How to Sell and License Post-Quanta

The patent exhaustion doctrine operates to exhaust a patentee’s rights following
the first authorised sale of a patented item. Once a patented article is
unconditionally sold by the patent owner or its licensee without restriction,
that article passes beyond the exclusive rights of the patent. In this way, the first
authorised sale of a patented article exhausts the patent to the extent that an unconditional
sale frees the purchaser from patent liability to use and resale the article.

While the patent exhaustion doctrine is relatively easy to state, courts tend to
hold that many sales and licensing strategies fall victim to the doctrine. On June 9
2008, the Supreme Court attempted to clarify the patent exhaustion doctrine in
Quanta Computer Inc v LG Electronics Inc by holding that the doctrine applies 1)
to the method and not just the apparatus claims of patents and 2) to sales “authorised”
by the patent holder of incomplete products that “substantially embody”
essential features of a patented invention.

Avoiding exhaustion

Field of use licensing
Licences that carve out a particular field of customer class for the licensee are commonly
referred to as field of use licences. Like territorial licences, these arrangements
have long been considered presumably lawful exercises of the patentee’s exclusionary
rights (such as making, using, offering for sale or importing) under its patent,
notwithstanding their obvious competitive ramifications. The leading case upholding
the basic legality of field of use licences is the Supreme Court’s decision in
General Talking Pictures Corp v Western Electric Co, which, while distinguished,
was implicitly adopted by the Quanta Court.

In General Talking Pictures, the patent owner had granted Transformer Company a
non-exclusive licence to sell the patented product solely for home use. The licence agreement
required Transformer Company to mark each product with a label describing the
limited field licence. Transformer Company sold the product to General Talking
Pictures with knowledge that the latter intended to use it for commercial purposes. In
addition, General Talking Pictures knew Transformer Company had no right to sell outside
the home use field. The Court held that the patent owner could sue General Talking
Pictures for patent infringement because “[t]he sales made by the Transformer
Company ... were outside the scope of its license and not under the patent.” The Court
further reasoned that both parties knew this fact at the time of the transactions.