The following is a guest post by Professor Samuel F. Ernst of Chapman University’s Dale E. Fowler School of Law. I asked Prof. Ernst to add his insight to the Helferich case and how it relates to his interesting 2014 article on Contracting Around Exhaustion. — Dennis
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by Samuel F. Ernst
Under the “first sale” or “exhaustion” doctrine, when a patent holder authorizes another party to sell a patented item, the patent holder’s right to exclude with respect to that item is exhausted, and the patent holder cannot pursue the licensed device down the stream of commerce to restrict subsequent parties from using the device for its intended purpose. “[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. It passes outside of it, and is no longer under the protection of the Act of Congress.” Bloomer v. McQuewan, 55 U.S. 539, 549 (1852). The Federal Circuit’s panel opinion in Helferich Patent Licensing v. NYTimes and JCPenney (Fed. Cir. 2015) imposes a wholly novel restriction on the exhaustion doctrine by holding that the doctrine only protects “authorized acquirers” of a device. Exhaustion no longer adheres in the licensed device itself as it moves in the stream of commerce. Hence, although Helferich authorized the cell phone industry to sell handsets that practice its patents – indisputably a “first sale” – the exhaustion doctrine did not prevent Helferich from pursuing the New York Times and other content providers for infringement based on the delivery of messages and content to those cell phones. The new “authorized acquirer” requirement directly carves out of the exhaustion doctrine protection for the very third party downstream uses of a licensed device that the doctrine is intended to protect. The panel opinion is directly contrary to Supreme Court precedent and represents a fundamental misunderstanding of one of the core purposes of the exhaustion doctrine. As I point out in my recent article, Patent Exhaustion for the Exhausted Defendant: Should Parties be able to Contract Around Exhaustion in Settling Patent Litigation?, 2014 U. Ill. J.L. Tech. & Pol’y 445 (2014), the exhaustion doctrine promotes the policy against servitudes attaching to goods in commerce in restraint of the free trade and use of those goods. Exhaustion is intended to prevent a situation where a patent holder can “send its machines forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of the patent owner.” Motion Picture Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 518 (1917).
Helferich Patent Licensing LLP owns a portfolio of more than fifty patents related to mobile communications devices and the provision of media and content to such devices. Helferich sold a license to its patents “to what, at least at one time constituted most – we may assume all – of the manufacturers of mobile handsets for sale in the United States,” according to the Federal Circuit. Helferich thereby authorized cell phone manufacturers to make phones that practice its patents and send them out into the stream of commerce. But after brokering these licenses, Helferich sought to pursue the phones down the stream of commerce. It sued the New York Times and other content providers for infringing their patents by alerting cell phone users in a certain fashion that content is available for download on the devices. Helferich’s licenses to cell phone makers contain various carve-outs and exceptions, according to the Federal Circuit, including a recitation of claims that would not be infringed by a handset manufacturer (but are nonetheless licensed), and a disclaimer of any grant of rights to content providers to practice Helferich’s patents. Under current law, it is uncertain whether such provisions are sufficient to “contract around” exhaustion or if they are ineffective “post-sale restrictions.” This is a topic I scrutinize in detail in Patent Exhaustion for the Exhausted Defendant, and which could have been a narrower basis for reversing (or affirming) the district court’s grant of summary judgment. But the Federal Circuit does not address the relevance of these license provisions to the exhaustion doctrine, saying only that there can be no claim of implied license due to these provisions.
Instead, the court bases it reversal of summary judgment on the 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. The court states, “[t]he doctrine has never applied unless, at a minimum, the patentee’s allegations of infringement, whether direct or indirect, entail infringement of the asserted claims by authorized acquirers.” Exhaustion only applies as to these “certain persons,” and does not exhaust the patent holder’s rights in the device itself. Hence, although there was indisputably an authorized first sale of the devices, the New York Times and other defendants were not “authorized acquirers” of the patented devices. Indeed these defendants never acquired the devices at all; they merely sent messages to consumers who happened to be using the devices. For this reason, the court held, the defendants were not relieved from liability by the fact that Helferich had exhausted its patent rights in the licensed cell phones. The court concludes that it will not “expand” the exhaustion doctrine “to hold that authorized sales to persons practicing the handset claims exhaust the patentee’s rights to enforce the asserted content claims against different persons.” Helferich is free to pursue the devices down the stream of commerce.
Contrary to the panel’s pronouncements, the exhaustion doctrine has frequently applied to shield from liability persons who were not “authorized acquirers” of the licensed devices. That is the very purpose of the exhaustion doctrine – to shield licensed devices from infringement claims as they move down the stream of commerce. Hence, in Quanta Computer v. LG Electronics, 553 U.S. 617 (2008), LGE authorized Intel to make and sell microprocessors that practiced LGE’s method claims, but prohibited third parties from purchasing the microprocessor for use in combination with non-Intel parts. LGE sued Quanta for using the licensed microprocessors under the theory that Quanta was not authorized to use the parts in Quanta computers. The Supreme Court held that LGE’s patent rights in the microprocessors were exhausted as to downstream users, whether “authorized” or not, because “[o]n LGE’s theory, although Intel is authorized to sell a completed computer system that practices the LGE Patents, any downstream purchasers of the system could nonetheless be liable for patent infringement.” 553 U.S. at 630. This, said the Court, would be contrary to the longstanding principle that “once lawfully made and sold, there is no restriction on [the licensed product’s] use to be implied for the benefit of the patentee.” Id. (quoting Adams v. Burke, 84 U.S. 453, 457 (1873)) (emphasis in original).
A case very close to the facts of Helferich is Motion Picture Patents v. Universal Film, 243 U.S. 502 (1917). The patentee in that case granted a third party a license to manufacture and sell its patented film projectors, but inserted a provision in the license provision stating that the projectors could only be used to display certain films. When Universal Film supplied to the purchaser of a licensed projector films that were not authorized for use on the machine, Motion Picture Patents sued Universal for patent infringement. The Court held that Motion Picture’s patent rights in the projectors were exhausted by their authorized sale. Motion Picture could not thereafter sue a third party, Universal, for a use of the machine that it believed constituted patent infringement, anymore than Helferich can sue the New York Times for the use of cellular phones in a way that it believes infringes its patents. This is because the cell phones, like the film projectors at issue in Motion Picture Patents, are licensed, and Helferich’s patent rights in those phones are thereby exhausted. Most critically, Universal, like the New York Times, was not an “authorized acquirer” of the patented projectors; like the New York Times, Universal had not acquired the licensed items at all. Patent exhaustion adheres in the patented device, not in “certain persons” who are authorized to use the device.
A primary reason why patent exhaustion liberates the patented device from infringement claims (and not “certain persons”) is to promote the policy against restraints on alienation. In Kirtsaeng v. John Wiley & Sons, 133 S.Ct. 1351 (a copyright case), the Supreme Court recognized that the “[t]he ‘first sale’ doctrine is a common-law doctrine with an impeccable historic pedigree.” The Court grounded the doctrine in “the common law’s refusal to permit restraints on alienation of chattels.” In Lifescan Scotland v. Shasta Technologies (Fed. Cir. 2013), the Federal Circuit extended this analysis to the patent exhaustion context. The court concluded that if patent exhaustion is easily evaded, “consumers’ reasonable expectations regarding their private property would be significantly eroded.” Hence, a rule restricting the protections of patent exhaustion to “authorized acquirers,” rather than grounding it in the licensed device, threatens to impose a servitude on devices as they pass down the stream of commerce. In this case, Helferich licensed the making and selling of cell phones for their intended purposes, including consumers receiving notifications and content from content providers such as the New York Times. Now Helferich seeks to extract an additional royalty from content providers for sending those notifications and content to the licensed cell phones. The Federal Circuit’s new “authorized acquirer” exhaustion restriction thereby improperly allows a patentee to “send its machine forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of such patent owner. The patent law furnishes no warrant for such a practice, and the cost, inconvenience, and annoyance to the public which the opposite conclusion would occasion forbid it.” Motion Pictures Patent Co., 243 U.S. at 518.