Recent Developments in Intellectual Property Law Impacting the Energy Industry. Authors 1 : Jeff C. Dodd Andrews Kurth Kenyon LLP

Transcription

1 Recent Developments in Intellectual Property Law Impacting the Energy Industry Authors 1 : Jeff C. Dodd Andrews Kurth Kenyon LLP H. Albert Liou Jones Day Jason P. Sander LyondellBasell Viddy T. Harris Jones Day as presented in a panel session moderated by Nicholas N. Leach, Chevron Corporation 1.01 Introduction The past twelve months has brought with it a number of important developments in intellectual property case law. In the trademark world, perhaps no decision was more scrutinized and debated than the Supreme Court s decision in Matal v. Tam, 137 S. Ct (2017), where the Supreme Court held that the statute prohibiting the U.S. Trademark Office from registering disparaging trademarks such as The Slants is unconstitutional. In copyright law, the Supreme Court s decision in Star Athletica LLC v. Varsity Brands Inc., 137 S. Ct (2017), adopted a test for when a design feature of a useful article is eligible for copyright protection. This Chapter, however, focuses on recent developments in three areas of intellectual property law likely to have significant effects on the energy industry. First, the Chapter will discuss the Supreme Court s March 2017 decision in Impression Products, Inc. v. Lexmark International, Inc., 137 S. Ct (2017), which resolved lingering questions about the doctrine of patent exhaustion. The Court s decision clarifies the intersection between patent law and contract law and will continue have a significant influence on how companies commercialize their products. Second, the Chapter will discuss the Supreme Court s interpretation of where a corporation resides in the context of the patent venue statute, 28 U.S.C. 1400(b), in the Supreme Court s May 2017 decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct (2017). The Supreme Court s decision and the lower court decisions that have followed have narrowed the bounds of a plaintiff s choice of venue in patent infringement lawsuits. Finally, in a case yet to be adjudicated, Oil States Energy Services, LLC v. Greene s Energy Group, LLC, the Supreme Court s upcoming decision may have the farthest reaching impact of all. Oil 1 The views set forth herein are the personal views of the authors and do not necessarily reflect those of Andrews Kurth Kenyon LLP, Jones Day, LyondellBasell, or Chevron Corporation.

2 States calls into question the constitutionality of inter partes review an administrative procedure relied on heavily by defendants to invalidate competitors patents and patents otherwise asserted against them. The Supreme Court s decision may potentially force companies to revamp their strategies for competing against others in the marketplace as well as defending against patent infringement lawsuits Exhaustion After Impression Products* [1] Background. License agreements focus on information and informational rights. Many licenses do not involve transfer of any tangible property. In other transactions, however, the licensed information is delivered on tangible media (goods) or the intellectual property rights cover the tangible property (e.g., patented machine). In some situations, the licenses authorize or contemplate that a licensee, distributor (or others) will transfer goods on which information resides or goods embodying intellectual property rights. In all of these cases, issues can arise about whether such a delivery constitutes a first sale of the copy under copyright law, a first sale of genuine trademarked goods under trademark law or exhaustion as to the tangible item under patent law. Generally, under the first sale/exhaustion doctrines, an unconditional transfer of a tangible item (copy) embodying or bearing a copyrighted work, a patented invention or item bearing a mark by or authorized by the intellectual property owner allows certain uses of that item (copy) free of infringement claims by or through the intellectual property owner. 2 The policies supporting the first sale/exhaustion doctrines are simply stated, even if the application of the doctrines has proven complex: in theory, by making or authorizing the transfer the intellectual property owner receives its reward for the use of intellectual property bound into * This Section 1.02 is submitted by Jeff Dodd based on Sections from Modern Licensing Law by R. Nimmer and J. Dodd (Thomson West 2017) 2017 Thomson Reuters (hereinafter, Modern Licensing Law ). 2 Section 2:49 of Modern Licensing Law. This doctrine has been applied as to patents, copyrights, and trademarks. It may apply to other forms of intellectual property as well. Thus, in Dow Jones & Company, Inc. v. International Securities Exchange, Inc., 451 F.3d 295, 79 U.S.P.Q.2d 1225, Comm. Fut. L. Rep. (CCH) P (2d Cir. 2006) the Second Circuit applied a form of exhaustion analysis to defeat state-law misappropriation claims relating to intellectual property that Dow Jones and Standard & Poor s claimed they owned in their stock indexes and related exchange traded funds that tracked those indexes. Without deciding whether each of the plaintiffs possesses an exclusive intellectual-property right in the index it created and in the exchange-traded fund (ETF) which has been structured to duplicate the index, the Second Circuit stated, By authorizing the creation of ETFs using their proprietary formulas, and the sale of the ETF shares to the public, the plaintiffs have relinquished any right to control resale and public trading of those shares, notwithstanding the fact that plaintiffs intellectual property may be embedded in the shares. Owners and would-be owners of ETF shares are free to negotiate with one another for the purchase and sale of the ETF shares plaintiffs have sold to the public. Dow Jones & Company, Inc. v. International Securities Exchange, Inc., 451 F.3d 295, 79 U.S.P.Q.2d 1225, 1330, Comm. Fut. L. Rep. (CCH) P (2d Cir. 2006)

3 or covering the item. 3 As the Supreme Court in Bowman v. Monsanto Co. 4 stated with respect to patent exhaustion, under the doctrine, the initial authorized sale of a patented item terminates all patent rights to that item.... We have explained the basis for the doctrine as follows: [T]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward... by the sale of the article ; once that purpose is realized the patent law affords no basis for restraining the use and enjoyment of the thing sold. 5 More recently in Impression Products, Inc. v. Lexmark International, Inc., 6 the Supreme Court set forth an additional and different basis for both first sale in copyright and exhaustion in patent cases namely, the common law principle against restraints on alienation.... We have explained in the context of copyright law that exhaustion has an impeccable historic pedigree, tracing its lineage back to the common law s refusal to permit restraints on the alienation of chattels.... This venerable principle is not, as the Federal Circuit dismissively viewed it, merely one commonlaw jurisdiction s general judicial policy at one time toward anti-alienation restrictions.... Congress enacted and has repeatedly revised the Patent Act against the backdrop of the hostility toward restraints on alienation. That enmity is reflected in the exhaustion doctrine. The patent laws do not include the right to restrain[ ]... further alienation after an initial sale; such conditions have been hateful to the law from Lord Coke s day to ours 3, e.g., Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, (2017) ( The Patent Act promote[s] the progress of science and the useful arts by granting to [inventors] a limited monopoly that allows them to secure the financial rewards for their inventions.... But once a patentee sells an item, it has enjoyed all the rights secured by that limited monopoly.... Because the purpose of the patent law is fulfilled... when the patentee has received his reward for the use of his invention, that law furnishes no basis for restraining the use and enjoyment of the thing sold. ); Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1373, 108 U.S.P.Q.2d 1648 (Fed. Cir. 2013) ( The rationale underlying the doctrine rests upon the theory that an unconditional sale of a patented device exhausts the patentee s right to control the purchaser s use of that item thereafter because the patentee has bargained for and received full value for the goods. ). 4 Bowman v. Monsanto Co., 133 S.Ct. 1761, 185 L.Ed. 2d 931, 185 L.Ed. 2d 941, 106 U.S.P.Q.2d 1593 (2013). 5 Bowman v. Monsanto Co., 133 S.Ct. 1761, 1766, 185 L.Ed. 2d 931, 185 L.Ed. 2d 941, 106 U.S.P.Q.2d 1593 (2013). In explaining why authorized sales overseas also exhausted US patent rights, thereby allowing their import into and use in the United States, the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017) stated: Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee s decision to give that item up and receive whatever fee it decides is appropriate for the article and the invention which it embodies..... The patentee may not be able to command the same amount for its products abroad as it does in the United States. But the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward of whatever amount the patentee deems to be satisfactory compensation, for every item that passes outside the scope of the patent monopoly. Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, 1537 (2017). 6 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017)

4 and are obnoxious to the public interest.... [E]xtending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain. And advances in technology, along with increasingly complex supply chains, magnify the problem. 7 In the next several sections we examine the complex of rules and principles comprising the exhaustion doctrine in patent law. As we discuss below the structure of the distribution channels and the terms of the licenses will have great influence on the application of these doctrines. [2] First Sale and Exhaustion Doctrines Unifying Elements. While we will be focusing on patent exhaustion, we note that copyright/trademark first sale and the patent exhaustion doctrines share at least five common elements that underscore the property-based nature of those doctrines. 8 First, first sale and exhaustion relate to physical items; they deal with the relationship between the intellectual property rights relating to a tangible item. This distinguishes the transfers of physical items, usually sales, from transactions in rights, like licenses. As the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc. 9 stated, A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee s monopoly:... Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections, So long as a licensee complies with the license when selling an item, the patentee has, in effect, authorized the sale. That licensee s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself. The result: The sale exhausts the patentee s rights in that item. 10 First sale and exhaustion doctrines thus do not vitiate or transfer the intellectual property rights generally; the transfer does not convey rights in the intellectual property itself. 11 Rather, under 7 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, 1532 (2017). 8 Indeed, in Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017), the Supreme Court pointed to the common law enmity for restraints on alienation of personal property as supporting copyright first sale and patent exhaustion doctrines. Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, 1532 (2017). 9 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 10 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, (2017) (emphasis added). 11 Geophysical Services, Incorporated v. TGS-NOPEC Geophysical, 850 F.3d 785, (5th Cir. 2017) ( This first sale doctrine found its way into United States copyright law long before it was codified as 109 in the - 4 -

5 first sale/exhaustion doctrines, an unconditional transfer of ownership of a tangible item (copy) embodying or bearing IP made or authorized by an IP owner allows certain uses of that item (copy) free of infringement claims by such owner as to such uses of that item (copy). 12 Second, first sale and exhaustion doctrines attach to transfers of ownership of the item (copy); the distinction between a sale or other transfer and a license remains important. Whether a sale or other transfer occurred depends on the terms of the contract. For example, copyright cases involving first sale hold that a transfer of a copy does not convey ownership of the copy if the terms of the contractual transfer place significant limitations on use of the program or other information contained on the copy. 13 If no transfer of ownership occurs and the recipient of a copy deals with it in a manner inconsistent with the copyright rights of the copyright copy owner and not permitted by the terms of the contract, then both a breach of contract and an infringement claim may be appropriate. Here, however, we should note that the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc., 14 did hold that a patentee s authority to limit licensees does not... mean that patentees can use licenses to impose post-sale restrictions on purchasers that are enforceable through the patent laws.... Once a patentee decides to sell whether on its own or through a licensee that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license. 15 Nonetheless we are not now addressing the enforcement of post-sale restrictions on use through infringement actions; rather, we merely are making the point that a transfer of ownership must be made to trigger first sale and exhaustion doctrines. 16 Third, first sale and exhaustion only provide defenses to property rights infringement claims. They do not address obligations or rights under contract law. Again we turn to the teaching of Impression Products, Inc. v. Lexmark International, Inc. 17 that exhaustion doctrine applies to the patent rights as to the item transferred (and hence infringement liability), but that contractual claims may still lie, in an appropriate case, with respect to uses after a sale. 18 Also, while the issue current Copyright Act in It reflects the fundamental principle of copyright that ownership of the copyright in a work is distinct from ownership of the material object that embodies the work. When a copyright owner transfers or authorizes transfer of a copy or phonorecord embodying his copyright, he does not surrender his copyright, but he does mostly surrender control of the material object. The copyright owner will not be heard to complain of his transferee s transferring the material object in a way that might otherwise foul the exclusive right to distribute. ). 12 Section 2.36 of Modern Licensing Law. 13 Vernor v. Autodesk, Inc., 621 F.3d 1102, 96 U.S.P.Q.2d 1201 (9th Cir. 2010). also MDY Industries, LLC v. Blizzard Entertainment, Inc., 629 F.3d 928, 97 U.S.P.Q.2d 1001 (9th Cir. 2010), as amended on denial of reh g, (Feb. 17, 2011) and opinion amended and superseded on denial of reh g, 2011 WL (9th Cir. 2011). 14 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 15 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, (2017). 16 Note also, as we described above, the Supreme Court explicitly distinguished transfers that would implicate exhaustion from licenses. Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, (2017). 17 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 18 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017) ( A license may require the licensee to impose a restriction on purchasers, like the license limiting the computer manufacturer to selling for non-commercial use by individuals. But if the licensee does so by, perhaps, having each customer - 5 -

6 has not been tested, it might be reasonable to assume that freedom from infringement claims as to certain uses accorded by these doctrines might provide an appropriate source of default rules about the contractual attributes of an unrestricted transfer of ownership of a copy or item so far as the property rules go. For example, as a matter of contract law, the buyer of a copy of a computer program might be assumed to have contractual rights to use the copy in ways permitted under section 117 of the Copyright Act and other first sale rules unless the contract otherwise provides. Such an analysis would create a comfortable parallel between the two bodies of law and, arguably at least, parallel reasonable expectations. Whether such result should apply as a matter of contract, however, is a question to be resolved under contract law and for contractual obligations or limitations, the result would be subject to the terms of the parties agreement. Fourth, the uses to which a transferee may put an item are not limitless. Even if the sale is authorized, that leaves open the question of what, exactly, the scope of uses an authorized purchaser may make of a patented, trademarked, or copyrighted item. Even where a first-sale or exhaustion is found, the owner of the tangible item only has limited privileges to act with respect to that tangible item without being subject to a valid claim of infringement. 19 sign a contract promising not to use the computers in business the sale nonetheless exhausts all patent rights in the item sold.... The purchasers might not comply with the restriction, but the only recourse for the licensee is through contract law, just as if the patentee itself sold the item with a restriction. ). 19 Sections 2:49 and 10:28-10:31 of Modern Licensing Law. The Copyright Act specifies the effects of a transfer on a copyright owner s exclusive rights. With respect to copyrighted works, Congress has resolved the scope of permitted use of permitted use by statute. 17 U.S.C.A. 109, 117. As to patented and trademarked items, the precise contours of the range of permitted action afforded to the purchaser of such items have been etched by a long series of cases that attempt to strike a sensible balance reconciling the continuing existence of the intellectual property rights with the reasonable expectations of buyers of tangible items. Examples of patent cases include Bowman v. Monsanto Co., 133 S.Ct. 1761, 185 L.Ed. 2d 931, 185 L.Ed. 2d 941, 106 U.S.P.Q.2d 1593 (2013) (patent exhaustion limits a patentee s right to control what others can do with an article embodying or containing an invention. Under the doctrine, the initial authorized sale of a patented item terminates all patent rights to that item.... And by exhaust[ing] the [patentee s] monopoly in that item, the sale confers on the purchaser, or any subsequent owner, the right to use [or] sell the thing as he sees fit... We have explained the basis for the doctrine as follows: [T]he purpose of the patent law is fulfilled with respect to any particular article when the patentee has received his reward.... Consistent with that rationale, the doctrine restricts a patentee s rights only as to the particular article sold;.... it leaves untouched the patentee s ability to prevent a buyer from making new copies of the patented item.... Rather, a second creation of the patented item call[s] the monopoly, conferred by the patent grant, into play for a second time. ; purchaser of seed could resell or consume seed but exhaustion doctrine did not allow making additional patented seeds by replanting seeds that the patent owner only sold pursuant to license forbidding replanting without patent owner permission); Aro Mfg. Co. v. Convertible Top Replacement Co., 377 U.S. 476, 497, 84 S.Ct. 1526, 12 L.Ed. 2d 457, 141 U.S.P.Q. 681 (1964); Bottom Line Management, Inc. v. Pan Man, Inc., 228 F.3d 1352, 56 U.S.P.Q.2d 1316, 1319 (Fed. Cir. 2000). Trademark cases include Beltronics USA, Inc. v. Midwest Inventory Distribution, LLC, 562 F.3d 1067, 90 U.S.P.Q.2d 1228 (10th Cir. 2009) (In a trademark case, the essence of the first sale doctrine [is] that a purchaser who does no more than stock, display, and resell a producer s product under the producer s trademark violates no right conferred upon the producer by the Lanham Act. It logically follows that the first sale doctrine is not applicable when an alleged infringer sells trademarked goods that are materially different than those sold by the trademark owner. ); Automotive Gold Inc. v. Volkswagen of America, Inc., 603 F.3d 1133, 94 U.S.P.Q.2d 1873, 71 A.L.R. Fed. 2d 625 (9th Cir. 2010) (The first sale doctrine does not provide a defense to trademark infringement when the products create a likelihood of confusion as to their origins; The Court reasoned that activities creating a likelihood of post-purchase confusion are not protected, and selling altered goods under the original trademark creates trademark infringement. ); National Business Forms & Printing, Inc. v. Ford Motor Co., 2009 WL (S.D. Tex. 2009), judgment aff d in part, rev d in part on other grounds, 671 F.3d 526, 101 U.S.P.Q.2d - 6 -

7 Finally, first sale and exhaustion doctrines rely on authorization, generally conferred by consent. If the patent owner does not part with the item or does not authorize the sale or transfer of the item, patent exhaustion generally should not apply. We hasten to add while one reading of Impression Products, Inc. v. Lexmark International, Inc. 20 could raise questions about the full force of the preceding statement, as we discuss more fully in the ensuing sections we believe that Impression Products does not abrogate the tradition rule that the infringement claims of an owner are not extinguished if an authorized sale did not occur. [3] Core Elements: Transfer and Authorization. As the Supreme Court in Impression Products, Inc. v. Lexmark International, Inc. 21 described the patent exhaustion doctrine, A United States patent entitles the patent holder (the patentee ), for a period of 20 years, to exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States. 35 U.S.C. 154(a). Whoever engages in one of these acts without authority from the patentee may face liability for patent infringement. 271(a). When a patentee sells one of its products, however, the patentee can no longer control that item through the patent laws its patent rights are said to exhaust. The purchaser and all subsequent owners are free to use or resell the product just like any other item of personal property, without fear of an infringement lawsuit , 81 Fed. R. Serv. 3d 1285 (5th Cir. 2012) (Trademark violation on some, but not all of uses of Ford mark; first sale does not protect user of marks where these were counterfeit goods.). Often the privileges with respect to purchased items are said to be based on implied licenses., e.g. Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445, 43 U.S.P.Q.2d 1650, 1655 (Fed. Cir. 1997) ( Generally, when a seller sells a product without restrictions, it in effect promises the purchaser that in exchange for the price paid it will not interfere with the purchaser s full enjoyment of the product purchased. The buyer has an implied license under any patents of the seller that dominates the product or any uses of the product to which the parties might reasonably contemplate the product will be put. ); Sidel v. Uniloy Milacron, Inc., 61 U.S.P.Q.2d 1480, 1484, 2001 WL (N.D. Ga. 2001), dismissed, 35 Fed. Appx. 874 (Fed. Cir. 2002) ( the purchasers... ha[ve] an implied licenses for certain further uses under the patent ). Analyzing these privileges as implied licenses based on default rules as some, but not all, cases do furnishes important insights about how that balance has been struck. By virtue of being based on the concept of a license, these privileges are limited. Compare Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct. 1523, 1534 (2017) ( the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is instead a limit on the scope of the patentee s rights.... The right to use, sell, or import an item exists independently of the Patent Act. What a patent adds and grants exclusively to the patentee is a limited right to prevent others from engaging in those practices.... Exhaustion extinguishes that exclusionary power.... As a result, the sale transfers the right to use, sell, or import because those are the rights that come along with ownership, and the buyer is free and clear of an infringement lawsuit because there is no exclusionary right left to enforce. ). 20 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 21 Impression Products, Inc. v. Lexmark International, Inc. U.S., 137 S.Ct (2017). 22 Impression Products, Inc. v. Lexmark International, Inc. U.S., 137 S.Ct. 1523, 1529 (2017) - 7 -

8 As with the first sale doctrine in copyright law, the general principle is easy to articulate. Its application has proven slippery and subtle, however. [a] Transfer. As with copyright first sale, the crucial elements for triggering exhaustion are transfer and authorization. 23 However, while ownership of the intellectual property rights remains intact, an authorized first transfer of the good embodying the patent or containing the copyrighted work or bearing the trademark allows the owner-transferee to make limited uses of what it owns without fear of infringement claims by the patent, copyright or trademark owner. In essence, an authorized sale terminates the power of the patent, trademark, or copyright owner to control certain uses of the item that was sold. 24 Otherwise stated, first-sale and exhaustion doctrines prevent the owner of the information right to sue a purchaser in an authorized sale/transfer of a tangible item (copy) for infringement of the information right as to certain limited uses of that tangible item (or copy). Generally a transfer of ownership of goods does not in itself transfer ownership of intellectual property interests that may relate to, reside on or be embodied in those goods. The separation of tangible and intangible property is a central feature of licensing law and practice. Possession (even ownership) of a tangible thing does not in itself communicate much or anything about the owner s intellectual property rights, even though if first sale or exhaustion attaches the owner would be foreclosed from bringing infringement claims with respect to certain uses of the item. This theme is present throughout intellectual property law. It is also one basis for the rejection of ideas of bona fide purchaser status stemming from mere possession and control of a copy. [b] Authorization. In the first sale and exhaustion cases, perhaps no more vexing issue has been with the concept and dimensions of authorization. First-sale and patent-exhaustion concepts apply only if there has been an authorized sale (transfer) of a tangible item embodying the work or the patented subject matter or covered by the mark. In a sale context, the sale might be made directly from the rights owner to the buyer or it can be a sale by a licensee (or agent) authorized to make such transfers. In the latter case, the licensee may not be the owner of the copies because of restrictions 23 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,636, 128 S.Ct. 2109, 2121,170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) ( [e]xhaustion is triggered only by a sale authorized by the patent holder. ). 24 The Copyright Act sets the first-sale doctrines in statute, where patent exhaustion and trademark first sale doctrines have developed by judicial interpretation. The basic principle of all these doctrines is captured in Section 202 of the Copyright Act in the following terms: Ownership of a copyright, or of any of the exclusive rights under a copyright, is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy or phono record in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object. 17 U.S.C.A The same proposition is set out as a matter of contract law in UCITA 501 (2000 Official Text). also, Section 2:49 of Modern Licensing Law

9 on its ability to sell them, but the transferee may become an owner if the license authorizes a sale (or transfer) and the licensee acted within the scope of the license. 25 In Quanta Computer, Inc. v. LG Electronics, Inc., 26 the Supreme Court found that an authorized sale, resulting in exhaustion, occurred where Intel sold LG patented products pursuant to a license from LG. In the case, Intel entered into a License Agreement pursuant to which it: (i) took a license under LG Electronics patents authorizing Intel to make, use, sell (directly or indirectly), offer to sell, import and otherwise dispose of all Intel Licensed Products and (ii) agreed to make a disclaimer to buyers of any express or implied license for infringement if Intel s customers combined Intel Licensed Products with non-intel products. The components Intel manufactured had no reasonable purpose or use than to be included in computer systems that would include non-intel products. LG Electronics and Intel also entered into a Master Agreement that incorporated the License Agreement by reference. This separate contract required Intel to send its customers a notice that stated: Please note however that while the patent license that [respondent] granted to Intel covers Intel s products, it does not extend, expressly or by implication, to any product that you may make by combining an Intel product with any non-intel product. Intel complied with the notice requirement. Quanta purchased products specifically microprocessors and chipsets from Intel and received the notice compelled by the Master Agreement. Nonetheless, Quanta manufactured computers using Intel parts in combination with non-intel memory and buses in ways that practice the LGE Patents. Quanta does not modify the Intel components and follows Intel s specifications to incorporate the parts into its own systems. 27 So, Intel dutifully gave the notice to Quanta but also followed Intel s specifications for incorporating the parts into systems containing non-intel parts. The issue was whether Quanta s purchase from Intel was an authorized sale triggering the exhaustion doctrine in the face of no specific authorization to Intel to sell its products for use in combination with other products which Intel knew it was doing and even supplied specifications for incorporation and in face of the notice? The Court held that it was Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S.Ct. 2109, 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (exhaustion doctrine applies to method patent claims; in this case, license authorized Intel to make unconditional sales to third parties, but with notice that there was no license to use the product in practicing patent, the notice was not part of the contract and the authorized sales created an exhaustion as to the third parties). generally 10:28 to 10:32 of Modern Licensing Law 26 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S.Ct. 2109, 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). also TransCore, LP v. Electronic Transaction Consultants Corp., 563 F.3d 1271, 90 U.S.P.Q.2d 1372 (Fed. Cir. 2009) (unconditional covenant not to sue created exhaustion where covenantee sold product within scope of the covenant). 27 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,624, 128 S.Ct. 2109, 2114,170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). 28 There were three primary issues. The first was whether the doctrine of exhaustion applied to method patents. The Court held that it did apply at least in any case where the product sold in an authorized sale. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, , 128 S.Ct. 2109, 2117, 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) ( It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be embodied in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions involving embodiments of patented methods or processes from those involving - 9 -

10 In reaching this conclusion, the Court focused on the terms of the license itself: Nothing in the License Agreement restricts Intel s right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-intel parts. It broadly permits Intel to make, use, [or] sell products free of LGE s patent claims.... To be sure, LGE did require Intel to give notice to its customers, including Quanta, that LGE had not licensed those customers to practice its patents. But neither party contends that Intel breached the agreement in that respect.... In any event, the provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intel s authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta s decision to abide by LGE s directions in that notice. 29 Importantly, then, the authorization to make, use and sell was not qualified itself; a separate contractual provision required notice, but no more. Thus, the Court concluded, The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel s authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products. 30 The distinction between authorized sales and limitations on the authorized sale as part of the scope of the grant is absolutely crucial here. The Supreme Court found that the longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.... Although the Court permitted post sale restrictions on the use of patented apparatuses or materials. To the contrary, this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method. In Ethyl Gasoline Corporation v. U.S., 309 U.S. 436, 446, 457, 60 S.Ct. 618, 84 L.Ed. 852, 44 U.S.P.Q. 614 (1940), for example, the Court held that the sale of a motor fuel produced under one patent also exhausted the patent for a method of using the fuel in combustion motors. Similarly, as previously described, Univis held that the sale of optical lens blanks that partially practiced a patent exhausted the method patents that were not completely practiced until the blanks were ground into lenses. [U.S. v. Univis Lens Co., 316 U.S. 241, , 62 S.Ct. 1088, 86 L.Ed. 1408, 53 U.S.P.Q. 404 (1942)]. ). The second was whether a product had to embody all of the physical attributes required to practice the patents in order for exhaustion to attach. The Supreme Court held that it did not need to do so as long as the article substantially embodied the patented invention and the article is capable only on practicing the patent. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, , 128 S.Ct. 2109, , 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) ( We agree with Quanta that [U.S. v. Univis Lens Co., 316 U.S. 241, , 62 S.Ct. 1088, 86 L.Ed. 1408, 53 U.S.P.Q. 404 (1942)] governs this case. As the Court there explained, exhaustion was triggered by the sale of the lens blanks because their only reasonable and intended use was to practice the patent and because they embodie[d] essential features of [the] patented invention. 316 U.S., at , 62 S.Ct Each of those attributes is shared by the microprocessors and chipsets Intel sold to Quanta under the License Agreement. ). The third issue is addressed in the body of the text. 29 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,636-37, 128 S.Ct. 2109, ,170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). 30 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,637, 128 S.Ct. 2109, 2122,170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008)

11 a patented article in Henry v. A.B. Dick Co., 224 U.S. 1, 32 S.Ct. 364, 56 L.Ed. 645 (1912), that decision was short lived.... [In] Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 518, 37 S.Ct. 416, 61 L.Ed. 871 (1917), the Court explicitly overruled A.B. Dick.... [The] Court held that the scope of the grant which may be made to an inventor in a patent, pursuant to the [patent] statute, must be limited to the invention described in the claims of his patent.... Accordingly, it reiterated the rule that the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it. 31 The key question is what, precisely, did the license authorize? In fact the Court distinguished its prior decisions in the General Talking Pictures Corp. cases, 32 in which the Supreme Court dealt with a case where the manufacturer sold patented amplifiers for commercial use, thereby breaching a license that limited the buyer to selling the amplifiers for private and home use. The Court held that exhaustion did not apply because the manufacturer had no authority to sell the amplifiers for commercial use, and the manufacturer could not convey to petitioner what both knew it was not authorized to sell. 33 That distinguished the situation the Supreme Court faced in Quanta, for as we noted above, it found the License Agreement did not restrict Intel s right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-intel parts, but rather broadly permit[ted] Intel to make, use, [or] sell products free of LGE s patent claims. 34 But what of the notice? The notice merely blocked any implied license argument, but did not become a part of the contract with the buyer, or a condition on Intel s right to make an authorized sale. The fairest reading of this decision, then, is that authorization of sales in a license without qualification of that authorization itself, will allow exhaustion to attach. Note, however, that the 31 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, , 128 S.Ct. 2109, , 170 L.Ed. 2d 996, 8 6 U.S.P.Q.2d 1673 (2008). 32 General Talking Pictures Corporation v. Western Electric Co., 304 U.S. 175, 304 U.S. 546, 58 S.Ct. 849, 82 L.Ed. 1273, 37 U.S.P.Q. 357 (1938), aff d on reh g, 305 U.S. 124, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938), and General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938). 33 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 636, 128 S.Ct. 2109, 2121, 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008). The question of notice and knowledge of the downstream purchaser is an interesting one. In General Talking Pictures, American Transformer was a licensee under a license allowing it to sell amplifiers for noncommercial radios but not allowing it to sell amplifiers for use in theaters. American Transformer affixed a notice to the amplifiers noting the restrictions on use. The Supreme Court specifically drew attention to the knowledge of the purchaser of the nature of the restriction, adding That a restrictive license is legal seems clear.... [T]he patentee may grant a license upon any condition the performance for which is reasonably within the reward is the patentee by the grant of the patent is entitled to secure and the practice of granting licenses restricted use is an old one... [and] its legality has never been questioned. General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938). However, the Supreme Court also stated that, on rehearing, it was not considering, what the rights of the parties would have been if the amplifier had been manufactured under the patent and had passed into the hands of the purchaser in the ordinary channels of trade. Nor have we occasion to consider the effect of a licensee s notice which purports to restrict the use of articles lawfully sold. General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938). 34 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 636, 128 S.Ct. 2109, 2121, 170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008)

12 License Agreement authorized Intel to sell components, but did not authorize any subsequent use by the purchasers and, indeed, had a disclaimer as to the combination uses to which the components were put. The Court treated the disclaimer as not qualifying the scope clause itself. Would the outcome be different if the scope clause stated that the only authorized sales under the License Agreement were for non-combination uses? The sales in such cases would be authorized in some senses, but the authorized sales are limited. What is the role of knowledge of the purchasers as to that limitation in the scope clause? As we will Impression Products, Inc. v. Lexmark International, Inc. 35 speaks, in some ways, as to this issue, but we think that several questions remain. Also, importantly, the Supreme Court was quite careful to note the limits of exhaustion: The authorized sale of an article that substantially embodies a patent exhausts the patent holder s rights and prevents the patent holder from invoking patent law to control post sale use of the article. 36 Thus, exhaustion extinguishes infringement actions with respect to post-sale uses, but it does not necessarily affect other claims, such as contractual claims. This too will be important to understanding the Impression Products, Inc. v. Lexmark International, Inc. 37 case. [i] Authorization Restrictions on downstream uses Pre- Impression Products Federal Circuit cases. Before the Supreme Court s decision in Impression Products, Inc. v. Lexmark International, Inc. 38 the Federal Circuit held that a patent owner could control the downstream uses of purchasers and bring patent infringement actions to enforce those restrictions. One strain of these cases required the restrictions be enforceable contracts. In such cases the patent owner could enforce the restriction by contract or infringement claim. The other, more property-oriented rule, tethered the post-sale restrictions to the notion that the owner of the property right had not given authorization to the use as opposed to the sale when such restrictions were in place. Both lines have been repudiated by the reasoning in Impression Products, Inc. v. Lexmark International, Inc. 39 but to understand the contours of and the questions remaining as to patent exhaustion s effect on distribution channels in the wake of Impression Products, we need to examine both lines before we turn to our discussion in of Impression Products itself. [A] Contractual Theory. One line of Federal Circuit Cases prior to Impression Products, Inc. v. Lexmark International, Inc. 40 held that the binding quality of downstream restrictions rooted in contract and 35 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). Section 2:46 of Modern Licensing Law. 36 Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617,638, 128 S.Ct. 2109, 2122,170 L.Ed. 2d 996, 86 U.S.P.Q.2d 1673 (2008) (emphasis added). 37 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 38 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 39 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 40 Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017)

13 that if the otherwise contractually enforceable restrictions were not observed the purchaser infringed. B. Braun Medical, Inc. v. Abbott Laboratories 41 provides an example. The case involved a reflux value covered by a patent held by Braun, which agreed to sell the values to Abbott subject to the following restrictions (which Abbott expressly assented to): We will honor your company s demand that we not use the valve in question for list numbers other than our primary and primary piggyback sets. 42 After many sales, the parties had a falling out. The court noted: As a general matter,... an unconditional sale of a patented device exhausts the patentee s right to control the purchaser s use of the device thereafter.... This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the use rights conferred by the patentee. As a result, express conditions accompanying the sale or license of a patented product are generally upheld.... Such express conditions, however, are contractual in nature and are subject to antitrust, patent, contract, and any other applicable law, as well as equitable considerations such as patent misuse.... Accordingly, conditions that violate some law or equitable consideration are unenforceable. On the other hand, violation of valid conditions entitles the patentee to a remedy for either patent infringement or breach of contract. 43 Now suppose there was no express agreement, but only a label included with the product imposing limitations on uses by downstream buyers. Would such a so-called label license effectively impose limitations on a transferee? The court in Mallinckrodt, Inc. v. Medipart, Inc., 44 dealt with the sale of a medical device accompanied by a single-use only notice on the device. The parties did not dispute that notice of the restriction and reuse had been given. The Federal Circuit held that the restriction on use prevented exhaustion from attaching. The court stated that restrictions on use are judged in terms of the relation of the patentee s right to exclude from all or part of the patent grant. 45 The court referred to a rule of contract law that sale may be 41 B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997) abrogated by Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 42 B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1422, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997) abrogated by Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017).. 43 B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426, 43 U.S.P.Q.2d 1896 (Fed. Cir. 1997) abrogated by Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 44 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 U.S.P.Q.2d 1173 (Fed. Cir. 1992) abrogated by Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017). 45 The district court had relied on a group of cases based on resale price fixing of patented goods, the so-called Bauer trilogy Bauer & Cie v. O Donnell, 229 U.S. 1, 33 S.Ct. 616, 57 L.Ed (1913); Straus v. Victor Talking Mach. Co., 243 U.S. 490, 37 S.Ct. 412, 61 L.Ed. 866 (1917); Boston Store of Chicago v. American Graphophone Co., 246 U.S. 8, 38 S.Ct. 257, 62 L.Ed. 551 (1918) and on a tying case. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 37 S.Ct. 416, 61 L.Ed. 871 (1917). The Federal Circuit treated these cases as merely antitrust cases, even though they set their principles on footings much broader than antitrust

14 conditioned and to cases where label restrictions apparently were enforced. It also referred to the General Talking Pictures case. 46 In that case, American Transformer was a licensee under a license allowing it to sell amplifiers for noncommercial radios but not allowing it to sell amplifiers for use in theaters. American Transformer affixed a notice to the amplifiers noting the restrictions on use, but the Supreme Court, on rehearing, found that the sale in question exceed the scope of the license, which both the licensee and its purchaser knew and that it did not need to address the question of what the rights of the parties would have been if the amplifier had been manufactured under the patent and had passed into the hands of the purchaser in the ordinary channels of trade. Nor have we occasion to consider the effect of a licensee s notice which purports to restrict the use of articles lawfully sold. 47 In Mallinckrodt the Federal Circuit decided the question that the Supreme Court had left open, holding that since the users in Mallinckrodt admitted that they had notice of the restriction, the restriction could be enforced whether the purchaser acquired a device from a licensee or the patentee directly in the ordinary channels of trade. 48 Jazz Photo Corp. v. International Trade Commission 49 took up where Mallinckrodt left off and made it clear that the efficacy of the restriction would depend on contract. Challenging Jazz Photo s reconditioning for reuse of single-use cameras, Fuji argued that the right to repair was limited by the circumstances of sale, pointing to the instructions and warnings printed on the covers of the cameras. Fuji argued that these limitations created a license limited to a single use. The court held that notices and information on the box containing the camera were insufficient as a matter of contract. It held that there was no express contractual undertaking by the purchaser. In those circumstances: a seller s intent, unless embodied in an enforceable contract, does not create a limitation on the right of the purchaser to use, sale, or modify a patented product as long as a reconstruction of the patented combination is avoided.... We do not discern an enforceable restriction on the reuse of these cameras based on the package statements. These statements are law. The Federal Circuit, however, declined to extend them beyond their facts. Mallinckrodt, 976 F.2d at General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938). 47 General Talking Pictures Corporation v. Western Electric Co., 305 U.S. 124, 127, 59 S.Ct. 116, 83 L.Ed. 81, 39 U.S.P.Q. 329 (1938). 48 The Federal Circuit found the distinction between purchasers directly from the patentee versus a licensee to be formalistic. Mallinckrodt, 976 F.2d at 705. The Federal Circuit also drew attention to two cases that made the efficacy of restrictions turn on the particular facts. It compared Munters Corp. v. Burgess Industries Inc., 450 F. Supp. 1195, 194 U.S.P.Q. 146, Trade Cas. (CCH) 61475, 25 Fed. R. Serv. 2d 274 (S.D. N.Y. 1977), adhered to, 201 U.S.P.Q. 756, Trade Cas. (CCH) 62149, 1978 WL 1367 (S.D. N.Y. 1978) (refusing to enforce a license restriction on the goods where manufactured by the patentee, sold to the licensee, and then resold into general channels of trade ) with Chemagro Corp. v. Universal Chemical Co., 244 F. Supp. 486, 146 U.S.P.Q. 466 (E.D. Tex. 1965) (label license effective against a purchaser with notice). 49 Jazz Photo Corp. v. International Trade Com n, 264 F.3d 1094, 59 U.S.P.Q.2d 1907 (Fed. Cir. 2001) abrogated by Impression Products, Inc. v. Lexmark International, Inc., U.S., 137 S.Ct (2017)