honey, i shrunk the patent rights david kagan kagan binder, pllc intellectual property attorneys...

Honey, I Shrunk the Patent Rights

David KaganKagan Binder, PLLC

Intellectual Property Attorneysdkagan@kaganbinder.com

651-275-9804

How Implied Licenses and the Exhaustion Doctrine Limit Patent and

Licensing Strategies

A Harsh Reality

Implied License

Patent Exhaustion

Repair v. Reconstruction

Topics• Does this impact me?

• Implied Licenses

• Exhaustion Doctrine

• Repair v. Reconstruction

• You’re darn right this impacts me!

Does this impact me?

Patent preparation and prosecution

Client counseling Opinions Agreements Dispute resolution Implied license and exhaustion

Policies at play

Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Policies at play Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Mistakes, ambiguity, gaps

Benefit of bargainBenefit of bargain

Policies at play

Patent termPatent term Overextend claimsOverextend claims

Policies at play Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Double recovery by patentee

Too much profitToo much profit

Customer double dipsCustomer double dips

Implied licenses are brutal.

• Met-Coil (1986)• Anton Bauer (2003)• New developments

Met-Coil Systems Corp. v. Korners Unlimited, Inc. (Fed. Cir. 1986)

Patent owners Customers

Classic tension

Just the facts, please.Met-Coil

Special cornersSpecial corners

The Met Coil Products

Patent on the Equipment

Patented Method

A: Shape ducts

B: Snap on corners

C: Bolt together

The Met Coil Patents

The Met Coil Business Model

Equipmentpatent

Patented Method of

making duct systems

• Sell equipment• Sell ducts• Sell corners• Generate fabulous $$$$$$

Selling consumables is key revenue source.

Plans foiled!• Customers buy corners from

Korners Unlimited.

Why would Met Coil customers do this?

Equipmentpatent

Patented Method of

making duct systems

Epic Patent Battle EruptsMet-Coil

Patented Method

A: Shape ducts

B: Snap on corners

C: Bolt together

• MC: only my corner customers licensed

• MC: Korners’ customers directly infringe

• MC: Korners induces or contributes to infringement

Epic Patent Battle EruptsMet-Coil

Korners defends: Equipment customers have implied license

Patented Method

A: Shape ducts

B: Snap on corners

C: Bolt together

• MC: only my corner customers licensed

• MC: Korners’ customers directly infringe

• MC: Korners induces or contributes to infringement

Crazy!

Held: Implied License !!!Met-Coil

Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when:

The item has no non-infringing uses; and

The facts plainly indicate that a license should be implied.

Patented Method

A: Shape ducts

B: Snap on corners

C: Bolt together

The “plain” facts:Met-Coil

• Unrestricted sale of equipment• Equipment has one use• Corners have one use• No contract restrictions• After the fact notice irrelevant• Corners unpatented• Implied: equipment was very expensive

Policies at play in Met CoilMet-Coil

Amazing impact!Met-Coil

IMPLIED LICENSE

Patent remnants

The Met-Coil rule is circular.Met-Coil

Implied license exists legally if

Implied license exists factually

What we learn:Met-Coil

• Triggered by sales

• Patents and business complementary

• Patent key components, consumables, equipment, methods, not just complete systems

Anton-Bauer Inc. v. PAG, Ltd (Fed. Cir. 2003)

17 years have passed Expands Met Coil Narrows Met Coil Impacts business strategies Impacts patent strategies

Just the facts, pleaseAnton-Bauer

(M) Male plate/battery

(F) Female plate/charger

M+F Combination patented, but M, F individually not patented.

More facts, pleaseAnton-Bauer

• (M+F) combination patented• Customers buy F from Anton Bauer• Customers buy M from PAG• Anton Bauer sues PAG for violating

(M+F) patent

Held: Sale of F gave implied license to buy M from anybody and then practice (M+F) patent.

Let’s quickly review Met Coil rule:Anton-Bauer

(M) • Patented equipment has no noninfringing uses

• Facts plainly indicate license should be implied

Patentee’s unrestricted sale of patented equipment carries implied license to use equipment in patented method when:

What’s the new AB/PAG rule?Anton-Bauer

Patentee’s unrestricted sale of patented or unpatented item carries implied license to use item in patented method or patented combination when:

• Patented item has no noninfringing uses• Facts plainly indicate license should be

implied• Sold item is material to patent

What if . . .Met-Coil

Original Met Coil machine

• Paper weight• Sailboat ballast• Industrial sculpture• Scrap/recyclable• Paint and varnish

experiments• Door stop• Projectile in neighbor

disputes

Machine/blender

Physically and conceptually separable . . .

Machine/blender

What if Met Coil had patent protection for the special corners themselves?

Implied license.No implied license

The item has no non-infringing uses

What if Met Coil had patent protection for the special corners themselves?

The item has no non-infringing uses

What if Met Coil gave the equipment away and earned revenues from duct and corner sales only?

Would Met-Coil be different if:Met-Coil

• Met coil licenses the equipment• License to use equipment under method

patent• Royalty based on equipment output• Royalty included in sales price of

components procured from Met Coil• 10% royalty on duct systems when

components obtained from third parties

OPTION A: Equipment license

• Toll manufacturer licensed for $$$ to use equipment to shape ducts and assemble duct systems for Met Coil only

• Met Coil supplies components to be used by toll manufacturer for Met Coil

• Met Coil sells finished, assembled duct systems to the toll manufacturer (title transfer)

OPTION B: Toll manufacture; then title transfer

• Met Coil happy being equipment supplier• Accepts that consummables to be

obtained from 3d parties

OPTION C: Equipment supplier

Implied license developmentsMet-Coil

• Implied licenses can be derived from express licenses (not just sales).

• Proof of no noninfringing uses not required!

• Policy: benefit of bargain.

Zenith Electronics Corp. v. PDI Communications Systems Inc., 522 F3d 1348, 86 USPQ2d 1513 (Fed. Cir. 2008);

Jacobs v. Nintendo of America, Inc., 370 F3d 1097, 71 USPQ2d 1055 (Fed. Cir. 2004).

• Implied license extended to continuations having same disclosure as expressly licensed patent.

General Protecht Group Inc. v. Leviton Mftg., 651 F3d 1355, 99 USPQ2d 1275 (Fed. Cir. 2011).

• Intent is relevant to implied license, but not to exhaustion.

Transcore LP v. Electronic Transaction Consultants, 563 F3d 1271, 90 USPQ2d 1372 (Fed. Cir. 2009).

• Licensee sales can still be “authorized” even if Licensee breached its royalty obligations where right to sell not conditioned on royalty payments.

Tessera Inc. v. ITC, 646 F3d 1357, 98 USPQ2d 1868 (Fed. Cir. 2011).

• Speakers sales triggered implied license to TV’s but not to remote controls.

Zenith Electronics Corp. v. PDI Communications Systems Inc., 522 F3d 1348, 86 USPQ2d 1513 (Fed. Cir. 2008).

Patent exhaustion is brutal.

• Background• Quanta (2008)• New

developments

Man, all that implied license talk made me

exhausted!

Man, all that implied license talk made me

exhausted!

Exhaustion background

• Make, use, sell, offer to sell, import• Exhausted after a patented item is

sold• Making is the exception• Post sale restrictions ineffective and

possibly improper

• Classically, triggered by sale of completed item

• Applies to thing sold, not other items• Univis (US 1942) applied doctrine to

precursors• Did not apply to method claims• Quanta (US 2008) applied doctrine to

other items and method claims5

Univis rule:• Authorized sale• Precursor has one use• Precursor sufficiently

embodies essential features of the patent

I’m exhaustion.

I’m implied license.

Quanta Computer Inc. v. LGE, Inc. (US 2008)

• Bad news: complicated facts

• Good news: simplified facts work.

Key Issues under investigation

Can method claims be exhausted?

If yes, what’s the rule?

Just the facts, schematically please.

Intel as licensee (LGE is patent owner)

Quanta

Third parties

Sells chips and

microprocessorsStandard st

Quanta customers

puters

Intel as licensee (LG is patent owner)

Quanta

Third parties

Quanta customers

putersCommon stuff (X and Y)

Special stuff (M and C)

Sells chips and

Quanta

Third parties

Quanta customers

putersCommon stuff (X and Y)

Computers built from M, C, X and Y

Sells chips and

Quanta

Third parties

Quanta customers

putersM, C, X, and Y all used to practice LG patented

methods when computers are used

Common stuff (X and Y)

Computers built from M, C, X and Y

Sells chips and

Battle erupts, similar to Met Coil and Anton Bauer except exhaustion at issue.

• LGE: Only M and C purchased from Licensee.

• LGE: X and Y purchased from third parties.

• LGE: Method claims infringed unless all M, C, X and Y obtained from LGE (Intel).

Battle erupts, similar to Met Coil and Anton Bauer except exhaustion at issue.

• LGE: Only M and C purchased from Licensee.

• LGE: X and Y purchased from third parties.

• LGE: Method claims infringed unless all M, C, X and Y obtained from LGE (Intel).

Quanta defense: sale of M and C exhausted the method claims. So I can buy

X and Y from anybody I want.

Quanta defense is crazy talk?

• District court: method claims cannot be exhausted (after opinion revised).

• Federal Circuit: method claims cannot be exhausted.

• Even if exhausted, applies only to M&C items sold under patent, not to X and Y items.

Supreme surprise

Method claims can be exhausted or we face parade of evils:

• Exhaustion negated by method claims in every patent. (claim scope policy)

• Patentee could control chain of distribution too much (unjust enrichment policy)

• Precedent supports• Broad definition of exhaustion makes sense

Key Issues under investigation

Can method claims be exhausted?

If yes, what’s the rule?

How to exhaust method claims:

• Authorized sale of product (or equipment);

• Only reasonable use is in the patented method

• The product sold substantially embodies the patented method

There can only be ONE

Only reasonable use is in patented method

“without utility” unless used in the patented method

No alternative use proposed, nor can the court discern one

Univis: Fused lens blanks had no use but to be turned into finished lenses

Quanta: chips and processors have no utility unless connected to buses and memory.

Factors to show “product embodies patent”

Additional components or finishing steps not unique; off the shelf components

No patents protect the extra features needed to complete the combination

All novelty resides in the M&C products sold, not the extra X&Y features added to complete the combination

Patents themselves say the extra features are standard, conventional, and little detail provided further indicating commonness

Extra features incidental to invention

No independent creativity or innovation needed to complete the combination

Products used as is without modification; followed sellers specs.

Exhaustion developments

• Sale in violation of license is not an authorized sale.

Monsanto Co. v. Scruggs, 459 F3d 1328, 79 USPQ2d 1813 (Fed. Cir. 2006).

Second generation seeds grown by buyer from first generation seeds have never been “sold” for purposes of triggering exhaustion.

Sales of first generation of self-replicating product could exhaust patent rights as to second and subsequent generations if the only use of the product was to replicate itself.

Monsanto Co. v. Bowman, 657 F3d 1341, 100 USPQ2d 1224 (Fed. Cir. 2011); Monsanto Co. v. Scruggs, 459 F3d 1328, 79 USPQ2d 1813 (Fed. Cir. 2006); Monsanto Co. v. McFarling, 302 F.3d 1291, 64 USPQ2d 1161 (Fed. Cir. 2002).

Based on language used, a covenant not to sue authorized sales for purposes of the exhaustion doctrine.

Sales authorized by earlier covenant not to sue

exhausted rights in a future patent.

Transcore LP v. Electronic Transaction Consultants, 563 F3d 1271, 90 USPQ2d 1372 (Fed. Cir. 2009).

To invoke exhaustion doctrine, the authorized sale must have occurred under the U.S. Patent at issue. Hence, sale in foreign territory does not trigger exhaustion.

Quanta (2008) did not eliminate the territory requirement that a sale must occur under a U.S. Patent to trigger exhaustion.

Ninestar Technology Co. v. ITC, 667 F3d 1373, 101 USPQ2d (Fed. Cir. 2012); Jazz Photo Corp. v. ITC, 264 F3d 1094, 59 USPQ2d 1907 (Fed. Cir. 2001).

You have to know about this if your business involves:

•Used equipment competition

•Replacement parts

•Servicing products

• System patents protect new equipment, but not equipment or replacement parts or service or consumables

• Component patents key to protect against used equipment and to protect consumables/replacement parts/service business

• Caution: Hewlett Packard case

Be careful when trying to repel implied license and exhaustion.

Avoid business and patent strategies whose foundation is based on anticompetitive conduct or

unfair trade practices.

Doctrines not always evil.

Does this impact me?

Patent preparation and prosecution

Client counseling Opinions Agreements Dispute resolution Implied license and exhaustion

We need to fix our

perspective . . .

Does this impact me? Does my client sell a product? Is the product used in combination

with other products? Does my client sell equipment? Does my client compete with used

equipment refurbishers? Does my client sell replacement

parts or sell repair services?FOCUS ON THE CLIENT’S CONDUCT

We can deal with this reality

Implied License

Patent Exhaustion

Thank you.

K BAg AN

Silver

Atomic Mass

Nitrogen

Protons and Neutrons

Potassium

39.098

10.811

107.87 14.007

IIodine

126.90

NdNeodymium

144.24 ErErbium

167.26

Intellectual Property AttorneysAll the right elements.

honey, i shrunk the patent rights david kagan kagan binder, pllc intellectual property attorneys...

metcoil duct patent

metcoil korners

coil customers

exhaustion slide

metcoil patented method

metcoil systems

reconstruction slide

infringement slide

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