Contractual expansion of the scope of patent infringement through field-of-use licensing.

• Author: Patterson, Mark R.

ABSTRACT

Patentees sometimes employ field-of-use licenses, under which they grant the right to use their inventions, but only in specified ways. Field-of-use licensing is often procompetitive, because the ability to provide different licensing terms for different users can encourage broader licensing of inventions. But in recent cases, the Court of Appeals for the Federal Circuit and several district courts have upheld field-of-use licenses that prohibited activities that would otherwise have been permitted by patent law, such as the repair and resale of patented products. By treating any violation of a license agreement as patent infringement, and by upholding license provisions that prohibited previously permitted activities, the courts have allowed patentees to expand the scope of patent infringement liability. This Article describes the dramatic expansion of patent law that has resulted, and it advocates a test that would require a patentee to show that the conduct it challenges would be infringement in the absence of a license before it can seek to make it infringement by license. The Article also briefly compares these effects in patent law to the analogous effects of shrink-wrap licenses and the DMCA in copyright law, and it assesses the potential for similar expansion of patent infringement liability in Europe.

TABLE OF CONTENTS INTRODUCTION I. THE LEGAL FRAMEWORK FOR FIELD-OF-USE LICENSING A. The Supreme Court B. The Federal Circuit C. The IP Guidelines D. Field-of-Use Licensing Rules in Europe II. THE U.S. APPROACH IN THE LOWER COURTS A. Recent Cases 1. Lexmark 2. Ottawa Plant Food 3. The Monsanto Cases B. Shortcomings in the Courts' Contract and Patent Analyses 1. Contract Analysis 2. Patent Analysis III. FIELD-OF-USE LICENSING AND THE SCOPE OF PATENT INFRINGEMENT A. The Scope of Infringement 1. Making and Repair 2. Selling and Reselling 3. Self-Replicating Products B. Restrictions on Downstream Purchasers IV. THE BENEFITS OF USE LICENSING A. Free Riding 1. "Free Riding" in Downstream Markets 2. Patents Related to the Use at Issue B. Price Discrimination and Financing 1. Price Discrimination in Related Markets 2. Price Discrimination Through Contract 3. Exceptional Cases Requiring Patent Protection CONCLUSION INTRODUCTION

Patentees have a variety of options for licensing their patented inventions. One common technique is the field-of-use license, under which the patentee grants the right to use the patented invention, but only in a specified way. Field-of-use licensing is generally seen as procompetitive, because the ability to provide different licensing terms for different users can encourage broader licensing of inventions. (1) For example, the Supreme Court has upheld a field-of-use licensing arrangement under which several patentees licensed third parties to manufacture audio amplifiers using their patented technologies, but only for home use. (2) This arrangement allowed the patentees to reserve the right to manufacture for commercial use, which was apparently more profitable, while still allowing the technologies to be used broadly for home applications. (3) If licensing had required the patentees to share the commercial business as well, they might not have licensed the technologies for home use at all.

But field-of-use licensing need not always be procompetitive. The anticompetitive concerns can be especially great when the patentee imposes restrictions on the ultimate purchasers of the patented products rather than on manufacturing licensees. (4) In recent U.S. cases, patentees have used field-of-use licensing to prevent purchasers of patented products from repairing those products, and to enforce distribution restraints. (5) In these contexts, the use restrictions might not have facilitated broader licensing. Instead, the restrictions appear to have been employed to allow the patentees to price discriminate or to control more fully activities in related markets, neither of which is necessarily procompetitive. (6)

Furthermore, the effects of these recent field-of-use licensing arrangements have not been carefully examined because the courts have accorded them very deferential treatment. (7) The Court of Appeals for the Federal Circuit has established a test that depends in theory on whether the restraint is "within the scope of the patent claims," (8) a criterion that could be useful in assessing the relationship of use restrictions to the patentee's inventive contribution. Subsequent decisions, however, have turned simply on the Federal Circuit's view that any contractual condition on a license makes the exhaustion doctrine inapplicable, (9) and on the court's unwillingness to evaluate the effects of any license restrictions that are not per se antitrust violations. (10)

Moreover, although these restrictions are contractual, their effects are not simply matters of contract law. As a result of the Federal Circuit's view that any violation of a patent license is patent infringement, contract law and patent law coincide here. (11) That is, violation of the terms of a use license by a licensee or purchaser is not only a breach of contract but also patent infringement. This result is especially troubling because the Federal Circuit has permitted patentees to restrict uses that the Supreme Court has said are not patent infringement. (12) As a result, the Federal Circuit's rules allow patentees to use contract law to transform previously permissible conduct into patent infringement. (13) Indeed, the lower courts have applied these rules in such a way as to give patentees carte blanche to expand the scope of infringement. (14)

This issue echoes two similar issues in copyright law. First, several cases have considered contractual clauses in copyright licenses that eliminate the fair use right to reverse engineer the copyrighted software. (15) Using contract in this way, to redefine copyright law, is similar to the application of use licensing to redefine patent law. (16) Indeed, the copyright decisions are arguably less troubling, in that the applicability of the fair use defense has not been entirely clear in the cases that have allowed its elimination. (17)

Second, a somewhat similar concern exists regarding the effect of the Digital Millennium Copyright Act (DMCA) (18) on fair use. (19) The DMCA creates a cause of action against one who circumvents a technological protection measure for a copyrighted work. (20) No general exception exists under the DMCA for circumvention for fair use. (21) Therefore, one who circumvents a technological measure protecting a copyrighted work may be liable under the DMCA, even if the use to which the copyrighted work would be put is a fair use, and thus otherwise permissible under the Copyright Act. This problem has arisen in a number of contexts (22) and is presumably not the result Congress intended when it passed the DMCA. (23) Nevertheless, one could argue that the result is at least one created by statute. In contrast, the amendments of patent law effected by use licensing have been created by the courts and patentees with very little judicial, let alone legislative, analysis. (24)

Although the alteration of copyright law by contract and by the DMCA has received much attention, the similar alteration of patent law has been less noticed. (25) The time is particularly opportune for an assessment of field-of-use licenses because the use of such licenses in the United States has increased, and the proper scope of the licenses is a question likely to reach the Supreme Court soon. Recently, the Federal Circuit upheld one such license (26) and the licensee petitioned for certiorari; the Supreme Court asked for the views of the Solicitor General before denying the application, indicating that the Court has taken an interest in the issue. (27)

This Article argues that patent law limitations should be restored to field-of-use licensing. More specifically, the courts should recognize that the scope of infringement liability is defined in the first instance by patent law, not by contract. Within the limits of infringement liability, contracts can permit or deny users the right to make particular uses of the invention. Outside the scope of infringement liability as it is defined by patent law, however, patentees cannot create new forms of infringement. Hence, this Article argues that in any analysis of the violation of a license the first step--a step that has been neglected by some lower courts--should be to ask whether the challenged conduct is within the scope of patent infringement as defined by patent law. Contrary to some recent decisions, only if the answer to that question is yes does it become relevant whether the conduct was licensed.

The Article proceeds in the next Part by outlining the legal background for field-of-use licensing; this discussion focuses on the law in the United States, but it also describes how the law in Europe is critically different in this area. Part II then describes several recent cases from the lower U.S. courts and examines shortcomings in the analyses of those courts, both with respect to patent law and contract law, again drawing comparisons to the law in Europe. Part III describes the effect of unbridled field-of-use licensing, which is to allow patentees to define by contract the nature of patent infringement without regard to previous limitations on infringement. Finally, Part IV describes alternative means that patentees could use to achieve the procompetitive purposes served by field-of-use licensing.

1. THE LEGAL FRAMEWORK FOR FIELD-OF-USE LICENSING

   The legal framework for field-of-use licensing is somewhat confused. The Supreme Court approved use licensing in one case, (28) but both that case and others suggest limitations on use licensing that the Federal Circuit has eliminated. The first two sections below discuss the use licensing cases from both courts, but because the law is uncertain, it is worth...