Guest Post by Professor Amelia Smith Rinehart (University of Utah)

Recently, the Federal Circuit held that the New York Times and others infringed patents claiming methods and systems for delivering content to smartphones.[1] In a related Patently-O essay, Professor Sam Ernst states that the Federal Circuit’s opinion in Helferich is “directly contrary to Supreme Court precedent and represents a fundamental misunderstanding of one of the core purposes of the exhaustion doctrine.”[2] To support his premise, Ernst claims that the Federal Circuit made “a broad and novel pronouncement that patent exhaustion only shields an authorized acquirer from liability, and does not follow the licensed device down the stream of commerce to protect all users of the device for its intended purpose.” [3]

I respectfully disagree. There is nothing broad or novel about the Federal Circuit’s “authorized acquirers” concept. In fact, as the Federal Circuit explains in Helferich, it comports with 150 years of judicial authority examining the patent exhaustion doctrine in a variety of contexts.[4] Likewise, Helferich squares directly with the Supreme Court’s recent exhaustion decisions in Quanta Computer v. LG Electronics[5] and Bowman v. Monsanto Co.[6] More surprising, perhaps, may be the fact that this is so—that Helferich could win infringement suits against New York Times and J.C. Penney based on their provision of content to smartphones that were already licensed by Helferich.[7] Accordingly, the difficulty with Helferich is not that the Federal Circuit stretches the exhaustion doctrine in a new way, but that the doctrine, in its old way, fails to provide an easy way to remove infringement liability in an increasingly complex world of patent assertion.

In his well-reasoned post, Professor Ernst contends that the exhaustion doctrine “has frequently applied to shield from liability persons who are not ‘authorized acquirers’ of the licensed devices,” and looks to both Quanta and the much older Motion Picture Patents v. Universal Manufacturing Co. for support. In my view, neither of these cases provides authority for applying the exhaustion doctrine directly to third parties who have not acquired the sold articles.

Quanta involved a license agreement that authorized the licensee to make, use, and sell the licensed products without restriction. In a separate agreement, the licensee agreed to notify its customers that they did not have a license to combine the licensed products with other non-licensed components. The Supreme Court held that the notice restriction was irrelevant because the licensee had a blanket authorization to make, use, and sell the licensed products. Once made then sold under this first authorization to make, sell, and use, the licensed products could be used by anyone downstream without liability for infringement on the grounds of exhaustion, including those purchasers who had notice of the separate notice restriction.[8] In Quanta, the purchasers of the licensed products—the customers of the licensee, Intel—were authorized acquirers (having acquired title to the products from one authorized to make and sell them unconditionally) shielded from liability when the patent owner sued them for infringement. The Quanta Court did not have to address the question of whether a third party who has not acquired title to a licensed product is shielded from direct liability for its own infringement by an authorized acquirer’s unlimited right to use and sell the patented good obtained via exhaustion.

Motion Picture Patents provides a more nuanced account of the exhaustion doctrine, but still involves authorized acquirers shielded from infringement liability.[9] The patented movie projectors in Motion Picture Patents carried a label notice that restricted the projector owner’s permission to use the projector to use solely with the patent owner’s films. After the patent owner sued a projector owner and a third party film manufacturer for infringement, the Court held that the projector patent rights were not infringed because of exhaustion. The label notice was not enforceable as a matter of patent law because the films were not within the patent rights in question—“to enforce [the label notice] would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law as we have interpreted it.”[10] The projector owner clearly qualified as an authorized acquirer (with an invalid restriction on use) and avoided infringement liability because the authorized projector sale exhausted the patent rights covering those projectors.

Professor Ernst seems to extrapolate from the Motion Picture Patents opinion (which admittedly is unclear on this point) that the third party film manufacturer could not be liable for infringement of the projector patents because it made and sold films for use in the projectors obtained from the patent owner in an authorized sale. In other words, Professor Ernst reads Motion Picture Patents to hold that exhaustion shielded the film manufacturer from liability because otherwise the patent owner could interfere with a projector owner’s use of the machines themselves.[11]

But Motion Picture Patents doesn’t go that far. The questions addressed by the Supreme Court both focus on whether the patent owner can restrict by mere notice a machine’s use by its purchaser or his successors in interest.[12] Later in its opinion, the Supreme Court distinguishes the machine from the materials to be used with it, declaring that “the right of the owner [of the machine] . . . to control by restriction the materials to be used in operating [it] . . . must be a right derived through the general law from the ownership of the property in the machine.”[13] Plainly, the Court applies the exhaustion doctrine to the possessor of the projector, a patented good now in commerce and owned free and clear from the patentee’s right to control the use and sale of the good itself. Therefore, I believe the better view of Motion Picture Patents is that the film manufacturer would’ve been liable, if at all, on a theory of contributory infringement. When the label notices could not be enforced, the sales of the projectors exhausted the projector patent rights as to those machines, and the film manufacturer could produce unpatented film for use in any of the sold machines without contributing to or inducing any infringement by the machine users.

Like the projectors in Motion Picture Patents, goods can travel through many hands downstream from the first authorized acquirer of title to the good. Nothing in Helferich indicates that the Federal Circuit is construing its “authorized acquirer” concept so narrowly as to exclude a good’s future owner (no matter how that downstream party obtained the good) from claiming exhaustion as a defense, should that good’s owner be charged with infringement by use or sale. Rather, the Federal Circuit seems to be unremarkably suggesting that an alleged infringer cannot assert an exhaustion defense unless she has acquired a good from the patent owner (directly or indirectly through someone with authorization to make and sell) that exhausts the claims at issue. Difficult questions may arise as to whether the good was acquired without condition on sale, whether the good’s sale exhausts claims to methods or combinations, whether any post-sale restrictions on the good are enforceable, and so on, but those questions are not at issue in the Helferich appeal.

When Professor Ernst states that “patent exhaustion adheres in the patented device, not in ‘certain persons’ who are authorized to use the device,” he might be conflating the exclusive rights of a patent with the exclusive rights of a purchased good, a conundrum that itself supports the existence of the patent exhaustion doctrine in the first place. Patent exhaustion is a defense to patent infringement. As such, it belongs to juridical persons accused of infringement (people, corporations, etc.), not the good itself.[14] Although we might talk in shorthand about the patented good traveling in commerce unencumbered by patent rights, a patent grants to its owner the right to exclude others (people, corporations, etc.) from infringing the patent. The purchaser of a good holds the rights inherent to the good as a piece of personal property. When the good is patented, these rights overlap. The doctrine of patent exhaustion emerged to reconcile that overlap in favor of the purchaser (and downstream acquirers, too) when it comes to using and selling a patented good acquired from an authorized seller: “one who buys patented articles of manufacture from one authorized to sell them becomes possessed of an absolute property in such articles, unrestricted in time or place.”[15] If the patented good is bought from someone unauthorized, if the transfer of the good’s title is conditional, if the good carries a post-sale restriction, then the purchaser may not be able to avail itself of the exhaustion defense. Thus, it is true that “patent exhaustion removes those legal restrictions [imposed by the patent statute] on certain persons in certain circumstances”[16]

The Federal Circuit makes Helferich look easy (and much less groundbreaking than Professor Ernst suggests) by assuming that Helferich controls separate and distinct patents from an exhaustion standpoint. The court holds that Helferich’s content claims are distinct patentable inventions from its handset claims, and, importantly, the allegedly infringing content providers are distinct infringing entities from the handset owners. This enables the court to affirm that exhaustion does not apply to “multiple related and separately patentable inventions” in this manner, without addressing the possibility offered by Professor Ernst that the exhaustion doctrine’s protection of downstream uses of a purchased good might inure to third parties who practice a claimed invention simply referencing a downstream device.[17]

During the parties’ oral arguments, all three judges asked both sides to consider that more difficult question of whether exhaustion would apply to the third party content providers if the content and handset patents were not separate and distinct. The plaintiffs not surprisingly answered no, that third parties not in possession of the patented good could not benefit from the exhaustion defense. The defendants admitted that no case existed on this point, but that cases like Hewlett Packard and Keurig, Inc. v. Sturm Foods, Inc. held that claims contemplating that an alleged infringer interferes with the use of a patented good would suffice to trigger exhaustion as to that third party.[18] In its opinion, the court confirmed that third party exhaustion was a question of first impression— “[n]either the parties nor we have identified any case from the Supreme Court that has found exhaustion without this common feature [of an authorized acquirer infringing the asserted claims].” Then, distinguishing the Keurig case directly, the court held that an alleged infringer who does not acquire the relevant patented good in an authorized manner cannot claim an exhaustion defense for his own direct infringement.[19]

Professor Ernst concludes that “[a] primary reason why patent exhaustion liberates the patented device from infringement claims is to promote the policy against restraints on alienation.” This notion obviously relates to the restrictions that factored so heavily into the early cases about exhaustion: territorial restrictions, post-sale restrictions, and tying restrictions like the ones in Motion Picture Patents. The holding in Helferich does not, as Professor Ernst urges, “threaten to impose a servitude on devices as they pass down the stream of commerce” because a downstream acquirer of the device can fully avail himself of the defense due to his property rights in the device. Judge Bryson’s walkie-talkie owner can sell his walkie-talkie, use it as an expensive paperweight, or otherwise dispose of it as he sees fit without fear of suit from the patent owner. In contrast, Helferich may continue to bring its infringement claims because these alleged infringers cannot avail themselves of a patent exhaustion doctrine defense. In my view, the Federal Circuit gets it right on the law from Quanta and earlier cases. Indeed, the court recognizes that to hold otherwise would expand the judicial doctrine.[20]

Unfortunately, the exhaustion doctrine presently can’t regulate what is most troubling about Helferich: the patent owner’s licensing practices. Helferich is a patent assertion entity that generates revenue from handset device licensing, making all handset device owners authorized acquirers of its patented goods. Yet, Helferich also intends to generate revenue from content licensing that allows companies like the New York Times, J.C. Penney, CBS, and others to provide content to those same handsets. It cannot do so unless it can threaten these companies with infringement. In this manner, Helferich wields what Justice Clarke in Motion Picture Patents called “a potential power for evil over an industry which must be recognized as an important element in the amusement life of a nation. . .”[21] Like the patent owners in that case, Helferich sells its machines and attempts to prohibit their use with content providers not authorized by Helferich. Unlike the patent owners in that case, Helferich’s content provision claims are independently patentable (or so the Federal Circuit determined based on the limited evidence before it) and, even if they were not, the content providers themselves (who do not use or sell the purchased handset devices) are not subject to the exhaustion doctrine based upon those claims.[22] Confirming the Court’s recent decisions in Quanta and Bowman, the class of “certain persons in certain circumstances” who can avail themselves of the patent exhaustion defense remains bound up in questions of what is used and sold, who bought the things used and sold, and what conditions are placed on that use or sale. None of these relevant limitations are apparent in Helferich.

Nevertheless, Professor Ernst is right to balk at carte blanche enforcement of these patents. The patent exhaustion doctrine fails to eliminate infringement liability for the defendants in Helferich, but the case offers an opportunity for scholars, courts, and other policymakers to reexamine the underlying goals of patenting along with mechanisms within patent law and antitrust law, like the narrowly applied exhaustion doctrine, that may promote or impede those goals in the context of patent assertion entities.[23]

—– notes —–

[1] Helferich Patent Licensing Co. v. New York Times Co. (Fed. Cir. Feb. 10, 2015).

[2] Samuel F. Ernst, The Federal Circuit’s New Authorized Acquirer Restriction on Patent Exhaustion, Patently-O blog, available at https://patentlyo.com/patent/2015/02/authorized-restriction-exhaustion.html.

[3] Id.

[4] Helferich, slip op. at 18.

[5] Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008).

[6]

[7] Helferich, slip op. at 7.

[8] Quanta, 553 U.S. at 638.

[9] Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).

[10] Id.

[11] See Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., Inc., 123 F.3d 1445 (Fed. Cir. 1997). Counsel for the Helferich defendants argued that the concept of interference with use laid out in Hewlett-Packard, a case about printer cartridge refilling, laid the grounds for a third party’s assertion of an exhaustion defense despite not owning the article sold. See Oral Argument, available at http://oralarguments.cafc.uscourts.gov/default.aspx?fl=2014-1196.mp3.

[12] Id. at 508–509.

[13] Id. at 513.

[14] See 35 U.S.C. § 271(a) (2012) (“whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.”) (emphasis added).

[15] Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666 (1895).

[16] Helferich, slip op. at 18.

[17] Helferich, slip op. at 17.

[18] Hewlett-Packard, 123 F.3d at 1455; Keurig, Inc. v. Sturm Foods, Inc., 732 F.3d 1370, 1374 (Fed. Cir. 2013).

[19] See Helferich, slip op. at 21 (“in contrast to Keurig, the present cases involve no assertion that the defendants are inducing or contributing to authorized acquirers’ infringement of the claims asserted against defendants.”)

[20] Id. at 29. Bowman further supports a goods-based view of exhaustion. There, the patented technology could self-replicate, meaning a use of the patented invention also made the patented invention. The Supreme Court held that an authorized sale only exhausted the right to use and sell the patented invention, not the right to make the invention, and so the second generation seed, despite being a product of a use of the first generation seed, infringed the patent when a farmer used it to grow (make) a third generation seed. Bowman, __ U.S. at __.

[21] Motion Picture Patents, 243 U.S. at 514–15.

[22] Notably, the films in Motion Picture Patents were also independently patentable, but the patent had expired before Universal began supplying film to the projector in suit. See Motion Picture Patents Co. v. Universal Film Mfg. Co., 235 F. 398, 399 (2d Cir. 1916) aff’d, 243 U.S. 502 (1917). (“Reissued letters patent No. 12,192 expired subsequent to the execution of the license by the complainant to the Precision Machine Company. Thereupon the Universal Film Manufacturing Company made a film embodying that invention, and sold it to the Universal Film Exchange, who furnished it for use to the [projector owner].”

[23] See also Mark A. Lemley & Douglas A. Melamed, Missing the Forest for the Trolls, 113 Colum. L. Rev. 2117 (suggesting changes to improve the patent system generally, including revising patentability standards, remedies and fee-shifting in patent litigation, and importantly, using antitrust to limit anticompetitive patent dispersion).