Exhaustion Doctrine

The patent exhaustion doctrine terminates a patent owner's control over a specific patented item after its authorized first sale: DEFINITION: when a patent owner (or an authorized licensee) makes an authorized sale of a patented item, the patent rights in that specific item are exhausted; the purchaser and all subsequent owners of that item may use or resell it without infringing the patent; FOUNDATION: exhaustion ensures that a product sold once can move freely in commerce without every downstream transfer constituting infringement; WHAT EXHAUSTION REQUIRES: (a) AUTHORIZED SALE: the sale must be authorized by the patent owner; a sale by an infringer does NOT exhaust the patent; (b) SPECIFIC ITEM: exhaustion applies to the specific physical item sold, not to the entire patent; the purchaser can use/resell this unit; the purchaser cannot make new units; (c) THE PATENT MUST COVER THE ITEM: the sold item must embody the patent (or substantially embody it, per Quanta); WHAT EXHAUSTION GRANTS THE PURCHASER: the right to USE the specific purchased item; the right to SELL the specific purchased item; the right to REPAIR the specific purchased item; WHAT EXHAUSTION DOES NOT GRANT: the right to MAKE new units of the patented invention; the right to RECONSTRUCT the item (distinguished from repair); a patent LICENSE (to practice the patent); REPAIR vs. RECONSTRUCTION: a purchaser may repair a patented item (replace worn parts); reconstruction (rebuilding the essential inventive concept from unpatented components) is infringement; Aro Manufacturing v. Convertible Top (S.Ct. 1961): replacement of a worn convertible top fabric was permissible repair; the unpatented fabric was a spent part, not the patented combination.

Quanta Computer v. LG Electronics (S.Ct. 2008) was a landmark expansion of the patent exhaustion doctrine: BACKGROUND: LG Electronics licensed patents to Intel; the license authorized Intel to make and sell chipsets; Intel sold chipsets to Quanta (a computer manufacturer); Quanta incorporated Intel's chipsets into computers; LG sued Quanta for infringement of patents NOT licensed directly to Quanta; ISSUE: did Intel's authorized sale of chipsets exhaust LG's patents in the downstream computer products? HOLDING: YES — exhaustion applied because the Intel chipsets substantially embodied LG's patents; SUBSTANTIALLY EMBODIES TEST: Quanta extended exhaustion to products that do not themselves infringe but substantially embody the patent; a product substantially embodies a patent when: (a) its only reasonable and intended use is to practice the patent; (b) it embodies the essential features of the patent; IMPACT: the decision made it much harder for patent holders to license separately at each level of the supply chain; a patent owner who licenses a chip manufacturer cannot then separately assert the same patents against the chip manufacturer's customers; IMPLICATIONS FOR PATENT LICENSING: STRUCTURED LICENSING RESPONSE: patent owners must now think carefully about where in the supply chain to license; licensing a component manufacturer may exhaust claims against OEMs; licensing at the OEM level may be necessary to avoid exhaustion arguments; METHOD PATENTS: Quanta applied to method patents where the method was performed by the downstream user of the component; the licensed sale of a component that performed the method steps exhausted the method patent claims.

Impression Products v. Lexmark International (S.Ct. 2017) resolved the geographic scope of patent exhaustion: BACKGROUND: Lexmark sold printer cartridges abroad and in the US; Lexmark's US cartridges included a 'single-use' restriction (post-sale condition); Impression Products collected used cartridges abroad and resold refilled cartridges in the US; Lexmark sued for patent infringement; TWO KEY ISSUES: (1) CONDITIONAL SALES: does exhaustion apply when the patent holder imposed a single-use condition on the sale?; (2) INTERNATIONAL SALES: does a foreign sale by the patent holder exhaust US patents?; HOLDING ON CONDITIONAL SALES: Mallinckrodt's rule (requiring exhaustion to be waived only by patent law conditions) was OVERRULED; Lexmark could NOT impose post-sale conditions via patent law; if Lexmark wanted to restrict single-use, it must rely on contract law, not patent law; US patent rights in a sold item are exhausted after any authorized sale in the US; HOLDING ON INTERNATIONAL SALES: international sales by the patent holder also exhaust US patent rights; this reversed the Federal Circuit's prior rule; rationale: exhaustion follows the decision to sell, not the geography of the sale; the patent holder already received value for the item when sold abroad; IMPACT: international authorized sales now exhaust US patent rights; prevents patent holders from using US patents to control imports of items they have already sold abroad; LIMITS: does NOT apply to sales by unauthorized parties (infringers); does NOT grant the right to make new copies; LICENSEE INTERNATIONAL SALES: more complex — whether a foreign authorized licensee sale exhausts US patents depends on the scope of the license.

Patent exhaustion and implied license both permit use of patented technology without an explicit license, but they arise differently: PATENT EXHAUSTION: arises automatically from an authorized sale of a patented item; no contract required; protects purchasers of items downstream from the authorized first sale; applies to specific items, not to the general right to make the invention; SCOPE: the purchaser may use and resell the specific item; cannot make new units; cannot reconstruct the item; IMPLIED LICENSE: arises from the patent holder's conduct that leads another party to believe it has a license; NOT from a specific sale of a patented item; GROUNDS FOR IMPLIED LICENSE: (a) LEGAL ESTOPPEL: the patent holder's prior conduct was inconsistent with claiming infringement; e.g., the patent holder encouraged use, received payment, or was silent for years while use continued; (b) EQUITABLE ESTOPPEL: the patent holder's misleading conduct (silence or representations) induced the accused infringer to rely to its detriment; (c) ACQUIESCENCE: long-term acceptance of infringing use without objection may create an implied license; IMPLIED LICENSE FROM SALE OF UNPATENTED MATERIALS: a patent covering a process involving a particular material may give an implied license to use that material in the process; but courts are reluctant to find an implied license from sale of a product not itself patented; COVENANT NOT TO SUE: contractual agreement not to assert specific patents against specific parties; functions like an implied license in practice; DIFFER FROM SHOP RIGHT: shop right is a non-exclusive implied license arising from an employee's use of employer resources to develop an invention; employer gets a shop right to use the employee's patent without compensation.

Patent exhaustion in SEP licensing creates complex supply chain issues: SEP AND EXHAUSTION: standard-essential patents cover technology embedded throughout the supply chain (chip → module → device → system); if a SEP holder licenses chip manufacturers, does that exhaust its claims against OEMs who purchase the chips? LICENSED COMPONENT MANUFACTURER: if the SEP holder grants an authorized license to an Intel, Qualcomm, or Broadcom chip manufacturer; and the chip manufacturer sells licensed chips to OEMs; the OEM might argue exhaustion: the chip substantially embodies the SEP (Quanta analysis); PATENT HOLDER RESPONSE: many SEP holders structure licenses to expressly EXCLUDE exhaustion arguments: license grant explicitly does not authorize the licensee to pass exhaustion rights downstream; covenant not to sue excludes downstream customers; BUT: courts have been skeptical of contractual limitations on exhaustion; Quanta: Intel's license with LG did not include permission for Intel to pass license rights to Intel customers; the Court still found exhaustion based on authorized sale; LEVEL OF LICENSE DEBATE: major SEP holders prefer to license at the OEM level (device makers); OEMs prefer component-level licensing (pay once at chip purchase, not separately per device); this debate is the core of many SEP licensing disputes; FRAND NON-DISCRIMINATION: if a SEP holder licenses some OEMs and not others, the unlicensed OEMs claim non-discrimination under FRAND requires equal access; EXHAUSTION IN PATENT POOLS: pool licenses typically expressly address exhaustion; Avanci (4G/5G IoT pool) licenses at the OEM/device level to avoid exhaustion arguments against chip-level licensing.