The Federal Circuit’s recent opinion in Helferich Patent Licensing, LLC v. The New York Times Co., __ F.3d ___ (Feb. 10, 2015) is the latest on patent exhaustion. Although the law in this area will continue to evolve, the opinion in this case provides practical insights for patent owners who are actively licensing their portfolios.
Patent Exhaustion – Basics.
Patent exhaustion is sometimes referred to as the rule against patent “double dipping.” The basic idea is that the patent owner’s rights are “exhausted” by the first authorized sale of a product that “substantially embodies” the patent. So, for example, if Bobby Flay buys a patented sauté pan from the patent owner, then the patent owner can’t sue for patent infringement when Bobby Flay sells the pan to Cat Cora.
Application of the exhaustion doctrine often focuses on a product that was (at least ostensibly) sold by the patent owner or the patent owner’s licensee. For example, patent exhaustion often turns on whether the product “substantially embodies” the patent, and whether there was an “authorized sale” of that product. These were two of the central issues in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), which is the U.S. Supreme Court’s latest opinion on the topic of patent exhaustion.
But the Federal Circuit’s opinion in the Helferich case emphasizes a different aspect of the exhaustion doctrine – the “authorized acquirer.”
The Authorized Acquirer.
In the Helferich case, the patent owner (Helferich) asserted that several digital content providers (the New York Times and others) infringe Helferich’s patents when they deliver content to cell phone handsets in a certain way. The asserted patents include “handset claims” that cover handset operations, and “content claims” that cover content delivery methods. Slip op. at 5-6.
Notably, the asserted patents have been licensed to essentially all existing handset manufacturers, and Helferich has not asserted any claims against the handset users or handset manufacturers in this case. Helferich has asserted only the “content claims” against the content providers.
Because the handsets that receive the digital content were manufactured under a license from Helferich, the content providers raised the defense of patent exhaustion. But the Federal Circuit struck down this defense in a 2-1 panel decision a few weeks ago. The court’s opinion explains that patent exhaustion doesn’t apply here because infringement of the asserted claims does not “require that handset acquirers are practicing” the asserted claims (emphasis added). Slip op. at 19.
Thus, the Federal Circuit’s opinion emphasizes the who (the identity of the infringer) instead of the what (the infringing product). Here’s an excerpt from the court’s analysis, which explains that patent exhaustion applies only to “authorized acquirers” of a product (Slip op. at 18, emphases added, internal quotes removed):
Patent exhaustion removes those legal restrictions on certain persons in certain circumstances: it eliminates the legal restrictions on what authorized acquirers can do with an article embodying or containing an invention whose initial sale (or comparable transfer) the patentee authorized. … Specifically, once there has been an authorized sale of a patented item, that sale confers on the purchaser, or any subsequent owner, the right to use or sell the thing as he sees fit.
The 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— either because they are parties accused of infringement or because they are the ones allegedly committing the direct infringement required by the indirect infringement charged against other parties.
Practical Lessons for Patent Licensing.
With all this in mind, there are a few practical points that patent owners can take from the Helferich case, particularly in the context of crafting a license agreement.
First, if the licensee will be selling licensed products, the patent owner might want to consider specifying who the licensee is authorized to sell licensed products to. In particular, the patent owner should think about who could eventually become an “authorized acquirer” of the licensed products, and consider carving out certain distribution channels or supply chains (which may be separately licensed). For example, the patent owner could specify that the licensee is only authorized to sell licensed products to Internet service providers, oil and gas producers or Iron Chefs.
Second, if the licensed patents include multiple distinct inventions, the patent owner might want to think about whether the licensee should receive a license for all of the inventions, or just a subset of them. In the Helferich case, the licensed patents included “handset claims” and “content claims” that each covered distinct inventions. The court’s opinion made much of the fact that the asserted claims (the “content claims”) were not infringed by “authorized acquirers” of the licensed handsets, and the licensed handsets were covered by separate claims (the “handset claims”).
Finally, patent owners might want to consider explicitly stating their own intentions in the license agreement. In the Helferich case, the court’s opinion notes that Helferich’s license agreements show “painstaking efforts to distinguish the conduct of handset makers and possessors from the conduct of others, such as content providers, and to distinguish claims practiced by the former from claims practiced by the latter.” Slip op. at 9. Although these types of recitals will not ultimately determine whether patent rights are exhausted, they might mitigate the appearance of overreaching when the patent owner later claims that certain rights are not exhausted by the licensee’s sales of licensed products.
In conclusion, when drafting a license agreement, patent owners should think about the possible implications of patent exhaustion. In particular, think about whether the license agreement could unintentionally exhaust patent rights that the patent owner wants to preserve for other market sectors or distribution channels.