Authorized personnel only: the patent exhaustion doctrine after Helferich.

• Author: Schmidt, Jeffrey W.

INTRODUCTION

Imagine you recently purchased the latest smartphone. Then, weeks later, the manufacturer contacts you and alleges that you are infringing hundreds of patents simply by using the phone.

While this seems ridiculous, technically speaking, you probably are an infringer. (1) Fortunately, courts have devised a defense to infringement, called the patent exhaustion doctrine, that comes to the rescue. According to the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., this doctrine "provides that the initial authorized sale of a patented item terminates all patent rights to that item." (2) As a result, once a consumer purchases a smartphone, the patent owners, or its licensees who do the manufacturing, no longer have any rights over the patents in that phone. (3) What about when a third party engages in some activity that, through interaction with your smartphone, infringes method patents that are part of the same licensed patent portfolio as the smartphone patents? Can the third party take advantage of your phone's patent exhaustion to get away with infringing complementary patent claims that you, as the owner of the phone, could not even practice? What if the infringing activity was merely the New York Times sending you text messages alerting you of breaking news, CBS texting you exclusive content related to your favorite TV show, or J.C. Penney sending you text notifications of their latest giveaway and sweepstakes promotions? (4) This is the issue that recently came up in Helferich Patent Licensing, LLC v. New York Times Co. (5) In its controversial holding, the Federal Circuit expressly held that the patent exhaustion doctrine only serves to protect so-called "authorized acquirers" and does not extend to third parties who have not, directly or indirectly, obtained ownership over the patented device. (6) This was after the district court, also citing Supreme Court precedent, arrived at the opposite conclusion. (7) Another major difference between the two courts' holdings was the framework with which they determined what patents and claims are exhausted, and how they are exhausted, in a given device. (8)

This Note will analyze the framework utilized by the Federal Circuit in Helferich to assess whether or not it follows Supreme Court precedent along with the public policies that govern American patent law. Part I provides a brief introduction to the patent exhaustion doctrine and the public policies surrounding the doctrine and patent law in general and discusses important Supreme Court cases that defined the doctrine. Part II discusses Helferich in detail and lays out some of the major differences between the approaches taken by the Federal Circuit and the one taken by the district court. Part III analyzes the framework applied by the Federal Circuit and argues that the Federal Circuit correctly followed Supreme Court precedent when it focused on substantial embodiment in the context of separately patentable inventions and when it set out the express limitation that the patent exhaustion doctrine only applies to authorized acquirers.

1. BACKGROUND ON THE PATENT EXHAUSTION DOCTRINE

   An inventor obtains a patent, has the lawful right to exclude others from making, using, or selling her patented product, (9) but nonetheless decides to sell the product to a consumer. This is no doubt a standard practice and is at the heart of patent law policy. (10) Yet there is uncertainty as to what sort of patent enforcement rights a patent owner can lawfully retain on a product willingly sold to a consumer and thereby released to the public. (11) The patent exhaustion doctrine seeks to achieve a finely tuned balance between rewarding a patentee while also preventing the patentee from controlling an item's post-sale use and demanding multiple royalties from subsequent owners of the item. (12)

   1. An Overview of the Patent Exhaustion Doctrine

      In order to evaluate the metes and bounds of the patent exhaustion doctrine, it is important to understand the basis by which our patent system operates. Article I, Section 8 of the U.S. Constitution provides that "Congress shall have Power ... To promote the Progress of ... useful Arts, by securing for limited Times to ... Inventors the exclusive Right to their respective ... Discoveries." (13) The complete authority to issue U.S. patents was vested in what is today called the United States Patent and Trademark Office (PTO).

      The patent exhaustion doctrine holds that "a single authorized and unconditional sale of a patented article terminates all patent rights to that article." (14) This means that a patentee's right to exclude (15) is terminated. The patentee can no longer exclude or restrict any aspect of the purchaser's use, possession, or resale of the article. (16) Any profit the patentee seeks to make on the patented device must, therefore, come from the initial sale only. (17) The importance of this doctrine is also not new, as it is rooted in more than 150 years of American jurisprudence. (18) The reasoning behind it is supported by both practical (19) and public policy (20) rationales.

      Patent exhaustion is but one of three general ways in which a patent owner can authorize the use of its patent rights. (21) The other two include express licensing and implied licensing. (22) The major difference between a license and a sale, which is what triggers patent exhaustion, is the sale itself. (23) The unrestricted sale acts as a firm trigger for exhaustion. On the other hand, restrictions that accompany licensing transactions are common, often times necessary, and are routinely enforced. (24) After all, a license is not a "sale" but rather a "permission ... to commit some act [or series of acts] that would otherwise be unlawful." (25) So what happens when a patentee incorporates conditions on a license to a manufacturer that seeks to impose restrictions on the ultimate purchaser? The law, as was made clear in Motion Pictures Patents Co. v. Universal Film Manufacturing Co., (26) is that it doesn't matter whether the restrictions were imposed directly by the patentee on the purchaser or if they were imposed through an intermediate licensee--in either case, the post-sale restriction is invalid under the exhaustion doctrine. (27)

      Patent exhaustion may seem like a relatively straightforward concept, but recent technological advances have blurred the lines between not only what constitutes distinct inventions, but also how, and in what embodiments, method patents are ultimately practiced through electronic technologies. (28) While these issues were ultimately addressed in Helferich, the fundamental rules and principles that guided the Federal Circuit's analysis was deeply rooted in earlier Supreme Court cases, as discussed later in this Note. (29)

   2. Public Policy Rationale

      The policy of promoting the advancement of science and technology was undoubtedly the driving force behind American patent law, as the power to do so was expressly given to Congress in the Constitution. (30) Public policy has also been a major driving force behind the termination of patent rights under the patent exhaustion doctrine. (31) Historically, patent exhaustion has served three purposes--(1) to protect consumers from liability for unknowingly infringing patents simply by using the product, (2) to prevent post-sale restrictions on licensed products, and (3) to ensure patentees are not over-or under-compensated. (32)

      The first two purposes are intended to protect the purchaser and any subsequent owner of the patented article from liability or restrictions that limit their freedom to use the article as they wish. (33) Without the first two protections, commerce would be detrimentally affected. After all, encouraging commerce is desirable and the ability for a patentee to sue a purchaser for infringement immediately after the sale would ultimately discourage commerce or at the very least significantly increase transaction costs. (34) As discussed below, (35) the recent Supreme Court case, Quanta Computer, Inc. v. LG Electronics, Inc., is said to support this purpose of the patent exhaustion doctrine by "providing greater certainty" in protecting consumers and other downstream players as an article passes down the chain of commerce. (36)

      The public policy behind preventing post-sale restrictions has also been around since the early cases of the exhaustion doctrine. In Motion Pictures Patents Co. v. Universal Film Manufacturing Co., the Supreme Court identified a post-sale restriction on a patented film projector as giving the patentee "a potential power for evil over an industry" and therefore held the restriction to be invalid since "it would be gravely injurious to [the] public interest." (37) An alternative argument against post-sale restrictions is that besides conflicting with patent exhaustion policy, it also conflicts with policies against restraints on alienation. (38) On the other hand, while restraints blindly imposed on any subsequent acquirer of a patented product, enforceable through infringement liability, are invalid, contract-based post-sale restrictions entered into between an acquirer and an authorized seller may be enforceable in certain circumstances. (39) In any case, the first unrestricted sale of a patented article exhausts all patent infringement remedies that might result from an alleged breach of a post-sale restriction while breach of contract remedies may remain, (40) assuming the post-sale restriction was part of a contract between buyer and seller. The ability to enforce certain contract-based post-sale restrictions is likely the result of courts finding that the public policies favoring the freedom to contract outweigh the public policies against all post-sale restrictions. (41) After all, a reason for preventing post-sale restrictions in patented articles--ensuring the patentee receives "but one royalty" (42)--would not be an issue when the buyer and seller...