The U.S. Supreme Court decision in Quanta opened the door for exhausting method claims upon the authorized sale of components that substantially embodied them. The Federal Circuit grappled with Quanta’s implications inLifeScan,and determined in Helferich how the licensed sale of a product that embodies some method claims does not necessarily exhaust other method claims that cover complementary products or services. Close on the heels of Helferich, the Federal Circuit decided in JVC Kenwood Corp. v. Nero, Inc. (hereinafter, “Nero II”) whether a software provider is liable for contributory or induced infringement of standard-essential patents. Nero II turned on the related question: are purchasers of licensed, standard-compliant DVD and Blu-ray discs liable as direct infringers if they use the authorized discs in combination with unsanctioned software (assuming such combined use necessarily practices the standard-essential patents)?  Instead of substantively critiquing the finer points of the lower court’s analysis of Nero’s patent exhaustion defense, the panel unanimously vacated that portion of the ruling and affirmed the finding of non-infringement on other grounds. How does one explain the way in whichNero II turned out?    

Replaying Nero I

The case reached the Federal Circuit on appeal from the District Court for the Central District of California’s grant of summary judgment of non-infringement (hereinafter, “Nero I”). In the first instance, JVC had asserted multiple patent that included both method and apparatus claims. Its indirect infringement case against Nero hinged on the theory that purchasers of both the licensed optical discs and Nero’s software would directly infringe JVC’s standard-essential patents whenever those purchasers used any standard, patented functions, such as fast-forwarding, setting regional control, recording, rewriting, etc.    

JVC did not provide evidence of direct infringement specific to any end user, but instead advanced a standards-compliance theory of infringement. Its theory was that (a) because the asserted patent claims were essential to playing, copying, locking, and recording data on an optical disc compliant with the corresponding DVD or Blu-ray standard specification, then (b) Nero’s software must also practice the patents when used with standard-compliant discs to perform those functions.  

Nero moved for summary judgment of non-infringement on two theories—patent exhaustion and express release—each of which foreclosed direct infringement by the end-users of the licensed, standard-compliant discs.  

Conducting the 2-step analysis dictated by Quanta, the district court found that: (i) the licensed DVD and Blu-ray optical discs substantially embody the inventive aspects of the asserted JVC patents (which the DVD6C and One-Blue licensing consortiums had also deemed standards-essential to the corresponding optical disc products); and (ii) the only reasonable and intended use of the licensed DVD and Blu-ray optical discs is to play, copy, and record data in conformance with the DVD and Blu-ray standards specifications.  

Quanta further requires the initial sale be authorized. To that end, the district court divided the types of sales into three potential categories (unlicensed, partially licensed, and fully licensed) and ultimately concluded that Nero had carried its burden showing that all of the discs allegedly used with Nero’s software had been authorized under at least one license. The court further concluded that the licensing scenario served as a complete defense to infringement, reasoning that “[e]nd users should not be faced with the possibility of patent infringement if they purchase and use an authorized product that embodies a patent and is intended for use only to practice the patent.” The district court thus observed that licensees (and their purchasers) could not be direct infringers, thereby dooming JVC’s claims of indirect infringement.  

Moreover, JVC had acknowledged that its express release also provided to the end users—not merely the licensed manufacturers—a complete defense. In light of this express release and, having already determined JVC’s claim for present infringement was barred under the doctrine of patent exhaustion, the district court further held that the doctrine of express release likewise barred JVC’s claim for past infringement. The court having agreed with Nero and granted summary judgment on both grounds, JVC appealed.  

Of note, JVC relied on the standardized disc specifications to show infringement by Nero’s software when used in conjunction with the discs. Ironically, however, that approach ended up cutting the other way, supporting the district court’s finding that the discs and their use by end-users were licensed.

Skipping ahead to Nero II

As the most senior Circuit Judge on the 3-judge panel, Judge Newman had the prerogative of penning the unanimous opinion. Together with Judges Dyk and Reyna, she upheld the grant of summary judgment finding non-infringement, agreeing with the lower court’s conclusion that: “JVC cannot have it both ways—either the Patent is essential and licensed or JVC cannot rely on the standards to show infringement as it has chosen to do.” In a nutshell, since the optical discs comply with the standards, and their use complies with the standards to which JVC alleges its asserted Patents are essential, both the discs and their necessarily infringing use are licensed.   

Curiously, however, the panel decided to transpose the lower court’s primary rationale of patent exhaustion with its secondary, bootstrap argument of express release (on which the district court had spent little time elaborating). After characterizing Nero’s patent exhaustion defense as a mere “alternative” theory, the panel decided to affirm the summary judgment on express release grounds only, vacating the district court’s ruling with respect to patent exhaustion.  

Having approved the grant of summary judgment on the grounds of licensing, the panel could have more easily sidestepped and dispensed with the “alternative” grounds—patent exhaustion—with a simple one-liner explaining that it was unnecessary to decide that issue. It did not do so. Instead, the panel was unable to simply leave intact the lower court’s treatment of exhaustion, even as dicta. What, then, was the motivation to eradicate the district court’s analysis?  

As a preliminary matter, the patent exhaustion section of the Nero II opinion suggests that the Circuit Judges were able to agree on the proper test for exhaustion, but not its application. To keep the decision unanimous, Judge Newman may have been forced to stop short of mapping the facts to the legal elements, punted on evaluating the correctness of the reasoning below, and reached the desired result on a different theory.  

Also noteworthy, LifeScan was one of two Federal Circuit cases cited—in the now apparently superfluous section of the opinion—but merely for an unremarkable point of law. Nonetheless, the decision offers a potential backstory explaining how the instant panel arrived at where it did (and could proceed no further).

Outtakes from LifeScan and Behind-the-Scenes of Nero II

Nero II nearly could have been a replay of LifeScan. As in Nero II, the 3-judge panel in LifeScan included Circuit Judges Dyk and Reyna. Also similar to Nero II, LifeScan was another case where patent exhaustion was invoked as a defense to contributory and induced infringement for supplying perishable, complimentary products for a device sold by the patentee. In LifeScan, the appellate panel was split on whether the authorized first sale of the device—a blood-glucose measuring meter—exhausted method claims covering the use of the device in combination with the test strips that it was designed to receive. Writing the opinion for the panel majority, Judge Dyk held for the accused replacement test strip supplier, concluding that the asserted method claims for using the strips together with the meters were exhausted by the sale of those meters.  

The asserted method claims were directed to a more reliable and accurate way of measuring blood-glucose levels from blood samples and required “measuring an electric current at each working sensor part proportional to the concentration of said substance in the sample liquid; comparing the electric current from each of the working sensor parts to establish a difference parameter; and giving an indication of an error if said difference parameter is greater than a predetermined threshold.” LifeScan’s meter carried out the claims by detecting, measuring, and comparing the electric currents through three corresponding electrodes on the received test strip (i.e., providing two working signals and one reference signal).  

Going through Quanta’s analysis for method claims, because the meter alone could not practice the method without the test strip, the panel majority focused on whether the meter “substantially embodies the patent”—i.e., whether the additional features needed to transform the product into the completed invention are themselves “inventive” or “noninventive.” The panel majority reasoned that (a) because test strips with multiple electrodes were known in the prior art and (b) because the meter was the component that actually carried out the measuring, comparing, and indicating steps, therefore (c) any and all of the inventive aspects of the claim were substantially embodied in the meter. Thus, the sale of the meter, having been authorized by LifeScan, exhausted those method claims. The exhaustion shielded purchasers using the meters from direct infringement and the test-strip supplying defendants from indirect infringement.  

Judge Reyna dissented, disagreeing with the majority’s “substantially embodying” analysis.  He was at odds with Judge Dyk’s framework that mistook the meter as the component that was implementing the inventive features of the claimed method. Judge Reyna’s view was that “the test strips, and not the meters, embody those essential features.” He further criticized the majority’s overemphasis—during its Quanta analysis—on the patentability of the individual component in the mutually complementary combination, rather than the component’s contributionto the ultimately claimed invention.  In other words, he thought Judge Dyk may have missed the forest for the trees.  

To Judge Reyna, the complementary meter was old, existing technology. He observed that any diabetic patient with “a pencil, a pad of paper, and an ammeter” (to measure current—amperage) could determine his or her blood-glucose level” without the assistance of a blood glucose meter.” Basically, without the uniquely designed test strip, the meter was merely a “standard component in the system and only involves the application of common processes” that “does not embody the essential features of its patented method because the steps it performs are common and noninventive.” Thus he concluded that the test strips, rather than the meter, embodied the method claims, and so the meter’s sale would not have exhausted the patents.  

“Fast-forwarding” ahead back to Nero II, Judges Dyk and Reyna would find themselves on the same panel and again deciding whether asserted method claims were substantially embodied in one device such that they were exhausted with respect to its post-sale use with complementary products. Having cited LifeScan in Nero II, Judge Newman was, no doubt, aware of her colleagues’ disagreement in the earlier case.  

Practitioners reading the Nero II opinion might speculate that Judge Newman and her fellow judges were reliving the same debate, with Judge Dyk finding all of the inventive steps embodied in the disc and Judge Reyna finding at least one inventive step in Nero’s software (or vice-versa), thereby coming out on opposite sides of the exhaustion issue. If so, this impasse would explain why Judge Newman would go out of her way to bring into the foreground the express release argument and shelve the central exhaustion question. If so, this route, in her view, may have been preferable to suffering a fractured opinion and further muddling the law in this nuanced area of the doctrine.

End Credits

Nero II, an uncontroversial, reserved opinion, may be a product of Judge Newman’s diplomacy, carefully negotiated with her fellow panelists who may have been dueling over how to apply Quanta to the “undeveloped facts” of Nero I. So, instead of overextending herself in search for an illusory checkmate, she may have simply played a quiet waiting move. On any given turn at the board, there’s the strongest move and the best move, and here, Judge Newman may have opted for the latter.