Nov 22 2007

First sale limits at risk - they should not be

The Supreme Court has accepted cert in the LG Electronics case.  The issue involves patent exhaustion doctrine.  This is an opportunity for the Court to affirm the right of a patent (or copyright) property owner to control the terms on which its invention or work is provided to the public – by license or sale.  But unless the rights-owner community pitches in, the Court may get it wrong.

The issue is simple – if I own property, should I be able to apportion rights in transactions relating to that property or am I limited to choosing between either selling outright or never providing it to the public or third parties?  The obvious answer is that a property rights owner should have the right to choose the terms on which it makes that property available for others to use.

 

            The LG appeal challenges that concept as it applies to patents. 

 

LG licensed Intel to use a portfolio of patents and to sell products covered by several of the LG patents.  The license provided that Intel sales did not cover buyers’ use of the product in combinations covered by other LG patents.  Intel was required to notify buyers from it that the sale to them did not give them a license to use the products in combinations that controlled by LG patents.  Those notices were part of the Intel-buyer contracts.

 

So it seems simple.

 

            Property owner gave a limited license to Intel.  Intel produced products under that limited license and conveyed them to third parties pursuant to the license and under a contract limiting the scope of the sale transaction.  Transferees went outside that scope.  While transferees are shielded from some infringement claims by exhaustion doctrine, that doctrine applies to authorized unconditional sales; these transactions were not that because there were contractually effective restrictions on the rights transferred.

 

            The Supreme Court has accepted cert on the following issue:

 

Whether the Federal Circuit erred by holding … that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license to petitioners. 

 

The license here did not permit sales by Intel that would enable the purchaser to use the product in combinations that would infringe the licensor’s other patents.

 

            Of course such transactions did not “exhaust” the patent.  They were a contractual method of commercializing patents under license agreements that commercially apportioned rights or permissions.   If I rent my condo in Taos for a specified, limited use, have I exhausted my rights of ownership as to the lessee for any uses it desires to make of the premises?  Of course not.  The Court needs to make this clear.

 

            So what was the argument by the losing party below?  The following is quoted from their brief:

 

Under the patent exhaustion doctrine that this Court has applied for more than 90 years …. an authorized first sale of a patented article exhausts the patent owner's rights in that article, and nullifies any “conditions” that the patent owner has tried to attach to its use or resale. Beginning with its decision in Mallinkrodt v. Medipart, Inc., 976 F.3d 700 (Fed. Cir. 1992), however, the Federal Circuit has steadily eroded the exhaustion doctrine. In this decision the Federal Circuit held that exhaustion is entirely optional, and easily nullified by a “notice” announcing that the patent owner would prefer that it not apply. That is an unprecedented and extremely dangerous expansion of the patent monopoly, in direct conflict with numerous decisions of this Court.

 

Frankly, this misrepresents the Federal Circuit’s actual ruling, prior law, and what the case involves.

 

The basic rule is and has long been that ideas of exhaustion and first sale only apply where there has been an authorized unconditional sale of a product or a copy or an unconditional and unrestricted license.  As the Federal Circuit commented:

 

The theory behind this rule is that in [an unconditional sale], the patentee has bargained for, and received, an amount equal to the full value of the goods.  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."

 

The LG?Intel license expressly excluded granting a license to Intel’s purchasers to combine Intel's parts with other components in ways that would infringe LG’s other patents.  This conditional agreement required Intel to notify customers of the limited scope of what they were purchasing, which it did.  Although Intel was free to sell the products, those sales were required to be conditional, and Intel's customers were expressly prohibited from infringing LG's combination patents.

 

            This is the proper rule. If rights owner chooses to commercialize its invention by apportioning rights or permissions, rather than simply selling product, that choice should be respected.  It is not an effort to circumvent ideas of exhaustion or first sale, but simply a decision to not engage in transactions to which those theories apply.

Written By:John G On November 23, 2007 12:13 PM

Professor Nimmer may be right on this issue, but I think the general proposition about owners' rights may need some qualification.

Intellectual property rights are creations of statute, created for public policy reasons. Inventors get a monopoly by patent on the ability to make and sell their invention for a limited time, even if someone else invents it independently soon after the original invention. In return, inventors can publish their invention, rather than keeping it secret. This benefits the public by encouraging commercialization of innovations and by getting information about them into the public eye, which may inspire further (non-infringing) innovations. But the time limit matters to the balance too.

Likewise the owner of copyright gets a monopoly (originally time limited, though it's hard to know if that's still the case in the US) over reproducing the copyrighted work in various forms, with the idea that the public will benefit from the publication. But those monopoly rights are limited by other public policy goals, such as free speech and criticism, education, etc, giving rise to such carve-outs from copyright as fair use, private study etc.

Owners of the IP may not like these limits to their ability to control the use of their property, but those are the conditions on which the property exists at all. The public - through its legislators - that created the property rights and their limits can change the balance. Congress has done this several times in the past 35 years, usually for the benefit of the owners rather than users, by extending the copyright monopoly far beyond what it was when the creators created the works in question (and thus with no effect on their incentive to create those works), and by refining the content of the monopoly as applied to digital works.

Professor Nimmer does not have the right to do anything he pleases with his (hypothetical?) condo in Taos; he can't run a crack house in it, and he can't simply destroy it (assuming it is, for example, on the second floor of a three-storey building...) Likewise his ability to impose restrictions on or allow freedoms to subsequent users may be limited by law, even though he is an owner.

So it's not a completely simple question of "I am the owner, hear me roar."

Written By:Roger Milgrim On November 23, 2007 1:02 PM

Ray, the petioner's quoted language is evidence that it either is unaware of patent law or, more likely, indifferent to it. A patent confers no "monopoly." A monopoly is created when the Government withdraws an existing right previously available to all. A patent is a swap: tell us about your new advance and if it meets the criteria for patentability we'll give you exclusive rights for a limited period. Surely LG's license terms, which are traditional ones, are wholly within the reasonable exercise of the exclusive rights and do so to a known license, with a known product and not a pass through right in effect granting a quasi-portfolio license to unknown parties for unknown uses.

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