In a decision concerning infringement of a combination (system) patent, the Dusseldorf District Court had to deal with the questions of whether and, if yes, under which circumstances the patent rights with respect to a patented device can be exhausted if only components of that device have been put on the market by, or with the consent of, the patent owner. Although the court rejected the defense of exhaustion of patent rights, in the case at hand, it indicated that the sale of a component might lead to an exhaustion of patent rights with respect to a device comprising that component if the component substantially embodies the patented invention.
The plaintiff is the owner of a patent whose independent system claim is directed to a data memory system having two components, a data memory and a memory controller. The defendant distributes servers in Germany having standardized memory systems with data memories provided by one supplier, and memory controllers contained in processors provided by another supplier. After the court found that the patent-in-suit was essential for the standard implemented by the memory systems in the attacked servers, and that therefore, the attacked servers infringed the patent-in-suit, it had to deal with the defenses based on the doctrine of exhaustion and on implied consent.
The defendant claimed that its supplier of the data memory had a cross-license to the plaintiff’s patent portfolio. However, this crosslicense was limited to patents on “semiconductor devices”, which were defined in the license agreement as being single chip devices. The defendant claimed that its supplier of the memory controller also had a cross-license to the patent portfolio of the plaintiff. This license was limited to “processors”.
The court found that the data memories provided by the data memory supplier were “semiconductor devices” and therefore covered by the first cross-license agreement. Furthermore, the processors supplied by the memory controller supplier were found to be covered by the second cross-license agreement. However, the “memory system” claimed in the patent-in-suit was neither a “semiconductor device” nor a “processor” and therefore not encompassed by one of the two cross-license agreements. In other words, the suppliers of the two components of the patented memory system may have had a license to the respective components, but they had no license to the (system) patent-in-suit.
Under established German case law, in principle, exhaustion of patent rights only occurs with respect to a specific product falling under the patent-in-suit. The patent rights with respect to this specific product are exhausted if this specific product has been put on the market by, or with the consent of, the patent owner in a member state of the European Union (EU) or the European Economic Area (EEA). Applying this principle to the case at hand, the court outlined that, generally, the patent rights to the attacked memory system could not be exhausted by the sales of its two components: First of all, although the components might have been put on the market with the consent of the plaintiff, the attacked memory system has not been put on the market with the consent of the plaintiff because there was no license to the system claimed in the patent-in-suit. Second, the components sold by the suppliers did not make use of the teaching of the patent, but exhaustion only applies if the product put on the market falls under the patent. And even in this case, exhaustion only limits the patent rights related to this specific product.
The court then turned to the question of whether there could be circumstances under which the patent rights are exhausted even if only components of the patented system have been put on the market by, or with the consent of, the patent owner. This question has not yet been directly addressed by the case law in Germany. In the legal literature, it has been advocated by some that the German courts should adopt the opinion of the US Supreme Court in Quanta Computer, Inc v LG Electronics, Inc, 553 US 617 (2008), and extend the doctrine of exhaustion to cases where the component put on the market substantially embodies the entire patented invention or where the component is an essential element of the patented invention and can reasonably be used only for realizing the patented system. The Dusseldorf District Court explained that the rationale for such an “extended exhaustion doctrine” could only be to prevent that the patent owner enjoys the advantages of the patent more than once.
First, such a danger of double-charging of license fees on different stages of the value creation chain and, thus, a rationale for an “extended exhaustion doctrine” might exist if, in one and the same patent, there is a claim to the overall device and a claim to an individual component of the overall device. This situation is frequently found in the high tech field, where there may be, e.g., a claim to a chip carrying out the invention and a claim to a computer or a mobile device comprising that chip. The court outlined that the scenario in the case at hand is different, since the patent-in-suit only had a claim to the data memory system but not to one of its components. Thus, in the case at hand, it could be left open whether an “extended exhaustion doctrine” might be applied in the aforesaid scenarios.
Second, a danger of double-charging and, thus, a rationale for an “extended exhaustion doctrine” might exist if the overall device and its individual components are protected by different patents. This was the situation in the case at hand. However, the court held that, generally, there was no reason why the sale of a component protected by one patent should lead to the exhaustion of the rights conferred to by a different patent which is directed to an overall device comprising that component. Thus, the court refused to apply an “extended exhaustion doctrine” in the case at hand. Nevertheless, the court explicitly left open whether this might be different where the inventive concept of the two patents is the same and is substantially embodied in the component – but this was not the situation of the case at hand.
Finally, the court held that even if it was true that, as was claimed by the defendant, the data memories and the memory controllers at issue could reasonably only be used for building the patented memory system, the explicit limitation of the suppliers’ licenses to components prevented that an implied consent to use the system claim of the patent-in-suit could be found. In the case at hand, the component suppliers had accepted the risk that their customers needed to ask for another license for using the entire system claim. Again, the court expressly noted that the result may be different where the patent owner himself sells the components, or the component suppliers have a license also to the system patent.
Although the court rejected the defense of exhaustion of rights, in the case at hand, it indicated that the sale of a component might lead to the exhaustion of the patent rights with respect to a system comprising that component if the component substantially embodies the patented invention. On the other hand, the court also stated that where the components supplied by a supplier having a component license could only be used for building a patented system, an implied license of the recipient of the components to build the patented system cannot be assumed if the component supplier does not have a license to build that system.
As long as the question of exhaustion by component sales has not been clearly answered by case law, component suppliers are well advised to include a clause in the license agreement which confers to their customers the right to build the system for which the component is intended. At least, the agreement should provide them with the right to supply unlicensed customers. Otherwise they run the risk to not be able to sell the component without committing indirect patent infringement.
System manufacturers should not blindly rely on the license obtained by their component supplier, but verify whether that license expressly provides the recipient of the component with the right to build the system. If not, they should consider seeking a license under the system patent themselves.
Finally, patent drafters should include in the patent application not only a claim to the component embodying the invention, but also a claim to the systems comprising the component. There remains a fair chance that the patent owner can then ask for a license fee from both, the component suppliers and the system suppliers.