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Yina Dong: A Patent Exhaustion Exposition

Stanford Technology Law Review

NOTE A Patent Exhaustion Exposition: Situating Quanta v. LGE in the Context of Supreme Court Jurisprudence

YINA DONG

CITE AS: 2010 STAN. TECH. L. REV. N2

http://stlr.stanford.edu/pdf/dong-a-patent-exhaustion-exposition.pdf ABSTRACT The Supreme Court decided Quanta v. LGE on June 9, 2008, marking the first time the Court had addressed the topic of patent exhaustion in sixty-six years. This paper provides an in-depth analysis of the law of patent exhaustion and analyzes the holding in Quanta in the context of past Supreme Court jurisprudence. In determining when a patent may be exhausted by the sale of a component embodying that patent, Quanta merely followed the test first enunciated by the Court decades ago. Although the Supreme Court in Quanta did determine for the first time that process patents can be exhausted, that conclusion also followed directly from the test for components. This paper also applies an in-depth analysis of Supreme Court jurisprudence to elucidate questions that Quanta left wide open--to what extent a patent owner can contract around the principles of exhaustion, and what types of remedies are available to those patent owners. The prior case law shows that license restrictions that are within the scope of patent rights have always been allowed. License restrictions that are not within the scope of patent rights, however, are considered patent misuse; attempts to contract around exhaustion through these impermissible restrictions are ineffective, and patent exhaustion applies. Finally, this paper argues that the distinction between restrictions on sale and restrictions on use is likely untenable, and it proposes a rule to determine whether remedies are available in patent law, contract law, or neither.

2010, Yina Dong, Candidate for J.D., Stanford Law School, 2010; B.S. Bioengineering, University of California, San Diego, 2007. The author would like to thank Professor Mark Lemley of Stanford Law School and Nader Mousavi of WilmerHale for their thoughtful advice and comments.

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Yina Dong: A Patent Exhaustion Exposition

TABLE OF CONTENTS I. Introduction....................................................................................................................................................... 3 II. Patents Can Be Exhausted By Components .............................................................................................. 3 A. Case Law...................................................................................................................................................... 4 1. Univis Lens ................................................................................................................................................ 4 2. Cyrix .......................................................................................................................................................... 4 3. Quanta ....................................................................................................................................................... 5 B. Notable Features ........................................................................................................................................ 5 III. Process Patents Can Be Exhausted ............................................................................................................ 7 A. Univis Lens .................................................................................................................................................... 8 B. Ethyl Gasoline................................................................................................................................................ 8 IV. Contracting Around The Rules Of Exhaustion ....................................................................................... 9 A. License Restrictions Within the Scope of Patent Rights Have Always Been Allowed .................10 1. Bloomer ....................................................................................................................................................10 2. Mitchell ....................................................................................................................................................11 3. Adams .....................................................................................................................................................11 4. Keeler ........................................................................................................................................................12 5. General Talking Pictures ..........................................................................................................................12 B. License Restrictions Not Within the Scope of Patent Rights Are Prohibited as Patent Misuse .13 1. A.B. Dick................................................................................................................................................13 2. Bauer & Cie ............................................................................................................................................14 3. Motion Picture Patents..............................................................................................................................14 4. Ethyl Gasoline..........................................................................................................................................15 5. Univis Lens ..............................................................................................................................................15 C. Is There a Difference Between Restrictions on Sale and Restrictions on Post-Sale Use? ...........16 1. Mallinckrodt.............................................................................................................................................17 2. Lexmark ..................................................................................................................................................18 D. How Does Quanta Fit into This Analysis?..........................................................................................18 E. What Remedies Are Available? ..............................................................................................................19 1. Limitations on License Scope Versus Covenants ...........................................................................20 2. Restrictions on Sale Versus Restrictions on Use.............................................................................21 F. Covenants Not to Sue Do Not Succeed in Contracting Around Exhaustion................................22 V. Conclusion......................................................................................................................................................23 Appendix A .........................................................................................................................................................24

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Yina Dong: A Patent Exhaustion Exposition

I. INTRODUCTION ¶1 In 2008, the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc.,1 spoke on the topic of patent exhaustion for the first time since United States v. Univis Lens Co.2 in 1942: "The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item."3 Patent exhaustion, also known as the "first-sale doctrine," requires a sale, either from a patent owner to the purchaser or from a licensee to a purchaser.4 If the sale of the patented item is authorized, then the patent owner gives up her statutory rights of exclusion with respect to that item. This paper explains the current state of the law on patent exhaustion and aims to analyze the holding in Quanta in the context of past case law and Supreme Court jurisprudence. Part II discusses the test for determining when a component can exhaust a related patent, a test which Quanta borrowed directly from Univis Lens. Part III explores Quantas holding that process patents, in addition to product patents, can also be exhausted. Finally, Part IV endeavors to answer questions that Quanta left wide open--to what extent a patent owner can contract around the principles of exhaustion, and what types of remedies are available. Because patent exhaustion turns to a large extent on the specific facts of each case, Appendix A provides a graphical representation of the relationship between the parties in each of the major cases discussed. This paper does not address patented products that are able to make new copies of themselves, such as the seeds at issue in the Monsanto line of cases,5 nor does it address issues of international patent exhaustion, such as those raised in Jazz Photo Corp. v. ITC.6 II. PATENTS CAN BE EXHAUSTED BY COMPONENTS ¶3 Quanta reinforced the rule from Univis Lens that a component7 that embodies a patent can trigger exhaustion if it satisfies a two-prong test. First, the components "only reasonable and intended use [must be] to practice the patent,"8 such that it has "no reasonable noninfringing use."9 Second, the component must "embod[y] essential features of [the] patented invention,"10 by "includ[ing] all the inventive aspects" 11 of the patented invention. To understand this test, it is useful to explain the facts of two cases that elucidate the reasoning behind this application of patent exhaustion. This is

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1 Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 128 S. Ct. 2109 (2008). As of the date of publication of this paper, the pagination for the U.S. Reports edition of the case had not been released. All subsequent citations to Quanta refer to the Supreme Court Reporter. 2 United States v. Univis Lens Co., 316 U.S. 241 (1942). 3 Quanta, 128 S. Ct. at 2115. 4 If a licensee is authorized to sell, then the licensee acts as the patent owner for purposes of the doctrine; there should be no distinction "whether the purchaser acquired the [item] from a manufacturing licensee or from a manufacturing patentee"--that would be "formalistic line drawing." Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 705 (Fed. Cir. 1992) (quoting Contl T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 57-59 (1977)). 5 In the Monsanto line of cases, buyers purchased original seeds, which grew into plants. The plants then produced secondgeneration seeds. It is unclear whether patent exhaustion should apply to the second generation of seeds, since they were never sold. In McFarling, the Federal Circuit held that there was no first sale to implicate the doctrine of patent exhaustion. Monsanto Co. v. McFarling, 302 F.3d 1291, 1299 (Fed. Cir. 2002). The Supreme Court has since denied certiorari. Monsanto Co. v. McFarling, 488 F.3d 973 (Fed. Cir. 2007), cert. denied, 128 S. Ct. 871 (2008). 6 Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001). 7 As used in this paper, the word "component" refers to any item that does not fully satisfy every element of a given patent claim. Thus, the word encompasses many items that would not be considered "components" in common parlance--for example, a lens blank might not be considered by many to be a component of a finished lens. 8 Quanta, 128 S. Ct. at 2119. 9 Id. at 2122. 10 Id. at 2119 (quoting United States v. Univis Lens Co., 316 U.S. 241, 251 (1942)). 11 Id. at 2122.

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Yina Dong: A Patent Exhaustion Exposition especially relevant since the Supreme Court based so much of its Quanta opinion on the analysis in Univis Lens and did not discuss Cyrix Corp. v. Intel Corp.,12 which was merely a district court ruling, but had a fact pattern nearly identical to that of Quanta. After explaining the case law, this paper will discuss some of the more notable features of this test. A. Case Law 1. Univis Lens ¶4 In Univis Lens,13 Univis Corporation granted Univis Lens Company a license to make lens blanks for $0.50 each,14 and to sell those lens blanks at $4.00 to licensed finishing retailers and $3.25 to licensed wholesalers. Under the first option, the finishing retailers would grind and polish the lens blanks into finished lenses, which they would sell directly to customers at a set price of $16. Under the second option, wholesalers would grind and polish the lens blanks into finished lenses, which they would sell at a set price of $7 to licensed prescription retailers, who then resold to customers at a set price of $16.15 All of these prices were set by the Univis Corporation through its multi-tiered licensing scheme. The lens blanks were covered by five patents on methods of manufacturing lens blanks. The finished lenses were separately covered by eight product patents. The district court had specifically found, and the Supreme Court did not dispute, that those patents only covered lenses in a finished form.16 However, the Supreme Court found that when the Lens Company sold the lens blanks to wholesalers and finishing retailers, those lens blanks exhausted the eight product patents. Therefore, only the Corporations license to the Lens Company was within its patent rights; the Corporations attempt to license the finishing retailers, wholesalers, and prescription retailers to fix prices was an antitrust violation. The lens blanks passed the exhaustion test for components. Under the reasonable and intended use prong, "it is plain that . . . the only use to which [the lens blank] could be put and the only object of the sale is to enable the [finisher] to grind and polish it for use as a lens by the prospective wearer."17 As for the essential features prong, the Court reiterated that "each blank . . . embodies essential features of the patented device and is without utility until it is ground and polished as the finished lens of the patent."18 The Court emphasized that "merely because the licensee takes the final step . . . it does not follow that the patentee can control the price at which the finished lens is sold."19 2. Cyrix ¶7 In the district court case of Cyrix, Intel entered into cross-licenses with SGS-Thomson (ST) and Texas Instruments (TI). Under the cross-license, ST and TI made microprocessors--which were covered by one of the claims in an Intel patent under the cross-license--for Cyrix. Cyrix combined these microprocessors with external memory; this combination then infringed different claims of the same Intel patent. When Intel sued Cyrix for patent infringement, the Eastern District of Texas

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Cyrix Corp. v. Intel Corp., 846 F. Supp. 522 (E.D. Tex. 1994). The facts in this paragraph come from United States v. Univis Lens Co., 316 U.S. 241 (1942). 14 The Supreme Court in Quanta misread the facts of Univis Lens and thought that "Univis Lens Company, the holder of patents on eyeglass lenses, licensed a purchaser to manufacture lens blanks," Quanta, 128 S. Ct. at 2116. In fact, the Univis Corporation licensed the Univis Lens Company to manufacture lens blanks. The Lens Company was not a purchaser, but a licensee. Univis Lens, 316 U.S. at 243. Fortunately, this misreading of the facts does not change the Courts analysis or reasoning. However, as this paper will show, this was not the only time the Quanta Court misread or misinterpreted a case. 15 Univis Lens, 316 U.S. at 245. 16 Id. at 247 (referring to United States v. Univis Lens Co., 41 F. Supp. 258, 262-64 (S.D.N.Y. 1941)). 17 Id. at 249. 18 Id. 19 Id.

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Yina Dong: A Patent Exhaustion Exposition found that the sale of the microprocessors exhausted the Intel patent. The Court likened the case to Univis Lens: the combination claims were exhausted because the microprocessors "cannot be used for any purpose without external memory. . . . Cyrixs microprocessors, although complete in and of themselves, are unfinished in the sense that they need to be combined with external memory to be used. Cyrixs microprocessors thus are like the lens blanks" of Univis Lens.20 3. Quanta ¶8 In Quanta, in a twist on the facts of Cyrix, Intel entered into a cross-license with LG Electronics (LGE). This time, under the cross-license, Intel made microprocessors--which were covered by a number of LGE patents under the cross-license--for Quanta. Quanta combined these microprocessors with external memory and buses; this combination then infringed three different patents under the cross-license. The Federal Circuit held that there was no exhaustion in this case, and oddly enough, failed to mention either Univis Lens or Cyrix--which the Federal Circuit had affirmed--and failed to make any mention of the "reasonable and intended use" and "essential features" test in its opinion.21 The Supreme Court correctly overturned the Federal Circuit and, following Univis Lens, found that the sale of the microprocessors did exhaust the three LGE system and method patents. Under the reasonable and intended use prong, "[a] microprocessor or chipset cannot function until it is connected to buses and memory. And here, as in Univis, the only apparent object of Intels sales to Quanta was to permit Quanta to incorporate the Intel Products into computers that would practice the patents."22 As for the essential features prong: [T]he only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the [microprocessors]. . . . The [microprocessors] were specifically designed to function only when memory or buses are attached; Quanta was not required to make any creative or inventive decision when it added those parts. . . . . . . [T]he final step to practice the patent is common and noninventive . . . . The [microprocessors] embody the essential features of the LGE Patents because they carry out all the inventive processes when combined, according to their design, with standard components.23 B. Notable Features ¶10 Quanta reinforced the implication in Univis Lens that exhaustion is not limited to a product as sold. Rather, under what James Beard refers to as "simultaneous exhaustion," any related patent "is exhausted so long as [the component] substantially embodies the core inventive qualities of the claimed elements and merely requires the addition of common components or the performance of simple processes."24 What is particularly unique about this test of patent exhaustion for components is that patent law has repeatedly rejected an "essential element" or "heart of the invention" test.25

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Cyrix Corp. v. Intel Corp., 846 F. Supp. 522, 540 (E.D. Tex. 1994). LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1369-70 (Fed. Cir. 2006), overruled by Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109 (2008). 22 Quanta, 128 S. Ct. at 2119. 23 Id. at 2120. 24 James W. Beard, The Limits of Licensing: Quanta v. LGE and the New Doctrine of Simultaneous Exhaustion, 2008 UCLA J.L. & TECH. 3, at 27 (2008). 25 Both the Federal Circuit and Supreme Court have stated that "there is no legally recognizable or protected ,,essential element, ,,gist or ,,heart of the invention in a combination patent." Allen Engg Corp. v. Bartell Indus., Inc., 299 F.3d 1336, 1345 (Fed. Cir. 2002) (quoting Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336, 345 (1961)). This is true also of process patents. See W.L. Gore & Assocs., Inc. v. Garlock, Inc., 721 F.2d 1540, 1548 (Fed. Cir. 1983).

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Yina Dong: A Patent Exhaustion Exposition The language in Quanta above, however, emphasizes exactly this "heart of the invention" requirement; clearly, "essential features" means "inventive features." This concept is not entirely foreign to patent law, however. For example, it plays a role in inventorship cases, which have a similar requirement for the type of contribution that one must make before she legally qualifies as an "inventor" who must be named on the patent application. Inventors must "make a contribution to the claimed invention that is not insignificant in quality, when that contribution is measured against the dimension of the full invention, and . . . do more than merely explain to the real inventors well-known concepts and/or the current state of the art."26 Purported inventors who "did no more than a skilled salesman would do" are rejected.27 Likewise, this "heart of the invention" concept is present in patent remedy concepts such as the "entire market value rule," which allows the owner of a patented component to capture the entire value of a larger infringing product that incorporates that component.28 This is very germane to the current topic of proposed patent reforms, such as limiting patentee overcompensation through apportionment and clearly distinguishing between lost profits and reasonable royalty calculations. The language of the exhaustion cases indicates that in order for a component to be an "essential feature," the other parts of the patented invention must be uninventive: grinding and polishing the lens blanks in Univis Lens, and adding memory and buses to the microprocessors in Quanta. If there are two essential features, then patent exhaustion may well not apply. This is a much higher threshold than that required in inventorship determinations. As for patent remedies, though, it would indeed be overcompensating the owner of a patented component to award the entire value of the infringing product, if that component was not the sole inventive feature. John Osborne illustrates this principle with a hypothetical that Justice Breyer posited during oral arguments in Quanta: Imagine that I want to buy some bicycle pedals, so I go to the bicycle shop. These are fabulous [patented] pedals. The inventor has licensed somebody to make them, and he sold them to the shop. . . . I go buy the pedals. I put it in my bicycle. I start pedaling down the road. Now we dont want 19 patent inspectors chasing me . . . . . . . [W]hy cant I look at this as saying that patent is exhausted, the patent on the pedals and the patent for those bicycles insofar as that patent for the bicycles says I have a patent on inserting the pedal into a bicycle.29 Indeed, under the holding of Univis Lens and now Quanta, if the pedals are the only essential feature--the "heart of the invention" of the bike patent--then Justice Breyer is correct that there should be no further royalty due to the inventor for the bike patent. Yet, as Osborne points out: [T]he hypo entirely failed to appreciate that the pedal manufacturer might have a different patent on a bicycle system including a novel braking component . . . . . . . Notwithstanding Justice Breyers desire to pedal away unencumbered, surely he would not expect a free pass to a brake patent simply because the brake invention was patented by the same inventor who granted a license to the pedal.30 Even more, there is no requirement that there be a separate patent on the brake. As long as the court finds that the pedal is not the sole inventive feature of the bicycle system patent, the sale of a pedal

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Pannu v. Iolab Corp., 155 F.3d 1344, 1351 (Fed. Cir. 1998). See Hess v. Advanced Cardiovascular Systems, Inc., 106 F.3d 976, 981 (Fed. Cir. 1997). 28 See, e.g., Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1549-50 (Fed. Cir. 1995). 29 Transcript of Oral Argument at 29-30, Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109 (2008) (No. 06-937). 30 John W. Osborne, Justice Breyer's Bicycle and the Ignored Elephant of Patent Exhaustion: An Avoidable Collision in Quanta v. LGE, 7 J. MARSHALL REV. INTELL. PROP. L. 245, 248-49 (2008).

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Yina Dong: A Patent Exhaustion Exposition does not exhaust the patent on the bike system. This is true even if the pedal has no use other than to be placed into the bike system, because the sale of the pedal should not also give a potential infringer the right to use the inventive braking component. One should also note that this "reasonable and intended use" and "essential features" test is quite different from a determination of nonobviousness. Since the Quanta Court found that the microprocessors embodied the essential elements of the system and method patents, it seems to follow logically that the microprocessors would render the broader patents obvious. However, there are two possibilities. First, the microprocessor patents might have been filed at the same time as the system and method patents, such that they would not serve as prior art to the broader patents. Second, even if the system and method patents were filed subsequent to the microprocessor patents, it is possible that a person having ordinary skill in the art would have thought it nonobvious to combine the microprocessors, external memory, and buses in the manner described in the patents; yet once the combination has been developed, it is no longer inventive under the exhaustion test to take the steps of adding the memory and buses to the microprocessors. Finally, a review of the case law seems to suggest that, given the concept of "simultaneous exhaustion," it may be irrelevant to the exhaustion test for components whether the related patent at issue is licensed or not. In Quanta, the three system and method patents were indeed licensed to Intel, and they were exhausted by the sale of the microprocessors.31 In Univis Lens, however, it is unclear whether the eight product patents covering the finished lens were licensed to the Univis Lens Company; certainly, the blanks manufactured by the Lens Company did not fully read on those patents,32 yet those patents were still exhausted by the sale of the lens blanks.33 And although Cyrix is not controlling precedent, the case is a good illustration of the principle that the claims of a patent are the true legal definition of the property right. In Cyrix, the patent at issue was licensed to ST and TI, and the combination claims of the patent were exhausted by the sale of the microprocessors covered under a product claim in the exact same patent.34 III. PROCESS PATENTS CAN BE EXHAUSTED ¶16 Along with its holding on components that embody essential features, the Quanta Court reasoned that "[i]t is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be ,,embodied in a product, the sale of which exhausts patent rights."35 From a practical standpoint, the Court noted that method and apparatus claims may be quite similar, and it would be a simple matter to redraft a product claim as a method claim; this would be an "endrun around exhaustion" and "seriously undermine the exhaustion doctrine."36 This reasoning is surely correct, and a holding that the system patents in Quanta were exhausted, but the method patents were not, would have been the wrong result. Given the Courts emphasis on the essential features test, it is clear that a component of a method can embody the essential features of that method. Interestingly, none of the Supreme Court cases leading up to Quanta had ever applied exhaustion to method claims. Contrary to the Courts claim that "this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied that method,"37 this was really an issue

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Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2113-14 (2008). United States v. Univis Lens Co., 316 U.S. 241, 247 (1942) (referring to United States v. Univis Lens Co., 41 F. Supp. 258, 262-64 (S.D.N.Y. 1941)). 33 Id. at 249-51. 34 Cyrix Corp. v. Intel Corp., 846 F. Supp. 522, 540 (E.D. Tex. 1994). 35 Quanta, 128 S. Ct. at 2117. 36 Id. at 2117-18. 37 Id. at 2117.

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Yina Dong: A Patent Exhaustion Exposition of first impression at the Supreme Court level. Although the Court reached the right result, it misread the facts of both Univis Lens--again--and Ethyl Gasoline Corp. v. United States.38 A. Univis Lens ¶18 As noted above, in Univis Lens, the lens blanks were covered by five patents on methods of manufacturing lens blanks, but the patents that were exhausted were the eight product patents covering the finished lenses: Of the sixteen patents owned by the Corporation, three are unrelated to the issues of the present case; five are for methods of producing lenses utilized by the Lens Company in manufacturing blanks and do not concern any method or process employed by the licensees who finish the lens blanks. Each of the remaining eight patents relates to the shape, size, composition and disposition of the pieces of glass of different refractive power in the blanks into which they are fused.39 Since exhaustion applied once the Lens Company sold the lens blanks to the finishing licensees who used only the product patents, the method patents for manufacturing lens blanks were irrelevant to the analysis. B. Ethyl Gasoline ¶19 In Ethyl Gasoline, it was true that the Ethyl Gasoline Corporation owned four patents, one of which was a "method of using fuel containing the patented fluid in combustion motors."40 However, the Court never mentioned that patent again in the opinion and did not have a reason to mention it. Ethyl Gasoline made and sold its patented fluid to oil refiners, who used it to make and sell motor fuel to jobbers, who then resold the fuel to retail dealers and consumers. The Court was concerned with Ethyls control over the jobber market--approximately 11,000 of the 12,000 jobbers in the United States were licensed by Ethyl41--and its use of this control to fix indirectly the jobbers resale prices. The Court held that "[b]y the authorized sales of the fuel by refiners to jobbers the patent monopoly over it is exhausted, and after the sale neither appellant nor the refiners may longer rely on the patents to exercise any control over the price at which the fuel may be resold."42 The Court said nothing about Ethyls method patent, however, because the only parties who could logically practice the "method of using fuel containing the patented fluid in combustion motors"43 would be the consumers who drove cars! As far as the Courts opinion discussed, there is no indication that Ethyl attempted to license the method patent to consumers, or that Ethyl attempted to license jobbers to sell the motor fuel only for use in practicing the method patent. Since this was an antitrust action brought by the government against Ethyl, there was no need for the Court to consider the method patent at all. Whether the patented fluid had no reasonable noninfringing use and embodied essential features of the method patent was irrelevant to the Courts analysis. *** Regardless of these possible misinterpretations, it is clear after Quanta that method patents may also be exhausted, as long as the "reasonable and intended use" and "essential features" test for

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Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940). United States v. Univis Lens Co., 316 U.S. 241, 246-47 (1942) (emphasis added). The Supreme Court in Quanta thought that "Univis held that the sale of optical lens blanks that partially practiced a patent exhausted the method patents that were not completely practiced until the blanks were ground into lenses." Quanta, 128 S. Ct. at 2117. This is clearly incorrect, as only the Lens Company was using those method patents, not the licensees who finished the lenses. 40 Ethyl Gasoline, 309 U.S. at 446. 41 Id. at 449. 42 Id. at 457. 43 Id. at 446.

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Yina Dong: A Patent Exhaustion Exposition components is met. This is the right result, whether or not there is prior case law on point. As the Quanta Court mentioned, it would be a simple matter to redraft a product claim as a method claim-- an "end-run around exhaustion."44 To emphasize this point, the Court even pointed to a law review commentator who had "recommend[ed] this strategy as a way to draft patent claims that ,,will survive numerous transactions . . . allowing the force of the patent to intrude deeply into the stream of commerce."45 For example, one of the patents at issue in Quanta disclosed a "system for ensuring that the most current data are retrieved by monitoring data requests and updating main memory from the cache when stale data are requested."46 If the Supreme Court had held that method patents were not subject to exhaustion, then future patentees would know to claim a method that retrieves current data and updates main memory instead of, or in addition to, the system claim. Pure semantics should not lead to a different result in that case and "undermine the exhaustion doctrine."47 IV. CONTRACTING AROUND THE RULES OF EXHAUSTION ¶23 After Quanta, there is still substantial uncertainty about the extent to which parties may contract around exhaustion. The Supreme Court in Quanta was fairly reserved on this issue, but not surprisingly so, since the facts of Quanta on contracting around exhaustion were weak and clearly mandated reversal. Remarkably, the license agreement declared: "Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products."48 A plain language reading of that provision says that the default rules of patent exhaustion apply regardless of anything else written into the contract! Of course, the rules of contract interpretation emphasize the importance of reading this in light of the other provisions in the agreement, and there is at least some ambiguity as to the parties intent in including such a provision. Sure enough, the Court chose not to emphasize this language in its decision, although parties who want to contract around exhaustion in the future might be well advised not to include such language in their agreements. Looking beyond that glaring provision, LGE did attempt to contract around exhaustion in at least two ways. First, LGE required Intel, in a separate agreement, to give notice to its customers that the customers were not licensed by LGE to combine Intel products with non-Intel products.49 The Court found this provision to be ineffective: "neither party contends that Intel breached the agreement . . . . In any event, the provision requiring notice to Quanta appeared only in the Master Agreement [a separate contract], and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement."50 Second, the license agreement stipulated that no license "is granted by either party hereto . . . to any third party for the combination . . . of Licensed Products . . . with items . . . from sources other than a party hereto."51 Again, the Court found this provision to be ineffective because it was a disclaimer of implied license, and "whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion."52

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Quanta, 128 S. Ct. at 2118. Id. at 2118 n.5 (quoting John R. Thomas, Of Text, Technique, and the Tangible: Drafting Patent Claims Around Patent Rules, 17 J. MARSHALL J. COMPUTER & INFO. L. 219, 252 (1998)). 46 Id. at 2113. 47 Id. at 2117. 48 Id. at 2114. 49 Id. 50Id. at 2121-22. 51 Id. at 2114. 52 Id. at 2122.

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Yina Dong: A Patent Exhaustion Exposition ¶25 Because Quanta was a weak case for the Court to set out firm principles for contracting around exhaustion, we must look to the prior case law to understand the rules for limiting exhaustion though contract. Cases leading up to Quanta indicate that license restrictions that are within the scope of patent rights have always been allowed; when those restrictions are valid and properly written into the license, contracting around exhaustion can be effective. License restrictions that are not within the scope of patent rights are considered patent misuse and are not allowed; when this is so, attempts to contract around exhaustion are ineffective, and the default rules of patent exhaustion apply. After examining the cases that set up these principles and determining whether there should be a further distinction between restrictions on sale and restrictions on use, this paper examines which category the Quanta license falls under. There is also the issue of remedies--whether a breach of a contractual provision limiting exhaustion can be remedied by patent law, or only receives contractual remedies. Finally, this Part concludes with a look at covenants not to sue as an alternative to licenses. A. License Restrictions Within the Scope of Patent Rights Have Always Been Allowed ¶26 Much like the "bundle of sticks" concept in property law, patent owners may choose to give out certain sticks and keep others for themselves; even cases in the nineteenth century recognized and embraced this concept: "The right to manufacture, the right to sell, and the right to use are each substantive rights, and may be granted or conferred separately by the patentee."53 Twentieth century cases expanded this concept by explaining that "[p]atent owners may grant licenses extending to all uses or limited to use in a defined field. . . . Unquestionably, the owner of a patent may grant licenses to manufacture, use or sell upon conditions not inconsistent with the scope of the monopoly."54 The Supreme Court has held that restrictions on duration, location, and field of use are within the grant of patent rights. In the cases that follow, the Court found that the license restrictions were validly within the grant of patent rights. When these restrictions are valid, exhaustion turns on whether the sale of an item is expressly conditioned on these restrictions. In Adams v. Burke and Keeler v. Standard Folding Bed Co.,55 the Court ruled that exhaustion still took place because even though the license restriction was valid, the sales themselves were not explicitly restricted and were therefore authorized. But in Mitchell v. Hawley56 and General Talking Pictures Corp. v. Western Electric Co., the Court ruled that a valid license restriction and explicitly conditional sale were sufficient to prevent exhaustion from occurring. 1. Bloomer ¶28 As an initial matter, Bloomer v. McQuewan57 deserves some attention because the Quanta Court, in its discussion of the case law of patent exhaustion, cited this nineteenth century case for the first application of the exhaustion doctrine. As is a common theme throughout this paper, the Supreme Court in Quanta described the facts of that case incorrectly. In fact, there was no sale in Bloomer and therefore no exhaustion--Bloomer sets up the principle of exhaustion in dicta! The plaintiff in Bloomer had an exclusive license to make and use, and to sublicense to others the right to make and use, a patented planing machine in a district that included Pittsburg.58 The defendants purchased a sublicense to make and use a limited number of machines in Pittsburg and Alleghany County "without any limitation as to the time for which they were to be used."59 The issue

¶27

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Adams v. Burke, 84 U.S. (17 Wall.) 453, 456 (1873). General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 181 (1938) (citations omitted). 55 Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895). 56 Mitchell v. Hawley, 83 U.S. (16 Wall.) 544 (1873). 57 Bloomer v. McQuewan, 55 U.S. (14 How.) 539 (1853). 58 Id. at 548. 59 Id. at 553. The Supreme Court in Quanta thought that the defendants were "[p]urchasers of licenses to sell and use the machine." Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2115 (2008). In fact, the defendants only had the right to

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Yina Dong: A Patent Exhaustion Exposition in Bloomer was whether the defendants could continue making and using their machines after the original patent term was extended by the Act of 1836. The Supreme Court found that they could indeed keep making and using the machines because there were no time limitations on the sublicense. But because there was no sale of any item in Bloomer, in no way did this case implicate the principle of exhaustion. 2. Mitchell ¶30 In fact, twenty years later, the Supreme Court found that a proper time restriction on a license was effective in contracting around Bloomers dicta exhaustion principle. In Mitchell v. Hawley, the licensee had the right to make and use, and to sublicense the right to make and use, patented machines for making felt hats in Massachusetts and New Hampshire. An additional provision stated that the "licensee ,,shall not, in any way, or form, dispose of, sell, or grant any license to use the said machines beyond the expiration of the original term,"60 and did not give the licensee any rights in the extended term. Thus, the licenses were only valid until the original expiration date of the patent. The licensee sold four machines to the defendant with a sublicense to use the machines in the town of Haverhill but with no time limitation. Regardless, the Mitchell Court reached the opposite result as the Bloomer Court, holding that the defendant could not continue to use the machine in the extended patent term granted by the Act of 1836 because the original license was limited in time to the original patent term. The Court stated that "a patentee, when he has himself constructed a machine and sold it without any conditions, or authorized another to construct, sell, and deliver it, or to construct and use and operate it, without any conditions, and the consideration has been paid to him for the thing patented, the rule is well established that the patentee must be understood to have parted to that extent with all his exclusive right."61 Under the facts of Mitchell, however, the Court found this reasoning inapplicable and "unnecessary, as the instrument of conveyance from the patentee to him, which describes all the title he ever had, expressly stipulates that he shall not in any way or form dispose of, sell, or grant any license to use the said machine beyond the expiration."62 The Mitchell Courts reasoning paralleled the rule of property law that one cannot convey what one does not own.63 For example, if A grants a life estate to B who then transfers her interest to C, upon the death of B the property reverts back to A, regardless of whether C is still alive. Here, A granted B a license to make and use the patented invention for a limited number of years, so that even though B put no time limit on the sublicense to C, B could not transfer a length of time more than he owned. There was no exhaustion because there were valid conditions on the sale of the patented item, and the injunction against the defendants was affirmed. The Quanta Court, however, never mentioned the Mitchell case in its opinion. 3. Adams ¶33 In another case decided the same year as Mitchell, the Court found that exhaustion did apply in a case where the sale itself was authorized, even though it was geographically restricted. In Adams v. Burke, the licensee had the right to make, sell, and use patented coffin-lids within a ten-mile circle around Boston. The licensee sold a coffin-lid in Boston to the defendant, who then took it outside of Boston and used it outside the ten-mile circle. The license restriction was clearly a proper and valid limitation on the grant of patent rights, but the Court held that the patent was exhausted nevertheless because there were no conditions on its subsequent use by the defendant: "It would be to engraft a

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make and use the machine. There was no sale in Bloomer. 60 Mitchell, 83 U.S. at 549. 61 Id. at 547 (emphasis added). 62 Id. at 550. 63 See, e.g., TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1275 (Fed. Cir. 2009).

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Yina Dong: A Patent Exhaustion Exposition limitation upon the right of use not contemplated by the statute nor within the reason of the contract to say that it could only be used within the ten-miles circle."64 Interestingly, the Court put a lot of emphasis on the specific facts of this case and seemed to limit its holding to "an instrument or product of patented manufacture which perishes in the first use of it, or which, by that first use, becomes incapable of further use, and of no further value."65 4. Keeler ¶34 Just over twenty years later, Keeler expanded Adams v. Burke beyond single-use items, and first suggested that if the sale was authorized, and therefore subject to patent exhaustion, there might still be remedies against the purchaser in contract law. In Keeler, the patentee assigned all rights to the patent in Michigan to the Standard Folding Bed Company, and in Massachusetts to the Welch Folding Bed Company. When the defendant purchased the patented beds in Michigan and resold them in Massachusetts, the Court found that "the sale was a complete one in Michigan, and that neither the actual use [of the beds in Massachusetts], nor a knowledge on the part of the defendant that they were intended to be used there, would make him liable."66 The Court added language that: [O]ne who buys patented article of manufacture from one authorized to sell them becomes possessed of an absolute property in such articles, unrestricted in time or place. Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws.67 In both Adams and Keeler, the Court found that the geographic restrictions on the sales, though valid, did not change the finding that the sales were authorized. The purchasers neither received expressly limited licenses nor did the court care whether they were aware of the restrictions. In this circumstance, the Keeler Court speculated in the language above that the patent owner might only have contractual remedies. The Court was not necessarily saying anything about a situation in which there was an explicitly conditional sale, such that a sale in contravention of those conditions would be unauthorized--presumably, a patent owner in that circumstance could still reserve her patent rights. 5. General Talking Pictures ¶35 Forty-three years later, the patent owner in General Talking Pictures was indeed able to assert its patent rights and obtain an injunction against infringement. The patent owner granted American Transformer Company a license for making and selling vacuum tube amplifiers--only for private use (including radio amateur reception, radio experimental reception, and home broadcast reception), and not for commercial use (such as talking picture equipment in movie theaters). In violation of the license terms, the Transformer Company sold its amplifiers to the defendant, who resold the equipment to movie theaters: "the Transformer Company knew that the amplifiers it sold to petitioner were to be used in the motion picture industry. Likewise, the petitioner, when purchasing from the Transformer Company for that use, had actual knowledge that the latter had no license to make such a sale."68 The Court found that limitations on selling into a defined field were allowed, and the patent owner was not attempting to extend the scope of its patent monopoly.69 Like the licensee in Mitchell,

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Adams v. Burke, 84 U.S. (17 Wall.) 453, 456 (1873) (emphasis added). Id. 66 Keeler v. Standard Folding Bed Co., 157 U.S. 659, 665-66 (1895). 67 Id. at 666. 68 General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 180 (1938). 69 Id. at 181.

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Yina Dong: A Patent Exhaustion Exposition since the Transformer Company never had patent rights to sell for commercial use, it sold outside the scope of its license, and there was no exhaustion: The Transformer Company could not convey to petitioner what both knew it was not authorized to sell. Mitchell v. Hawley, 16 Wall. 544, 550. By knowingly making the sales to petitioner outside the scope of its license, the Transformer Company infringed the patents embodied in the amplifiers. . . . Petitioner, having with knowledge of the facts bought at sales constituting infringement, did itself infringe the patents embodied in the amplifiers when it leased them for use as talking picture equipment in theaters.70 Given the Courts emphasis on the knowledge of the purchaser, Osborne notes that "[e]xpress restrictions in patent licenses are analogous to restrictive covenants in real property law--which are enforceable against a subsequent purchaser of restricted property if the purchaser had constructive notice of the restriction."71 He argues that this distinguishes General Talking Pictures from Adams and Keeler, which dealt with implied restrictions on purchased goods,72 and where it was unclear whether the purchasers in each case had notice of the restrictions. However, patent infringement is largely a strict liability determination, and notice of restrictions is a concept that is much more relevant in the contract remedies context. Rather than focusing on the purchasers knowledge, it makes more sense to distinguish the case from Adams and Keeler on the basis that the licensees sale in General Talking Pictures was made outside the scope of its license and therefore unauthorized. There is no question that the patent owner could have sued the licensee for patent infringement, though it chose not to, perhaps for business reasons. In contrast, although the purchasers in Adams and Keeler did end up taking the items outside of the licenses contemplated geographic scope, the licensees themselves had made authorized sales by selling in the appropriate regions. B. License Restrictions Not Within the Scope of Patent Rights Are Prohibited as Patent Misuse ¶38 In a separate line of cases, the Supreme Court has held that certain license restrictions fall outside the scope of patent rights. The cases that follow involve issues like tying and price-fixing, in which the patentee impermissibly attempts to expand his patent monopoly. 1. A.B. Dick ¶39 In 1912, the Supreme Court upheld a tying restriction in Henry v. A.B. Dick Co.73 Over the next several years, the Court narrowed the A.B. Dick holding and eventually overturned it completely. The A.B. Dick Company sold its patented rotary mimeograph machine to a licensee with a license restriction that "it may be used only with the stencil paper, ink and other supplies made by A.B. Dick Company, Chicago, U.S.A."74 The licensee, however, purchased her ink from the defendants rather than the A.B. Dick Company. The Supreme Court held that these restrictions were valid. Therefore, the licensees violation of these restrictions constituted infringement, and the defendants actions constituted contributory infringement. But today, these types of tying restrictions are not within the scope of patent rights and are not enforceable; they clearly constitute patent misuse because the patentee is trying to use the power of his patent to coerce someone into purchasing an unpatented product.

¶37

Id. at 181-82. Osborne, supra note 30, at 259 n.84. 72 Id. (citing William A. Birdwell, Exhaustion of Rights and Patent Licensing Market Restrictions, 40 J. PAT. OFF. SOCY 203, 204 (1978)). 73 Henry v. A.B. Dick Co., 224 U.S. 1 (1912). 74 Id. at 11.

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Yina Dong: A Patent Exhaustion Exposition 2. Bauer & Cie ¶40 In Bauer & Cie v. O'Donnell,75 the patentee Bauer & Cie granted the licensee all of its patent rights to the drug Sanatogen in the U.S. The licensee then sold Sanatogen to retailers, with the requirement that the resale price had to be more than $1. Notwithstanding A.B. Dick, the Court found that the attempt to control the resale price was clearly price fixing: "the title transferred was full and complete, with an attempt to reserve the right to fix the price at which subsequent sales could be made."76 Thus, "the added restriction is beyond the protection and purpose of the [Patent Act]."77 3. Motion Picture Patents ¶41 The Supreme Court finally overruled A.B. Dick a few years later. In Motion Picture Patents Co. v. Universal Film Manufacturing Co.,78 the patent owner granted the Precision Machine Company a license to make and sell patented motion picture exhibiting machines. The license agreement required Precision to use the machine only to show films covered under a separately licensed patent (which expired two years after the agreement), to agree that the patentee could change the terms of the license at its discretion, and to include an identification plate on the machines stating these restrictions. The licensee sold a machine under those same license terms to the Seventy-second Street Amusement Company, which in turn leased space to the defendants, who proceeded to show nonpatentee films. The Court rejected the covenant requiring that the machine only be used with films under the expired patent as impermissible because such a film is obviously not any part of the invention of the patent in suit; because it is an attempt, without statutory warrant, to continue the patent monopoly in this particular character of film after it has expired, and because to enforce it would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law.79 The Court also rejected the covenant that the patentee could change the terms of the license at its discretion because it was a "restriction which would give to the plaintiff such a potential power for evil . . . wholly without the scope and purpose of our patent laws."80 Additionally, the Supreme Court extended the holding of Bauer & Cie from applying only to "selling" to encompass "using" as well: [T]his court . . . in Bauer . . . decided that the owner of a patent is not authorized by either the letter or the purpose of the law to fix, by notice, the price at which a patented article must be sold after the first sale of it, declaring that the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it. The statutory authority to grant the exclusive right to ,,use a patented machine is not greater, indeed, it is precisely the same, as the authority to grant the exclusive right to ,,vend . . . .81 The Court expressly overruled A.B. Dick,82 and again raised the Keeler issue of contract versus patent remedies: "The extent to which the use of the patented machine may validly be restricted to specific

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Bauer & Cie v. ODonnell, 229 U.S. 1 (1913). Id. at 16. 77 Id. at 17. 78 Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917). 79 Id. at 518. 80 Id. at 519. 81 Id. at 516. 82 Id. at 518.

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Yina Dong: A Patent Exhaustion Exposition supplies or otherwise by special contract between the owner of a patent and the purchaser or licensee is a question outside the patent law . . . ."83 4. Ethyl Gasoline ¶43 In Ethyl Gasoline, as described above, Ethyl Gasoline made and sold its patented fluid to oil refiners, who used it to make and sell motor fuel to licensed jobbers, who then resold the fuel to retail dealers and consumers. The Court was concerned with provisions in the oil refiners licenses, which restricted their sale of the motor fuel to only licensed jobbers, because of Ethyls massive control over the jobber market--approximately 11,000 of the 12,000 jobbers in the United States were licensed by Ethyl.84 Although Ethyl Gasoline did not directly fix prices, the Court found that its licensing scheme allowed it to exclude all unlicensed jobbers from the market, control the conduct of licensed jobbers, and thus fix indirectly the jobbers resale prices.85 Without going into much detail, the Court held that "by the authorized sales of the fuel by [oil] refiners to jobbers the patent monopoly over it is exhausted."86 Although the Court did not explain why the oil refiners sale was authorized, it appears that because the oil refiners were indeed complying with their licenses, they were making authorized sales.87 And since Ethyl Gasolines patent monopoly ended with this authorized sale, "after the sale neither [Ethyl] nor the refiners may longer rely on the patents to exercise any control over the price at which the fuel may be resold."88 5. Univis Lens ¶45 In Univis Lens, as explained previously, the Univis Corporation was able to set many prices through its multi-tiered licensing scheme. The Univis Corporation licensed the Univis Lens Company to make lens blanks for $0.50 each, and to sell those lens blanks at $4.00 to licensed finishing retailers and $3.25 to licensed wholesalers. The finishing retailers would grind and polish the lens blanks into finished lenses, which they sold directly to customers at a set price of $16; wholesalers would also grind and polish the lens blanks into finished lenses, which they sold at a set price of $7 to licensed prescription retailers, who then resold them to customers at a set price of $16. The District Court judge ruled that when the wholesalers sold finished lenses to the prescription retailers, the price restrictions placed on resale to customers constituted impermissible price fixing and fell outside the patent monopoly.89 The district court found, however, that prior to selling the finished lenses, "without the granted license the final step in finishing the lens would infringe the patent[s] and concluded that for this reason the Corporation could condition its licenses upon the maintenance by the licensee of the prescribed retail price."90 By contrast, the Supreme Court found that exhaustion took place one step earlier, when the Univis Lens Company sold lens blanks, which embodied the patented finished lenses. As such, because the Corporations patent monopoly ended with the sale of the lens blanks, it was impermissible for the Univis Corporation to require downstream parties to fix prices.

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Id. at 509 (citing Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895)). Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 449 (1940). 85 Id. at 449-50. 86 Id. at 457. 87 Contrast this with, for example, the licensee in General Talking Pictures who clearly sold items in violation of its license agreement. General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 181-82 (1938). 88 Ethyl Gasoline, 309 U.S. at 457. 89 United States v. Univis Lens Co., 316 U.S. 241, 247 (1942). 90 Id.

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Yina Dong: A Patent Exhaustion Exposition C. Is There a Difference Between Restrictions on Sale and Restrictions on Post-Sale Use? ¶47 Thus far, this paper has focused on the distinction between restrictions that seem to fall within the grant of patent rights versus those that constitute misuse and therefore clearly fall outside the scope of patent rights. But can a finer distinction be drawn between restrictions on sale and restrictions on post-sale use? Although Bloomer v. McQuewan was not a case about patent exhaustion, as discussed previously, it set up in dicta the distinction "between the grant of the right to make and vend the machine, and the grant of the right to use it."91 [W]hen [the patentee] sells the exclusive privilege of making or vending [the thing patented] for use in a particular place, the purchaser buys a portion of the franchise which the patent confers. . . . And the interest he acquires, necessarily terminates at the time limited for its continuance by the law which created it. . . . But the purchaser of the implement or machine for the purpose of using it in the ordinary pursuits of life, stands on different ground. In using it, he exercises no rights created by the act of Congress, nor does he derive title to it by virtue of the franchise or exclusive privilege granted to the patentee. . . . And when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. . . . And if his right to the implement or machine is infringed, he must seek redress in the courts of the State . . . and not . . . under the law of Congress granting the patent.92 Both the U.S. Solicitor Generals Office, which submitted two amicus briefs in Quanta,93 and at least one district court ruling on the issue post-Quanta94 have agreed that there is a difference between a license restriction on the right to sell, which successfully contracts around exhaustion,95 and a restriction on a purchasers use or resale, which cannot avoid patent exhaustion.96 The Quanta Court seemed to echo this distinction by referring to the license restrictions in A.B. Dick, Bauer & Cie, and Motion Picture Patents as impermissible "postsale restrictions" on purchasers.97 However, the analysis in this paper suggests that the problem in those cases was not merely that there were restrictions on post-sale use of the patented items, but that there were serious problems of patent misuse, involving impermissible tying and price-fixing provisions. The Quanta Court also characterized Adams v. Burke as a "patent holders suit alleging that a licensee had violated postsale restrictions on where patented coffin-lids could be used."98 However, it is not clear that there were any post-sale restrictions on use in this case. In Adams, the licensee was restricted to making and selling the coffin-lids within a ten-mile circle of Boston, but the Court mentioned no restrictions on the purchasers subsequent use.99 Likewise, in Keeler, the assignee was restricted to making and selling the folding beds in Michigan, but again the Court mentioned no restrictions on the purchasers use.100 In both cases, exhaustion seemed to turn on the fact that the sellers had complied with their geographic restrictions and therefore the sales were authorized, rather than the impermissible nature of (possibly nonexistent) post-sale restrictions.

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Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1853). Id. at 549-50. 93 Thomas G. Hungar, Observations Regarding the Supreme Court's Decision in Quanta Computer, Inc. v. LG Electronics, Inc., 49 IDEA 517, 523 (2009). 94 Static Control Components, Inc. v. Lexmark Intl, Inc., 615 F. Supp. 2d 575 (E.D. Ky. 2009). 95 Hungar, supra note 93, at 535. 96 Id. at 542. 97 Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2115-16 (2008). 98 Id. at 2115 (emphasis added). 99 Adams v. Burke, 84 U.S. (17 Wall.) 453 (1873). 100 Keeler v. Standard Folding Bed Co., 157 U.S. 659 (1895).

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Yina Dong: A Patent Exhaustion Exposition ¶50 Furthermore, if there is a distinction between the two types of restrictions, it is unclear what to make of Mitchell v. Hawley, a case in which the patent owner succeeded in contracting around exhaustion. The ruling in Lexmark, discussed below, rather than looking to the property-law analogy rationale of the Mitchell Court, suggests that "the [Mitchell] Court considered the restriction at issue to be a condition limiting the right to sell, rather than a post-sale restriction on the right of use."101 However, this conclusion is strange because the license agreement in Mitchell never granted the licensee the right to sell, but rather the right to make, use, and sublicense the patented machine.102 The Lexmark opinion seems to overlook the fact that the licensee in Mitchell never made a pure sale to the purchaser, but rather sold the machines with a sublicense agreement attached. And even though this sublicense restricted the purchasers use of the machine, the Court did not find that there was patent exhaustion; instead, the Court affirmed the grant of an injunction against the purchasers. It is not at all clear that there is really such a bright-line distinction between restrictions on sale and restrictions on use. For example, restriction on sales into a specific field of use (a restriction on a sale for use) straddles the line between the two types of restrictions. If, for example, the licensee in General Talking Pictures had been authorized to sell amplifiers only to the extent that the purchaser contractually agreed to use the amplifiers in the private field, it would be difficult to place the restriction unequivocally into only one category. 1. Mallinckrodt ¶52 Caught in the midst of this inquiry is the Federal Circuit ruling in Mallinckrodt, Inc. v. Medipart, Inc.,103 whose viability many have questioned leading up to Quanta but which the Quanta Court did not resolve. Mallinckrodt, the patent owner, sold its medical devices to hospitals with a "single use only" restriction. Instead of disposing of the devices after the first use, however, the hospitals sent them to Medipart for re-sterilization. The Federal Circuit held that the sale of the device to the hospitals did not exhaust the patent and that violation of the restriction was actionable as patent infringement as long as the sale "was validly conditioned under the applicable law such as the law governing sales and licenses, and . . . the restriction on reuse was within the scope of the patent grant or otherwise justified."104 The court reversed and remanded the case for that determination.105 In a subsequent case, B. Braun Medical, Inc. v. Abbott Laboratories, the Federal Circuit affirmed that it is not patent misuse to have field of use restrictions; rather, "any anticompetitive effects [the restrictions] may cause are reviewed in accordance with the rule of reason."106 After Quanta, though, many have pointed to the Supreme Courts language disapproving of postsale restrictions and concluded that Mallinckrodt is no longer good law. Thomas G. Hungar, the former Deputy Solicitor General who argued in favor of exhaustion in Quanta, asserts that "there is no longer any room for continued adherence to the Mallinckrodt line of cases."107 First, Hungar argues that because Mallinckrodt sold directly to its customers, rather than through a licensee, the sales were by definition authorized, "because a sale by a patent holder obviously cannot infringe the patent holders own patent."108 However, for purposes of patent exhaustion, it seems unfair that a patentee would be disadvantaged when it sells directly to customers as opposed to indirectly through a licensee. All other things being equal, a blanket statement like that would encourage companies like Mallinckrodt to operate through licensees to avoid the effects of patent exhaustion.

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Lexmark, 615 F. Supp. 2d at 582. Mitchell v. Hawley, 83 U.S. (16 Wall.) 544, 548-49 (1873). 103 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). 104 Id. at 709. 105 Id. 106 B. Braun Medical, Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997) (citing Mallinckrodt, 976 F.2d at 708). 107 Hungar, supra note 93, at 530. 108 Id.

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Yina Dong: A Patent Exhaustion Exposition ¶54 Second, Hungar contends that Supreme Court cases such as Univis Lens and Motion Picture Patents "preclude[] patent-law enforcement of various post-sale restrictions,"109 and make them "categorically unenforceable in an infringement suit."110 Again, though, it is important to point out that the problem in those cases was not merely that there were restrictions on post-sale use of the patented items, but that those restrictions fell far outside the scope of patent rights, and strayed into the realm of patent misuse, involving impermissible tying and price-fixing. As mentioned above, it is also not clear that there really is a bright-line distinction between restrictions on sale and restrictions on post-sale use. Contrary to the statements by Hungar and the Lexmark opinion, it is at least somewhat ambiguous in Mallinckrodt whether the single-use only restriction was truly an impermissible post-sale restriction and not a permissible condition on the sale itself. As the Federal Circuit pointed out in Mallinckrodt, "[i]n accordance with the Uniform Commercial Code a license notice may become a term of sale, even if not part of the original transaction, if not objected to within a reasonable time."111 Even though it is clear that a single-use only restriction is a restriction on use to at least some extent, it may also be a term of sale, and therefore a restriction on the sale itself. 2. Lexmark ¶56 After all the academic discussion on the issue of Mallinckrodts continued viability, one district court has in fact rejected Mallinckrodt. On March 31, 2009, the Eastern District of Kentucky in Lexmark reversed its prior ruling on the issue of a one-time only use restriction.112 The facts of this case were quite similar to those of Mallinckrodt. Lexmark, the patent owner, sold its toner cartridges to customers with single use only language printed at the top of the cartridge boxes. Instead of returning the empty cartridges to Lexmark, however, some customers sent them to remanufacturers for repair, refill, and resale. Static Control, the defendant in the case, sold parts and supplies to those remanufacturers. Interestingly, Lexmark charged less for these one-time only use cartridges, compared with its other cartridges that did not come with any such restrictions. The first time the Lexmark district judge decided this case, therefore, he found that Lexmark could only receive the full economic value of its patent if it was able to contract around exhaustion.113 However, because the Supreme Court did not consider economic justifications in Quanta, on rehearing the judge in Lexmark found that all postsale restrictions on use were categorically invalid.114 The district judge also concluded that Lexmarks sales were not restricted, and therefore authorized, because anyone could purchase the cartridges from stores or online. Following Quantas lead, he held that Lexmark might still have a claim for breach of contract. After Lexmark, it will be interesting to see whether other courts take such a bright-line ban against restrictions on use, and how they resolve the contract issue. D. How Does Quanta Fit into This Analysis? ¶59 Given the analysis presented by this paper, there are three possibilities for reaching the result of patent exhaustion in Quanta. First, it is possible that the attempted license restrictions in the LGEIntel agreement would have been valid had they simply been written better. If the license did not say that exhaustion applied regardless of any other provisions, if the requirement of written notice was

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Id. at 531. Id. at 533. 111 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 n.7 (Fed. Cir. 1992) (citing U.C.C. § 2-207(2)(c)). 112 Static Control Components, Inc. v. Lexmark Intl, Inc., 615 F. Supp. 2d 575 (E.D. Ky. 2009). 113 Id. at 586. 114 Id.

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Yina Dong: A Patent Exhaustion Exposition not in a separate agreement, and if the agreement had done more than just disclaim implied license, then it is possible that contracting around exhaustion would have been effective. After all, the license agreement did authorize Intel to "make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of" Intel products practicing the LGE patents.115 The Supreme Court found that, given the way the license was written, there was an "authorized sale" from Intel to Quanta, and that courts have often interpreted the term "authorized" to mean a sale without any conditions.116 Under this possibility, a well-written license would have enabled LGE to reserve its patent infringement rights and remedies. A second possibility, on the opposite extreme, is that there was exhaustion in the Quanta case not due to poorly written and ineffectual restrictions, but because the limitation on post-sale use of the microprocessors was not within the scope of patent rights. If so, regardless of the manner in which the parties attempt to phrase the restrictions, the principle of exhaustion applies and a patentee cannot contract around exhaustion to reserve its patent infringement rights and remedies, nor can it retain contract law remedies. Given the line of cases that dealt with issues of patent misuse, it would not be a far stretch to look at the license in Quanta as preventing any practical use whatsoever. Whereas the license restrictions in Mitchell allowed use for a specified period of time, those in General Talking Pictures allowed sale for use in the non-commercial field, and even the restrictions in Mallinckrodt allowed for one use, the components in Quanta had no use at all except to be placed into a patented system or used in a patented method. One might even analogize the situation to tying: Quanta Computer could only use the microprocessors it already paid for if (1) Quanta purchased all the other parts from Intel, or (2) Quanta purchased a license from LGE to practice the method and system patents using non-Intel parts. Since the equitable doctrine of patent misuse operates to limit anti-competitiveness and the broadening or extension of patent rights, the Supreme Court could be within reason to find these types of licenses to be wholly outside of the scope of patent rights. However, the Court declined to do so in Quanta, choosing instead to go the narrower route. Instead of finding the restrictions to be impermissible patent misuse, the Supreme Court found that because of the way the agreement was written, "[n]othing in the License Agreement restricts Intels right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts."117 Having ruled narrowly, the Court left us with a third possibility, in between the two extremes. Even though the Court appeared to disapprove of post-sale use restrictions, its disapproval did not mean that a use restriction would cross wholly over into the realm of patent misuse. In a footnote, the Court noted that even if patent remedies were not available, "the authorized nature of the sale to Quanta does not necessarily limit LGEs other contract rights. LGEs complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages."118 E. What Remedies Are Available? ¶63 After Quanta, therefore, we are left questioning what types of remedies are available. As explained above, there are three options: (1) one can contract around exhaustion and get remedies for patent infringement; (2) one cannot contract around exhaustion, but can still get remedies for breach of contract; or (3) one cannot contract around exhaustion because it is patent misuse, and there are no remedies in either patent or contract law.

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Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2114 (2008). See, e.g., Keeler v. Standard Folding Bed Co., 157 U.S. 659, 663 (1895). 117 Quanta, 128 S. Ct. at 2121. 118 Id. at 2122 n.7 (citing Keeler, 157 U.S. at 666).

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Yina Dong: A Patent Exhaustion Exposition ¶64 Both Keeler and Quanta have been read broadly by some scholars as saying that breach of contract may be the only remedy available when there are any conditions placed on a sale. Craig Nard notes that "[w]hile conditional sales may be permitted, the remedy may most likely be based on contract law, not patent law. . . . [I]t appears that the Supreme Court may agree that the patentees remedy is for breach of contract."119 However, this seems unlikely as it would require the Court to overturn, or at least creatively interpret, Mitchell and General Talking Pictures--both cases in which license restrictions and patent remedies, namely injunctions, were granted. Additionally, at least "one concern patentees may have with contract law as an enforcement mechanism is that the patent owner/licensor will have to show privity with downstream purchasers, a showing that can be quite challenging. In Quanta, for instance, it is uncertain that LG would be able to successfully sue Quanta for breach of contract because Intel complied with the license it had with LG."120 Thus, instead of concluding that only contract remedies are available, Keeler and Quanta can be read more narrowly to say that patent owners can still reserve patent remedies when there is a proper limitation on the scope of the license granted. 1. Limitations on License Scope Versus Covenants ¶66 Under this reading, a potentially useful distinction might be observed that license restrictions come in two varieties--limitations on license scope and covenants. This distinction was observed in a Ninth Circuit copyright case, Sun Microsystems, Inc. v. Microsoft Corp.,121 in which Sun licensed Microsoft the rights to Java, a computer programming language. Although addressing a different topic of intellectual property law, this case is well on point for distinguishing between the two types of restrictions: limitations on license scope result in infringement claims, whereas independent covenants in the license agreement result in breach of contract claims. The court explained that a ",,copyright owner who grants a nonexclusive license to use his copyrighted material waives his right to sue the licensee for copyright infringement and can sue only for breach of contract. . . . If, however, a license is limited in scope and the licensee acts outside the scope, the licensor can bring an action for copyright infringement."122 In order to determine whether the restriction is a covenant or limitation on the license scope, the court recommended ",,rely[ing] on state law to provide the canons of contractual construction provided that ,,such rules do not interfere with federal copyright law or policy."123 The Ninth Circuit vacated the injunction against Microsoft and remanded to district court to determine whether the terms were limitations on the license scope (a copyright claim) or covenants (a contract claim). Yet, are these distinctions really ones that patent law should care about? For example, it seems that patent law should care about the difference between an unrestricted sale and restricted sale since sales without any restrictions result in patent exhaustion, and the purchasers buy the item knowing that it is free from any claim on title. On the other hand, the difference between a covenant and a limitation on scope seems to be a mere matter of semantics since a good lawyer should be able to rewrite a covenant as a scope limitation on the grant of the license. If the distinction is only a matter of phrasing and language, then perhaps something as important as whether the remedy would be through patent or contract law should not rest on that characterization. For example, language in Mitchell that "the licensee ,,shall not, in any way, or form, dispose of, sell, or grant any license to use the said machines beyond the expiration of the original term"124 sounds more like a covenant than a limitation on the scope of license. What any lawyer could do,

CRAIG NARD, THE LAW OF PATENTS § 8.A.2.b, p.10 (Supp. August 28, 2008) ("Quanta Update"). Id. 121 Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115 (9th Cir. 1999). 122 Id. at 1121 (quoting Graham v. James, 144 F.3d 229, 236 (2d Cir. 1998)). 123 Id. at 1122 (quoting S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1088 (9th Cir. 1989)). 124 Mitchell v. Hawley, 83 U.S. (16 Wall.) 544, 549 (1873) (emphasis removed).

119 120

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Yina Dong: A Patent Exhaustion Exposition however, is to move that language up to the "grant" section of the license: "Patentee grants to Licensee an exclusive, sublicensable license in Massachusetts and New Hampshire to make and use the machines for a limited term of fourteen years." That quick fix would change the restriction into a limitation on the license scope, and under the analysis in Sun, should give the patent owner infringement remedies.125 This distinction is a bit more difficult to parse in Mallinckrodt, where the patentee was selling directly to customers and asserted that the "single use only" notice was a label license. The Federal Circuit chose not to "decide whether the form of the restriction met the legal requirements of notice or sufficed as a ,,label license."126--but if under the Uniform Commercial Code this notice became a term of sale, then it would seem to fall more on the covenant side than a restriction on license scope. If this difference really mattered to patent owners, however, they might require purchasers to sign explicit license agreements at the expense of driving up transaction costs. Therefore, it is not clear that making the distinction between covenants and limitations on license scope is necessarily the best way to resolve the issue of remedies. 2. Restrictions on Sale Versus Restrictions on Use ¶71 Another possibility, post-Quanta, is that if there really is a clear distinction between restrictions on sale and restrictions on use, then it seems to follow that while restrictions on sale may be remedied by patent law, restrictions on use may only be remedied through contract law--unless those restrictions run up against patent misuse or antitrust principles. As an example of the former category of restrictions on sale, in General Talking Pictures, the license agreement only granted the licensee the right to sell amplifiers into the private field; the licensee violated this restriction on sale and sold to a commercial purchaser.127 The Court held that the licensee and the purchaser were liable for patent infringement and upheld an injunction against the purchasers use of the amplifiers. In the latter category of restrictions on use, the Supreme Court in Keeler and Quanta suggested that even if there was patent exhaustion--and therefore no claim for patent infringement--there might still be a claim for breach of contract.128 Of course, contract remedies come with their own set of problems and requirements, namely the difficult showing of privity described previously.129 And even if restrictions on post-sale use are considered second-rate and relegated to contract remedies only, the analysis in this paper suggests that cases such as A.B. Dick, Bauer & Cie, and Motion Picture Patents are even less deserving of remedies. The problem in those cases was not merely that there were restrictions on post-sale use of the patented items, but that there were serious problems of patent misuse, involving impermissible tying and price-fixing provisions. Those problems rendered those restrictions invalid, not only as a matter of patent exhaustion to foreclose patent law remedies, but also as a matter of contract law. Thus, these attempts to expand the patent monopoly impermissibly receive neither patent law nor contract law remedies. *** Whether or not there is a fine distinction between restrictions on use versus sale, after Quanta, and in keeping with the prior case law, it may make the most sense to have a rule as follows. First, if a license restriction is validly within the scope of patent rights, and the sale of the patented item or component of the patented item is validly restricted, then one can contract around exhaustion and get remedies for patent infringement. Second, if the patent owner fails to reserve his patent infringement remedies, that means that he was not successful in contracting around exhaustion but

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Sun, 188 F.3d at 1121. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 701 (Fed. Cir. 1992). 127 General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 181 (1938). 128 Keeler v. Standard Folding Bed Co., 157 U.S. 659, 666 (1895); Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2122 n.7 (2008). 129 See NARD, supra note 119.

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Yina Dong: A Patent Exhaustion Exposition can still sue for breach of contract--as discussed above, the Quanta case most likely falls into this category. Finally, if the license restriction is one that would fall outside the scope of patent rights altogether, then the patent owner cannot contract around exhaustion because it would be patent misuse and there would be no remedies in either patent or contract law. Table 1 below indicates where Supreme Court jurisprudence falls along this proposed trichotomy. Table 1. Remedies in Supreme Court Patent Exhaustion Cases Remedies Cases Patent Law Mitchell v. Hawley (1873) General Talking Pictures Corp. v. Western Elec. Co. (1938) Contract Law Adams v. Burke (1873) Keeler v. Standard Folding Bed Co. (1895) Quanta Computer, Inc. v. LG Elecs., Inc. (2008) None Henry v. A.B. Dick Co. (1912) Bauer & Cie v. O'Donnell (1913) Motion Picture Patents Co. v. Universal Film Mfg. Co. (1917) Ethyl Gasoline Corp. v. United States (1940) United States v. Univis Lens Co. (1942) F. Covenants Not to Sue Do Not Succeed in Contracting Around Exhaustion ¶74 Given the extremely complex and uncertain law on contracting around exhaustion, one method that some patent owners used was to grant a covenant not to sue rather than a license in an attempt to avoid the effects of exhaustion. The recent Federal Circuit ruling in TransCore on April 8, 2009, however, virtually eliminated this possibility: "The question for this court is whether an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion. We hold that it does."130 Under the facts of TransCore, TransCore settled its infringement suit against Mark IV Industries in 2000 by granting Mark IV a covenant not to sue for ten of TransCores patents, in exchange for $4.5 million. These patents were all related to the manufacture, sale, and installation of automated toll collection systems. Under the covenant not to sue, Mark IV made and sold tolling systems that read on those patents to the Illinois State Toll Highway Authority (ISTHA). Electronic Transaction Consultants (ETC) won a bid with ISTHA to install and test this new system. TransCore then sued ETC for infringement of four of its patents--three which were included in the covenant not to sue and one that was pending at the time of settlement and therefore not included in the covenant not to sue. Starting with the baseline premise that "one cannot convey what one does not own," the Federal Circuit reasoned that "a patentee, by license or otherwise, cannot convey an affirmative right to practice a patented invention by way of making, using, selling, etc.; the patentee can only convey a freedom from suit."131 As such, "a non-exclusive patent license is equivalent to a covenant not to sue . . . both are properly viewed as ,,authorizations."132 The court found that the covenant authorized Mark IV to make, use, offer to sell, sell, or import any item covered by the patents listed in that agreement. And because there were no restrictions on sale, Mark IVs sales were authorized for

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TransCore, LP v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1274 (Fed. Cir. 2009). Id. at 1275. 132 Id. at 1275-76.

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Yina Dong: A Patent Exhaustion Exposition purposes of patent exhaustion. As in Quanta, the fact that the covenant not to sue stated that third parties received no implied license was irrelevant to the issue of exhaustion. The Federal Circuits reasoning as to the fourth patent, the one not explicitly included in the settlement agreement, was a bit more complicated. The district court found, and the Federal Circuit agreed, that because that fourth patent was broader than and necessary to practice at least one of the ten patents in the covenant not to sue, TransCore was legally stopped from asserting the fourth patent against Mark IV; this made Mark IV an implied licensee of that patent. The Federal Circuit held that "Mark IVs rights under its implied license to the 946 patent are necessarily coextensive with the rights it received in the TransCore-Mark IV [settlement] agreement. Mark IVs sales to ISTHA were thus authorized and, accordingly, exhausted TransCores patent rights in the products sold."133 The Federal Circuits broad language and holding means that, for the most part, covenants not to sue are no longer viable alternatives for patent owners who wish to contract around exhaustion. The court did not say whether TransCore would have been able to avoid this result by making the covenant not to sue expressly personal to Mark IV or by expressly providing that Mark IV was not authorized to make any sales unless the third party entered into a separate license agreement with TransCore. These questions, and many more, are open after Quanta. V. CONCLUSION ¶79 In conclusion, Quanta did not mark a new wave of change in the law of patent exhaustion. Rather, in determining when a patent may be exhausted by the sale of a component embodying that patent, Quanta followed the test first set up over half a century ago in Univis Lens. Although Quanta did mark the first time the Supreme Court decided that process patents can also be exhausted, that conclusion followed directly from the essential features test for components. Finally, although Quanta left open the questions of whether patent owners can contract around the principles of exhaustion and what types of remedies are available, this is not surprising given the weak facts of the case. The prior case law shows that license restrictions that are within the scope of patent rights have always been allowed; when the sale of the patented item or component of the patented item is validly restricted, contracting around exhaustion is effective. License restrictions that are not within the scope of patent rights are considered patent misuse and are not allowed; attempts to contract around exhaustion through these impermissible restrictions are ineffective, and patent exhaustion applies. Still, there has been no bright line separating these categories, and whether the distinction between restrictions on sale and restrictions on use can provide that dividing line remains uncertain. PostQuanta, it will be interesting to see how lower courts continue to deal with and resolve these numerous questions.

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Id. at 1279-80.

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Yina Dong: A Patent Exhaustion Exposition

APPENDIX A Figure 1. Graphical Representation of Relationships Among Parties in Cases Discussed

The clear boxes indicate the parties involved in the license or sale. The gray "exhaustion" box denotes the step in the chain in which patent exhaustion took place; if no such box is present, there was no exhaustion.

Quanta Computer, Inc. v. LG Elecs., Inc. (2008) Patentee (LGE)

LICENSE to make, sell, use (directly or indirectly), offer to sell, import or otherwise dispose of

Licensee (Intel)

SALE of microprocessors

Defendant (Quanta)

SALE of computers

EXHAUSTION

Bloomer v. McQuewan (1853)

Patentee

LICENSE to make, use, and sublicense in district

Licensee

SUBLICENSE to make and use in Pittsburg

Defendant

NO SALE = NO EXHAUSTION

Mitchell v. Hawley (1873) Patentee

LICENSE to make, use, and sublicense in MA and NH for original patent term

Licensee

SALE + LICENSE to use in Haverhill for entire patent term

Defendant

Patent Infringement

use beyond original patent term

Adams v. Burke (1873) Patentee

LICENSE to make, sell, and use within 10 mile circle of Boston

Licensee

SALE

Defendant

use outside of Boston

EXHAUSTION

Keeler v. Standard Folding Bed Co. (1894) Patentee

ASSIGN all rights to the patent in Michigan

Licensee

SALE

Defendant

RESALE in Massachusetts

EXHAUSTION

Henry v. A.B. Dick Co. (1912) Patentee

SALE + LICENSE to use only with supplies purchased from patentee

Licensee

sale of supplies

Defendant

Patent Infringement

This case was overturned

Bauer & Cie v. O'Donnell (1913)

Patentee

LICENSE all patent rights in United States

Licensee

SALE + LICENSE to resell for at least $1 EXHAUSTION

Defendant

RESALE for less than $1

Motion Picture Patents Co. v. Universal Film Mfg. Co. (1917)

Patentee

LICENSE with covenants requiring tying, term discretion, etc.

Licensee

SALE + LICENSE under same license terms

Theater

LEASE

Defendant

EXHAUSTION

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Yina Dong: A Patent Exhaustion Exposition

General Talking Pictures Corp. v. Western Elec. Co. (1937) Patentee

LICENSE to make and sell for private use

Licensee

SALE for commercial use

Defendant

Patent Infringement

RESALE for commercial use

Ethyl Gasoline Corp. v. United States (1940)

Patentee

SALE of patented fluid + LICENSE to make, sell, and distribute motor fuel only to licensed jobbers

Oil Refiners

SALE of motor fuel EXHAUSTION

Jobbers

RESALE

Retail Dealers and Consumers

LICENSE

LICENSE

United States v. Univis Lens Co. (1942)

LICENSE

Wholesalers Patentee

LICENSE to make lens blanks, and sell to licensed finishers

SALE of finished lens

Prescription Retailers

RESALE

Lens Company

SALE of lens blanks

EXHAUSTION

Finishing Retailers

SALE of finished lens

Customers

LICENSE

Mallinckrodt, Inc. v. Medipart, Inc. (Fed. Cir. 1992)

Patentee

SALE + LICENSE to use once

Hospitals

re-sterilization + RESALE

Defendant

Cyrix Corp. v. Intel Corp. (E.D. Tex. 1994)

Patentee (Intel)

LICENSE to make, have made, use, sell (directly or indirectly), lease, or otherwise dispose of

Licensees (ST & TI)

SALE of microprocessors

Defendant (Cyrix)

SALE of microprocessor combinations

EXHAUSTION

Static Control Components, Inc. v. Lexmark Int'l, Inc. (E.D. Ky. 2009)

SALE + LICENSE to use once re-fill + RESALE

Patentee

Customers

Remanufacturers

sale of supplies

Defendant

EXHAUSTION

TransCore, LP v. Elec. Transaction Consultants Corp. (Fed. Cir. 2009)

Patentee

COVENANT NOT TO SUE

Covenantee

SALE

Purchaser

setup and test

EXHAUSTION

Defendant

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