First published in LES Insights
A California court recently held that U.S. patent rights could be exhausted by the sale of patented components outside the United States when such sales were made under a worldwide license to sell and import those components. As such, the patent owner could not assert its U.S. patent rights against an entity who incorporated those components in its products for sale in the U.S.
An authorized sale of a patented product typically exhausts patent rights in that product, preventing a patent owner from using its patent rights to demand additional royalties or enjoin the use of the product. U.S. courts have explained that the rationale for the patent exhaustion doctrine is that in making such a sale, a patent owner has bargained for and received the full value of its patent rights in the product and should not be allowed a double recovery for the same product.
Some U.S. courts have prevented accused infringers from using the patent exhaustion doctrine as a defense to patent infringement in the United States where an authorized licensed sale of the products previously occurred outside the United States rather than inside the United States. But a recent decision by the United States District Court for the Northern District of California found that the exhaustion doctrine could be used as a defense to patent infringement when infringing components of the products were previously sold outside the United States under a world-wide license agreement.
Specifically, the Court found the patent owner's predecessor exhausted the patent rights under two patents when it granted certain foreign entities a nonexclusive, world-wide license to make, have made, use, sell, offer for sale, import, or otherwise dispose of the components that were covered by the patents. According to the Court, the world-wide nature of the license exhausted the U.S. patent rights regardless of where the licensed components were sold. Because the accused infringer had purchased the components from a licensed entity it could use those components in its own products.
Round Rock,1 the patent owner in the case, acquired a patent portfolio for semiconductor memory devices from Micron Technology. Before Micron transferred the patents to Round Rock, Micron granted to Toshiba and its subsidiaries a nonexclusive, nontransferable, royalty-free, world-wide license (without the right to sublicense third parties) to make, have made, use, sell, offer for sale, import, or otherwise dispose of licensed products and to use any methods covered by the Micron patents.
SanDisk, the accused infringer and a manufacturer of flash memory devices, purchased semiconductor memory devices in Japan from Toshiba subsidiaries and incorporated them into SanDisk products. Subsequently, SanDisk brought an action against Round Rock, seeking declaratory relief that its products did not infringe four of the patents Round Rock acquired from Micron. Three of the four patents were subject to the Micron-Toshiba agreement. On the parties' motions for partial summary judgment, the Court found that the patent-exhaustion doctrine barred Round Rock from pursing its infringement counterclaims against SanDisk for two of the three licensed patents.
The Court first briefly explained the history and purpose of the patent-exhaustion doctrine, noting that it operates to prevent a patent holder from continuing to assert its patent rights after it has bargained for and received the full value of the goods by unconditionally selling the patented device. Despite the Micron-Toshiba agreement, Rock Round argued that the U.S. patent rights were not exhausted under the doctrine because the sales from Toshiba to SanDisk occured in Japan. Round Rock relied on two Federal Circuit cases that did not apply the patent-exhaustion doctrine to U.S. sales where the products at issue were first sold outside of the United States. SanDisk, on the other hand, claimed that accepting Round Rock's argument would result in an "end-run" around the patent-exhaustion doctrine, something the Supreme Court has expressly cautioned against.
The Court agreed with SanDisk and noted that where the patent holder has already negotiated and obtained consideration for granting a world-wide license, allowing the patent holder to pursue infringement against a downstream customer would permit precisely the type of double recovery the doctrine seeks to bar. Furthermore, because the products were sold under the authority of a world-wide license agreement, the Federal Circuit cases cited by Round Rock did not apply. In those cases, the patent owners authorized overseas sales but did not authorize importation into the United States. Thus, it could not be said that those patent owners had already received consideration under their U.S. patent rights. In contrast, by the Micron-Toshiba agreement, Micron received consideration for Toshiba's express right to import into the United States products embodying the patented inventions. Thus, the Court concluded, where the title to the patented products transferred—whether in Japan or in the United States—is immaterial to the exhaustion analysis.
The Court next dismissed Round Rock's argument that the particular Toshiba entities selling the products at issue were not "licensees" under the Micron-Toshiba agreement. It was not disputed that the Toshiba subsidiaries that sold the products fell within the language used in the license. According to Round Rock, however, because the Toshiba subsidiaries came into legal existence after the agreement's effective date, and the agreement defined "subsidiaries" using the present tense, the subsidiaries fell outside the scope of the Micron-Toshiba agreement. The Court found that Round Rock presented no legal authority or factual basis for its assertion and declined to read the present-tense language to restrict the Micron-Toshiba agreement to only those Toshiba subsidiaries existing when the agreement was made.
Finally, the Court addressed Round Rock's argument that even if patent exhaustion applied to the products SanDisk purchased from Toshiba, the doctrine did not apply to SanDisk's own products, which incorporated the Toshiba components. The Court rejected Round Rock's arguments for two of the patents in which the Toshiba components fully or substantially embodied the patent claims. Accordingly, the Court denied SanDisk's motion for summary judgment regarding the third patent.
Strategy and Conclusion
While this case does not create an international patent exhaustion doctrine for the United States, it demonstrates that some courts may be persuaded that worldwide licenses can cause U.S. patent rights to be exhausted by an earlier authorized sale of a patented product outside the United States.