Honey I Shrunk the Patent Rights How Implied

Honey, I Shrunk the Patent Rights How Implied Licenses and the Exhaustion Doctrine Limit Patent and Licensing Strategies David Kagan Binder, PLLC Intellectual Property Attorneys dkagan@kaganbinder. com 651 -275 -9804 © David Kagan 2011 -2013

A Harsh Reality Patent Exhaustion Implied License 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? q q q Patent preparation and prosecution Client counseling Opinions Agreements Dispute resolution Implied license and exhaustion

Policies at play Ø Fixing/enforcing contracts fairly Ø Proper patent scope Ø Unjust enrichment Ø Antitrust and unfair trade practices 4

Policies at play q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices Mistakes, ambiguity, gaps Benefit of bargain 4

Policies at play q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices Patent term Overextend claims 4

Policies at play q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices Double recovery by patentee Customer double dips Too much profit 4

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

Met-Coil Just the facts, please. Special corners Duct The Met Coil Products

Met-Coil Just the facts, please. Duct The Met Coil Patents Patented Method Patent on the Equipment A: Shape ducts B: Snap on corners C: Bolt together

Met-Coil Just the facts, please. Duct Equipment patent Patented Method of making duct systems The Met Coil Business Model • • Sell equipment Sell ducts Sell corners Generate fabulous $$$$$$ Selling consumables is key revenue source.

Met-Coil Just the facts, please. Duct Plans foiled! Duct • Customers buy corners from Korners Unlimited. Equipment patent Patented Method of making duct systems Why would Met Coil customers do this?

Met-Coil Epic Patent Battle Erupts • MC: only my corner customers licensed • MC: Korners’ customers directly infringe • MC: Korners induces or contributes to infringement Patented Method A: Shape ducts B: Snap on corners C: Bolt together

Met-Coil Epic Patent Battle Erupts • MC: only my corner customers licensed • MC: Korners’ customers directly infringe • MC: Korners induces or contributes to infringement Patented Method A: Shape ducts B: Snap on corners C: Bolt together Korners defends: Equipment customers have implied license Crazy!

Met-Coil Held: Implied License !!! Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: 1 The item has no non-infringing uses; and 2 The facts plainly implied. indicate that a license should be Patented Method A: Shape ducts B: Snap on corners C: Bolt together

Met-Coil The “plain” facts: • 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

Met-Coil Policies at play in Met Coil q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Met-Coil Amazing impact! S EN IC L D IM IE PL E Patent remnants

Met-Coil The Met-Coil rule is circular. Implied license exists legally if Implied license exists factually

Met-Coil What we learn: • 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) q 17 years have passed q Expands Met Coil q Narrows Met Coil q Impacts business strategies q Impacts patent strategies

Anton-Bauer Just the facts, please (F) Female plate/charger (M) Male plate/battery M+F Combination patented, but M, F individually not patented.

Anton-Bauer More facts, please (F) (M) • • (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.

Anton-Bauer Let’s quickly review Met Coil rule: (F) (M) Patentee’s unrestricted sale of patented equipment carries implied license to use equipment in patented method when: • Patented equipment has no noninfringing uses • Facts plainly indicate license should be implied

Anton-Bauer What’s the new AB/PAG rule? Patentee’s unrestricted sale of patented or (F) unpatented item carries implied license to use item in patented method or patented combination when: (M) • • • Patented item has no noninfringing uses Facts plainly indicate license should be implied Sold item is material to patent

Met-Coil What if. . . Paper weight Sailboat ballast Industrial sculpture Scrap/recyclable Paint and varnish experiments • Door stop • Projectile in neighbor disputes • • • Original Met Coil machine

Met-Coil What if. . . Original Met Coil machine Machine/blender

Met-Coil What if. . . Original Met Coil machine Machine/blender Physically and conceptually separable. . .

Met-Coil What if. . . What if Met Coil had patent protection for the special corners themselves? Implied license. No implied license Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: The item has no non-infringing uses The facts plainly indicate that a license should be implied.

Met-Coil What if. . . What if Met Coil had patent protection for the special corners themselves? Implied license. No implied license q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Met-Coil What if. . . What if Met Coil gave the equipment away and earned revenues from duct and corner sales only? Implied license. No implied license Patentee’s unrestricted sale of patented item carries an implied license to practice a patented method when: The item has no non-infringing uses The facts plainly indicate that a license should be implied.

Met-Coil What if. . . What if Met Coil gave the equipment away and earned revenues from duct and corner sales only? Implied license. No implied license q q Fixing/enforcing contracts fairly Proper patent scope Unjust enrichment Antitrust and unfair trade practices

Met-Coil Would Met-Coil be different if: OPTION A: Equipment license • 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 35

Met-Coil Would Met-Coil be different if: OPTION B: Toll manufacture; then title transfer • 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) 36

Met-Coil Would Met-Coil be different if: OPTION C: Equipment supplier • Met Coil happy being equipment supplier • Accepts that consummables to be obtained from 3 d parties 37

Met-Coil Implied license developments • 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 F 3 d 1348, 86 USPQ 2 d 1513 (Fed. Cir. 2008); Jacobs v. Nintendo of America, Inc. , 370 F 3 d 1097, 71 USPQ 2 d 1055 (Fed. Cir. 2004).

Met-Coil Implied license developments • Implied license extended to continuations having same disclosure as expressly licensed patent. General Protecht Group Inc. v. Leviton Mftg. , 651 F 3 d 1355, 99 USPQ 2 d 1275 (Fed. Cir. 2011).

Met-Coil Implied license developments • Intent is relevant to implied license, but not to exhaustion. Transcore LP v. Electronic Transaction Consultants, 563 F 3 d 1271, 90 USPQ 2 d 1372 (Fed. Cir. 2009).

Met-Coil Implied license developments • 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 F 3 d 1357, 98 USPQ 2 d 1868 (Fed. Cir. 2011).

Met-Coil Implied license developments • Speakers sales triggered implied license to TV’s but not to remote controls. Zenith Electronics Corp. v. PDI Communications Systems Inc. , 522 F 3 d 1348, 86 USPQ 2 d 1513 (Fed. Cir. 2008).

Patent exhaustion is brutal. • Background • Quanta (2008) • New developments 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

Exhaustion background • 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 claims 5

Exhaustion background Univis rule: I’m exhaustion. • Authorized sale • Precursor has one use • Precursor sufficiently embodies essential features of the patent 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 1 Can method claims be exhausted? 2 If yes, what’s the rule?

Just the facts, schematically please. Intel as licensee (LGE is patent owner) Third parties Se mic lls ch rop ips roc and ess ors ff d ar nd a St Quanta Computers Quanta customers stu

Just the facts, schematically please. Special stuff (M and C) Intel as licensee (LG is patent owner) Se mic lls ch rop ips roc and ess ors Third parties ff d ar d n stu a St Quanta Computers Quanta customers Common stuff (X and Y)

Just the facts, schematically please. Special stuff (M and C) Intel as licensee (LG is patent owner) Se mic lls ch rop ips roc and ess ors Third parties ff d ar d n stu a St Quanta Common stuff (X and Y) Computers built from M, C, X and Y Quanta customers 51

Just the facts, schematically please. Special stuff (M and C) Intel as licensee (LG is patent owner) ff d ar d n stu a St Quanta Computers M, C, X, and Y all used to practice LG patented methods when computers are used Se mic lls ch rop ips roc and ess ors Third parties Common stuff (X and Y) Computers built from M, C, X and Y Quanta customers 52

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 1 Yes! Can method claims be exhausted? 2 If yes, what’s the rule? 57

How to exhaust method claims: NEW • 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 method utility” unless used in the patented 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 F 3 d 1328, 79 USPQ 2 d 1813 (Fed. Cir. 2006).

Exhaustion developments 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 F 3 d 1341, 100 USPQ 2 d 1224 (Fed. Cir. 2011); Monsanto Co. v. Scruggs, 459 F 3 d 1328, 79 USPQ 2 d 1813 (Fed. Cir. 2006); Monsanto Co. v. Mc. Farling, 302 F. 3 d 1291, 64 USPQ 2 d 1161 (Fed. Cir. 2002).

Exhaustion developments 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 F 3 d 1271, 90 USPQ 2 d 1372 (Fed. Cir. 2009).

Exhaustion developments 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 F 3 d 1373, 101 USPQ 2 d (Fed. Cir. 2012); Jazz Photo Corp. v. ITC, 264 F 3 d 1094, 59 USPQ 2 d 1907 (Fed. Cir. 2001).

Repair v. Reconstruction You have to know about this if your business involves: • Used equipment competition • Replacement parts • Servicing products

Repair v. Reconstruction • 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? q q q Patent preparation and prosecution Client counseling r u o fix Opinions o t. ed. e. n We pective Agreements pers Dispute resolution Implied license and exhaustion

Does this impact me? q Does my client sell a product? q Is the product used in combination with other products? q Does my client sell equipment? q Does my client compete with used equipment refurbishers? q Does my client sell replacement parts or sell repair services? FOCUS ON THE CLIENT’S CONDUCT

We can deal with this reality Patent Exhaustion Implied License Repair v. Reconstruction 71

Thank you. Boron Potassium 19 K 39. 09 8 Atomic Mass Silver Ag 47 107. 87 A Protons and Neutrons Nitrogen N 7 14. 007 5 B 10. 811 Iodine I 53 126. 90 Neodymium Nd Er 60 68 144. 24 Erbium 167. 26 Intellectual Property Attorneys All the right elements. 72