Exhaustion Doctrine: Everything You Need to Know
The exhaustion doctrine is a legal principle where a plaintiff needs to exhaust all possible administrative remedies prior to obtaining judicial review.3 min read
2. Fact-Sensitive Disputes
The exhaustion doctrine is a legal principle where a plaintiff needs to exhaust all possible administrative remedies prior to obtaining judicial review. When it comes to intellectual property, this principle states that the original sale of a patented, trademarked, or copyrighted good exhausts the patent, trademark, or copyright owner's intellectual property right so they can't control the resale or distribution of the good. For example, if owner A sells to owner B, owner B is allowed to sell to owner C without getting owner A's approval. This is also known as the doctrine of first sale.
Understanding the Patent Exhaustion Doctrine
According to the U.S. Patent Act, owners of patents are granted the monopoly right to prevent other people from doing the following:
- Using the patented invention.
- Making the invention.
- Selling the patented invention.
That said, the common law doctrine, also known as the patent exhaustion doctrine, usually controls what authority the patent owners have when it comes to authorized sales. This became cemented in the year 2008, when the Quanta Computer v LG Electronics case occurred. The court decided that the original authorized sale terminated all rights to that product afterward. In this example, LG Electronics, the plaintiff, had three patents that covered different computer computers, methods, and systems.
LG Electronics licensed their patents to Intel, who was permitted to create and sell chipsets and microprocessors that were covered under the patents. The license had the limitation that licenses could not be granted to third parties and stated that the doctrine of patent exhaustion could not be altered. Intel was in another agreement with LG that made it mandatory for Intel to let their customers know that Intel had the permission to sell their products, but the license wasn't applicable to any other products the purchaser made (such as combining a non-Intel product with an Intel product).
Quanta was another company who bought chipsets and microprocessors from Intel, and even though they knew about the company's notice, ended up combining Intel's products with components that weren't from Intel to make new computers under the LG patents. LG found out and sued Quanta under the terms of patent infringement.
Quanta's motion for summary judgment was originally granted on the terms that the LG license given to Intel exhausted LG's rights to be able to sue Intel's customers. It was reconsidered, and the court decided to deny summary judgment, saying that the patent exhaustion doctrine didn't apply to the claims, and therefore didn't apply to the patents since they had the method claims.
Recognizing that courts are in charge of disputes is important, as exhaustion issues are fact-sensitive. If a purchaser of an infringement claim becomes a target from the seller by reselling or using the article, it's essential to refer to the patent exhaustion doctrine. This is a meaningful and significant legal defense that's offered to the purchaser. The courts will decide if the sale of the article was actually an authorized sale that should trigger the doctrine. They'll see if there was a patent license that was associated with the transaction that occurred and if the license was limited.
The court will look at if contractual limitations or restrictive covenants were in place that gave contract rights that were separate from the IP rights of the patent owner. All of these questions will answer the gray areas of the doctrine that are being enforced. Patent owners who sell patented articles often try to find a way around the limitations that the patent exhaustion doctrine set by negotiating restrictive provisions and terms related to the sale.
Creating a license agreement between the provisions of the seller (licensor) and the purchaser (licensee) will make sure the licensee's customers aren't bound combine or process components of the licensed article. An example of trying to circumvent limitations is basing the sale of the purchaser accepting the patent license. Making it mandatory for the purchaser to let their customers know that they need to take a license from the patent owner before going further with the patented parts of an article is another way to circumvent the limitations.
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