Misuse and Exhaustion

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Misuse and Exhaustion

• Intro to IP Prof Merges
• 2.5.09

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What can a patentee legitimately do to exercise
control over a technology?

• Licensing restrictions conditions on use of a
  patented item
• Misuse does such a restriction exceed the market
  power appropriate to the patent?
• Exhaustion is such a restriction prevented by
  initial sale of the patented item?

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Defenses Antitrust/Misuse

• Patents confer market power
• Market power can be abused
• When it has been, this may provide a defense for
  an infringer

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Antitrust/Misuse

• Centers on how the patentee deploys the
  technology
• Numerous potential ways to abuse the market power
  conferred by a patent

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Examples

• Use of patents to mask or hide a cartel
• Horizontal abuse
• Use of patents to exert control over dealers or
  customers
• Vertical abuse

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Misuse/Antitrust Counterclaim
Defendant
Plaintiff/Patentee
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Misuse/Antitrust Counterclaim
Defendant
Plaintiff/Patentee
Counterclaim
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Misuse/Antitrust Counterclaim
Defendant
Plaintiff/Patentee
Licensing Agreement
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Misuse/Antitrust Counterclaim
Defendant
Plaintiff/Patentee
Licensing Agreement
Defendant asserts patent is unenforceable due to
anticompetitive licensing agreement
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Typical Counterclaims

• Anticompetitive acquisition of patent
• Walker Process Equipment , Inc . v . Food
  Machinery Chemical Corp., 382 U . S . 172 (1965)
  Handgards, Inc . v . Ethicon, Inc . 743 F . 2d
  1282 (9th Cir . 1984)
• Illegal tie-in
• Morton Salt

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Motion Picture Patents Co.
Projector may only be used with Edison brand
films.
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Holding P. 334

• Patent is limited to film feeding device for
  projectors
• Patentee should not be allowed to extend patent
  to cover film not claimed in the patent
• Injury to the public interest

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Illinois Tool

• Trident, a wholly-owned subsidiary of Illinois
  Tool Works, is a manufacturer of printheads and
  owns U.S. Patent No. 5,343,226 covering the ink
  jet print head.
• Trident also manufactures ink for use with the
  patented printheads.
• Although the ink is not protected by any of
  Tridents patents, their standard license
  agreements grant the right to manufacture, use
  and sell ink jet printing devices to other
  printer manufacturers ONLY when used in
  combination with ink and ink supply systems
  supplied by Trident.

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Misuse/Antitrust Counterclaim
Defendant
Plaintiff/Patentee
Licensing Agreement
Defendant asserts patent is unenforceable due to
anticompetitive licensing agreement
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• Independent Ink also manufactures ink useable in
  Tridents patented printheads. Independent filed
  suit in the Central District of California
  against Trident and Illinois Tool Works alleging,
  among other things, an illegal tying arrangement
  in violation of section 1 of the Sherman Act.
  The district court, however, dismissed the case
  on summary judgment.

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Sherman Act Section One 15 U.S.C. 1

• Every contract, combination in the form of trust
  or otherwise, or conspiracy, in restraint of
  trade or commerce among the several States, or
  with foreign nations, is declared to be illegal.
  Every person who shall make any contract or
  engage in any combination or conspiracy hereby
  declared to be illegal shall be deemed guilty of
  a felony, and, on conviction thereof, shall be
  punished by fine not exceeding 10,000,000 if a
  corporation, or, if any other person, 350,000,
  or by imprisonment not exceeding three years, or
  by both said punishments, in the discretion of
  the court.

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Sherman Act Section One 15 U.S.C. 2

• Every person who shall monopolize, or attempt to
  monopolize, or combine or conspire with any other
  person or persons, to monopolize any part of the
  trade or commerce among the several States, or
  with foreign nations, shall be deemed guilty of a
  felony, and, on conviction thereof, shall be
  punished by fine not exceeding 10,000,000 if a
  corporation, or, if any other person, 350,000,
  or by imprisonment not exceeding three years, or
  by both said punishments, in the discretion of
  the court.

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Theoretical basis

• Leverage theory
• Patents being improperly leveraged by various
  licensing practices
• For example, a tie-in

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Tie-in example

• If you want my patented machine, you must buy
  (unpatented) materials used in the machine

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Morton Salt case
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• Respondent is making use of its patent
  monopoly to restrain competition in the marketing
  of unpatented articles, the salt tablets, for use
  with the patented machines . . .

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Leverage theory

• Leveraging monopoly in machine into (separate)
  market for salt

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Chicago Critique

• No such thing as leverage
• Cannot charge more for Tying Tied product
  bundle than buyers are willing to pay

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More Chicago critique

• Look for more positive explanation of licensing
  practices
• Patentees deserve a monopoly
• How might it be good for the patentee and
  consumers?

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Metering Concept

• Relates back to price discrimination idea charge
  effectively different price for different classes
  of users
• High-value vs. low-value users

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Patent Exhaustion

• To exhaust to run out of, use up
• What is used up? The power of a patent
• When is it used up? When an item covered by the
  patent is sold on the market

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LG Electronics (Patent Owner)
Intel (Licensee)
Computer Cos.
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LG Electronics (Patentee)
Master License (required non-coverage notice to
Intel Customers)
Intel (Licensee)
Specific product license (no customer
restrictions)
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Intel (Licensee)
LGs right to Sue?
Computer Cos.
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LG Electronics (Patentee)
Intel
End Users
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Intel (Licensee)

License?
End Users
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LG Sued End Users Bizcom, Quanta, etc.

• End Users defended by claiming that they were
  protected against suit by virtue of the LG-Intel
  license agreement, and Intels sale of chips to
  them

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District Court

• LG argued that end users were not protected by
  exhaustion, since the chips sold by Intel did not
  completely embody any claims in the asserted
  patents
• District Court disagreed held, sales of chips by
  Intel exhausted LGs rights vis-à-vis end users

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Federal Circuit

• Partial reversal
• No exhaustion LG did not authorize Intel to
  authorize end-users to combine Intel products
  with non-Intel products

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Quanta Computer, Inc. v. LG Electronics, Inc.

• 128 S.Ct. 2109 (2008)
• Held licensee's sale of component computer parts
  that substantially embodied method patents held
  by patentee was authorized by patent holder,
  and had effect of exhausting patent holder's
  patents.

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Supreme Court Holdings

• Method claims are subject to exhaustion
• Embodiments substantially containing claimed
  technology exhaust a patent
• Sales in this case were authorized sales under
  the licensing arrangement in this case so
  patents were exhausted

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128 S.Ct. 2109, 2020

• If a device practices patent A while
  substantially embodying patent B, its
  relationship to patent A does not prevent
  exhaustion of patent B. For example, if the
  Univis lens blanks had been composed of
  shatter-resistant glass under patent A, the
  blanks would nonetheless have substantially
  embodied, and therefore exhausted, patent B for
  the finished lenses. This case is no different.

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Supreme Court Holdings

• Method claims are subject to exhaustion
• Embodiments substantially containing claimed
  technology exhaust a patent
• Sales in this case were authorized sales under
  the licensing arrangement in this case so
  patents were exhausted

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Third holding important for future cases

• We can learn from the LG Intel End User
  arrangement
• Drafting tips

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Basic exhaustion principles

• Exhaustion is triggered only by a sale
  authorized by the patent holder.
• gt 128 S.Ct. 2109, 2121

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Two elements here

• 1 SALE only
• gt Licensing is outside this holding
• gt Creative licensing arrangements are still
  permissible

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• 2 Authorized by the patent holder
• gt Principles of implied licensing come into play

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LG Electronics (Patentee)
Master License (required non-coeverage notice to
Intel Customers)
Intel (Licensee)
Specific product license (no customer
restrictions)
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No restriction on customers use of patented
technology

• The provision requiring notice to Quanta
  appeared only in the Master Agreement, and LGE
  does not suggest that a breach of that agreement
  would constitute a breach of the License
  Agreement. Hence, Intel's authority to sell its
  products embodying the LGE Patents was not
  conditioned on the notice or on Quanta's decision
  to abide by LGE's directions in that notice. --
  128 S.Ct. 2109, 2121-2122

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Quanta strongly suggests that effective
restrictions/not-ice in license agreement might
bind downstream users
Patentee
Licensee
End users
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LG Electronics (Patentee)
Specific product license WITH requirement to
restrict customers to give notice of no license
Intel (Licensee)
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Remedies in licensing agreement

• We note that the authorized nature of the sale
  to Quanta does not necessarily limit LGE's other
  contract rights. LGE's complaint does not include
  a breach-of-contract claim, and we express no
  opinion on whether contract damages might be
  available even though exhaustion operates to
  eliminate patent damages. 128 S.Ct. at 2122

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Important issues post-Quanta

• Contractual remedies for Licensees breach of
  license, including unauthorized infringement by
  Licensees customers

Patentee
Licensee
End users