EXHAUSTION
terms and conditions [of this agreement], Tessera hereby grants Licensee a ... license to the Tessera Patents ... and to sell ... and/or offer for sale such TCC (Tessera Compliant Chip) Licensed Products.” Each agreement also stated, “Licensee is licensed only to Licensed Products for which Licensee or a third party has satisfied a royalty obligation of Tessera.”
Te mechanics of the business process dictated that there would be a delay between the licensee’s sales and payment of royalties. On appeal, Tessera argued that the ITC improperly found patent exhaustion without an authorised sale, as some licensees were delinquent with their royalty payments. Tessera contended that the sales by delinquent licensees were unauthorised, and should not trigger the doctrine of exhaustion. Federal Circuit was careful to point out that there was nothing in the agreement that explicitly stated that the condition of royalties was directly linked to the authorisation of sale, and therefore found that the initial express authorisation by Tessera was not subsequently transformed into an unauthorised sale based upon the delinquent payment of royalties. While not used in this licensing agreement, this decision strongly implies that explicit limitations to the grant to render unauthorised certain sales are a viable means for patent owners to retain control of downstream use.
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While the Quanta ruling strengthened the doctrine of patent exhaustion, there are still means to retain patent right-based control aſter the first sale of an article. For exhaustion to occur, the sale must be of a product that substantially embodies the patent; the sale must, also, be authorised. Terefore, a clear and unequivocal limitation of the licence grant which makes the sale unauthorised under certain conditions would probably be enforceable. Alternatively, if the product sold does not substantially embody the patent, exhaustion does not occur.
Suggesting valid uses of the product being sold which fall outside the patent scope would, therefore, help avoid exhaustion. Te objective in Tessera was to ensure that the Tessera licence could be enforced by action for infringement in addition to breach of contract. Ensuring that the royalty is paid before the licence grant occurs should accomplish this objective. An explicit conditioning of authorised sale upon royalty payment would ensure exhaustion is avoided until aſter royalties are paid. It appears that once a sale of a product
embodying the patent is authorised (ie, it falls
within the licence grant), the patent rights are exhausted. So effective downstream control must occur by limiting or conditioning the grant, and not by controlling behaviour post- grant. n
Michael Mutter has practised IP law for nearly 30 years and co-chairs the firm’s electronics and IT practice. He has extensive experience in multimedia and image processing, image scanning and analysis, digitising, optical character recognition, control system, sonar, ultrasound imaging, data and image encoding, pattern recognition, radio communications and semiconductors. Mutter also co-chairs the firm’s litigation and dispute resolution practice. He has significant experience of counselling and representing clients in interference proceedings before the USPTO and in opposition proceedings in foreign countries. He is personally involved in the development of the current state of the law of patentability of algorithmic inventions and business methods in the US and in Europe.
Michael K. Mutter is a partner at Birch, Stewart, Kolasch & Birch, LLP. He can be contacted at:
mkm@bskb.com
World Intellectual Property Review March/April 2012
37
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