Multimedia Patent Trust ("MPT") filed a patent infringement action against several defendants, including DirecTV and Vizio, which alleged infringement of multiple patents related to video compression technology. DirecTV and Vizio answered the complaint an alleged affirmative defenses of patent exhaustion and license.
The parties filed cross motions for summary judgment on the issue of exhaustion and license. DirecTV contended that its licensed suppliers made authorized sales pursuant to a 2002 license and a 2009 license and that these authorized sales exhausted MPT's patent rights . MPT argued that even though DirecTV's manufacturers are licensed, the manufacturers' sales of certain products exceeded the scope of the license. In response, DirecTV argued that patent exhaustion applied because DirecTV's licensed suppliers' sales to DirecTV were authorized sales, and authorized sales exhaust a patentee's rights to sue others who subsequently use or sell the same article that allegedly infringes the patents.
The district court began its analysis by quoting the standard from the United States Supreme Court's decision in Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 625 (2008): "The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item. . . . [However, [e]xhaustion is triggered only by a sale authorized by the patent holder." Id. at 636. The district court also noted that a sale that is not authorized or that is in breach of the license agreement does not exhaust the patentees rights, citing to General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 181-82 (1938) (holding that exhaustion did not apply where the manufacturer of the patented article at issue breached the terms of its license by selling the article for commercial use).
The district court next analyzed whether the manufacturer's sales were authorized within the scope of the 2002 license or the 2009 license. "Therefore, in order to succeed on a patent exhaustion defense, DirecTV's manufacturers' sales must have been authorized within the scope of the 2002 License or 2009 License. The Court concludes that DirecTV's MPGE-2-only commercial encoders, commercial decoders, and STBs, as well as H.264 portions of DirecTV's hybrid STBs, hybrid encoders, and H.24-only encoders are licensed under the 2002 License."
Based on this analysis, the district court granted the motion on the exhaustion defense subject to showing that there were appropriate royalty payments to MPT under the 2002 license.
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Patent exhaustion is a powerful defense and should be considered in any case where a defendant is accused of infringement based on a product or a component of a product that is purchased from a supplier. It is important to determine what rights and what agreements the supplier has in place--the right license may exhaust the patent and end the claim of infringement.