for accomplishing a specific function, the licensee is not free under the exhaustion doctrine to practice that method without a license. Although the licensee could argue that the circumstances indicate that the sale of the equipment gives rise to an implied license, most agreements disclaim all licenses not expressly granted. Under these circumstances, the implied license doctrine is inapplicable. Therefore, the key issue for licensees is to make sure that any method claims are expressly included in the license grant. Moreover, the grant should also include the right for the licensees' customers to practice the method patent.

Although the patent exhaustion and implied license doctrines add complexity to the drafting process, both sides of the transaction can easily avoid disputes later on in the relationship. Actively contemplating the nature of the patents, the structure of the licensing arrangement and the portfolio of intellectual property necessary for the transaction will help the licensor and the licensee select appropriate express grants and limitations. And both parties will get what they bargained for.

Nothing should be left to chance when drafting patent licenses. Indeed, the parties on both sides of the transaction have a keen interest in eliminating ambiguities. This is particularly true with respect to the scope of the license grant. The licensor must be reasonably assured that it has not inadvertently given away more than what was bargained for. On the other side, the licensee must be reasonably assured that it may use the patent as it intended without being sued for infringement.

Beyond the language of the grant, a key consideration for both parties is the impact of the patent exhaustion and implied license doctrines. Both doctrines operate similarly. In essence, they limit the licensor's right to claim infringement against downstream users of its patent or sellers of devices that embody the patent. Although these doctrines are often applied with indistinguishable results, the requirements for each are different. Moreover, these doctrines also differ in scope.

Patent exhaustion results from an authorized, unconditional sale or license of a patented device. Subsequent sales and uses cannot infringe the patent covering the device. If the device had only been licensed for use in a particular product, however, the licensor would have a cause of action for any subsequent sale or use of the device apart from the product. An implied license arises when the licensor sells or licenses articles that have no reasonable, non-infringing uses, other than practicing the patent, and the circumstances plainly indicate that the grant of a license should be inferred. Significantly, it should be recognized that the scope of the implied license doctrine is somewhat broader than what is permissible under the patent exhaustion doctrine because the licensee would also have the right to make the patented article.

Nonetheless, there is some discrepancy among the courts over which doctrine controls the disposition of any particular case. In Anton/Bauer, Inc. v. PAG Ltd., 329 F.3d 1343 (Fed. Cir. 2003), the Federal Circuit held that an implied license permitted consumers to practice a claimed invention with no liability for infringement. The patent involved a battery pack connection, composed of a patented female and unpatented male plate, used in conjunction with video cameras. Anton/Bauer sold the female plates directly to video camera manufacturers, who sold the cameras to consumers with the female plate incorporated into the camera. When the defendant began selling compatible battery packs fitted with the male plate, Anton/Bauer sued for contributory infringement on the grounds that PAG had induced consumers to violate its rights in the patented combination. The court held that there was no underlying infringement because the female plate had been sold without restriction and was useful only in performing the claimed combination. Thus, Anton/Bauer had granted an implied license.

By contrast, the Northern District of California has taken a slightly different tack under a similar fact pattern. In LG Electronics v. Asustek , 248 F.Supp.2d 912 (N.D. Cal. 2003), the defendants had purchased microprocessors and chipsets from a licensee of LG and installed them in computers. LG claimed that the combination of these items infringed its patents. However, the court found that LG's patent rights in the combination were exhausted by the unconditional sale of the microprocessors and chipsets. Based on a synthesis of Supreme Court and Federal Circuit cases, the court held that the patent exhaustion doctrine also applied to the unrestricted sale of the essential components comprising a patented article. Since the microprocessors and chipsets were essential components of LG's patented combination, and these components would have been inoperable unless used in the combination, LG had exhausted its patent rights in the combination.

Although these cases are similar in outcome, they also highlight some key issues for licensors. First and foremost, the licensor must determine whether the nature of the patent poses risks for licensing arrangements. In the Anton/Bauer case, the licensor could not prevent others from making compatible battery packs because the patented aspects of the locking mechanism resided solely on the female plate. Anton/Bauer might have protected its patented combination had the patented aspects of the locking mechanism been divided among the female and male plates. Likewise, Anton/Bauer might have placed restrictions on the use of the plates or otherwise taken steps to negate the inference of a license.

Second, the licensor must determine whether the sale or license of separately patented components has implications for patented combinations. In the LG Electronics case, the licensor was not able to prevent computer manufacturers from combining microprocessors and chipsets purchased from LG's licensee because the components had no reasonable non-infringing uses on their own. Had LG placed conditions on the sale and use of these components, through its licensee, downstream purchasers would have been required to seek a license from LG in order to combine the components.

However, licensors are not the only parties that need to calculate the impact of these doctrines. One important limitation of both doctrines is the concept of unrestricted sale or license. In the exhaustion context, this is particularly critical for those who take licenses from a licensee. Unless the grant from the patentee to the licensee is unrestricted with respect to subsequent sales and uses of articles or combinations thereof, the restrictions will flow downstream. Similarly, since most agreements disclaim all licenses not expressly granted, the implied license defense will be unavailable to the licensee.

Licensees should also be aware of licensing arrangements that involve method patents because the patent exhaustion doctrine may not be applicable. As the LG Electronics court held, the sale of a device does not exhaust the licensor's rights under a separate method patent. Thus, even if the licensor sells equipment that practices a patented method for accomplishing a specific function, the licensee is not free under the exhaustion doctrine to practice that method without a license. Although the licensee could argue that the circumstances indicate that the sale of the equipment gives rise to an implied license, most agreements disclaim all licenses not expressly granted. Under these circumstances, the implied license doctrine is inapplicable. Therefore, the key issue for licensees is to make sure that any method claims are expressly included in the license grant. Moreover, the grant should also include the right for the licensees' customers to practice the method patent.

Although the patent exhaustion and implied license doctrines add complexity to the drafting process, both sides of the transaction can easily avoid disputes later on in the relationship. Actively contemplating the nature of the patents, the structure of the licensing arrangement and the portfolio of intellectual property necessary for the transaction will help the licensor and the licensee select appropriate express grants and limitations. And both parties will get what they bargained for.