Nervous exhaustion: the recent evolution of “first sale” doctrine in US patent law

As we noted in a previous item (“Reselling products in the USA, Part II: ‘First Sale’ doctrine in patent,” March 22, 2013), American patent law features a doctrine of “exhaus­tion,” also sometimes (apparently interchangeably) called “first sale.”  If you own a patent, and a claim of that patent reads on a product you sell, generally you cannot sue a purchaser for infringing that patent by using or selling that product so long as the purchaser complies with any conditions set out in the contract of sale.  This is the core rule of exhaus­tion, well established for many years.

The doctrine of exhaustion has been argued to also apply in many other situations.  A few illustrations may be instructive.  (Please assume in the hypotheticals that follow that no circumstances are present beyond those stated that would alter the character of the transactions or relationships.)

Suppose you own a patent, you’ve licensed it with certain limitations placed on the licensee, and your licensee, without breaching those limitations, sells products on which a claim of the patent reads.  Can you sue the users for infringing that patent claim?  No.  Exhaustion applies to sales by the licensee as long as the latter’s license authorizes the sale.  This was decided by the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617, 128 S. Ct. 2109 (2008).  Before Quanta, the Federal Circuit’s view had seemingly been that if the license imposed any condition at all, exhaustion did not apply.  B. Braun Medical Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed. Cir. 1997) (“This exhaus­tion doctrine, however, does not apply to an expressly conditional sale or license.”).

Now let us add an additional fact and suppose that you own a differ­ent patent with a claim that reads on a combination of the product with something else neces­sary to use the product.  Can you sue buyers for infringing the latter claim by using that product?  No, again per Quanta v. LG, supra, again reversing the Federal Circuit:  “‘the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold.’” 128 S. Ct. at 2119.  Here, the Supreme Court was quoting its earlier decision in United States v. Univis Lens Co., 316 U.S. 241, 249, 62 S. Ct. 1088 (1942).

Return to the first hypothetical, that you own a patent which has a claim that reads on a product which your licensee sells with permission, and this time let us suppose that you also have a different patent claim to a method which users of that product will necessarily practice when they use the product.  Can you sue buyers for infringing that method claim by using that product?  No, again per Quanta v. LG, supra, and again reversing the Federal Circuit:  “We . . . reject LGE’s argument that method claims, as a category, are never exhaustible,” and furthermore, a method claim is “exhausted by the sale of an item that embodied the method.”  128 S. Ct. at 2117.

This hardly exhausts (pun not intended) the possible situations in which the first sale doctrine might be argued to apply to bar patent infringement actions.  Unlike in copyright law (which we discussed in another previous item, “Reselling products in the USA, Part I: ‘First Sale’ doctrine in copyright” (Oct. 29, 2012)), in U.S. patent law the first sale doctrine is judge made, rather than statutory, so the Federal Circuit decides if patent exhaustion applies or not in common law fashion, analyzing one situation at a time as it comes up on appeal.  Perhaps chastened by its reversal in Quanta v. LG, the Federal Circuit has since Quanta seemed more generous in allowing exhaustion to bar lawsuits, including situations where the patent claim asserted does not read on the product sold.  The trend is illustrated by two recent Federal Circuit decisions, both of which found exhaustion and both of which were not unanimous.

The first of these cases, Keurig, Inc. v. Sturm Foods, Inc., No. 13-1072 (Fed. Cir. Oct. 17, 2013), can be stated relatively simply.  Suppose you license your patent and sell a product covered by a claim of that patent, thereby exhausting your patent rights against the product at least as to the claim that covers the product sold.  Can you still sue the purchaser under a different claim of the same patent that does not read on the product?  No.  In the opinion of the court in Keurig, we read:

“[The patentee’s] argument that patent exhaustion must be adjudicated on a claim-by-claim basis is unavailing.  The [Supreme] Court’s patent exhaustion jurispru­dence has focused on the exhaustion of the patents at issue in their entirety, rather than the exhaus­tion of the claims at issue on an individual basis.”

The facts of Keurig may amuse those of us who like single-serve coffee, which Keurig machines provide.  The claims were method claims reciting steps carried out by the machine sold.  The accused products were unli­censed Keurig-style coffee cartridges, use of which provides a single cup of coffee per cartridge.  (When licensed, such cartridges are called “K-Cups,” said to be a registered trademark of Keurig, the patentee.)

As patentee, Keurig took a “claim-by-claim” exhaustion position so that it could argue that its method claims were not exhausted by the authorized sale of products covered by its non-method claims—after all, in such a sale the method isn’t sold, just equipment to practice it.  Keurig’s position, if successful, would have allowed Keurig to continue making money off third-party cartridges, which are made by such famous coffee brands as Starbucks, by enforcing its method claims against unlicensed coffee cartridges used to practice those methods.

It is easy to understand why the Keurig panel majority was wary of agreeing with the paten­tee, since the Supreme Court has been explicit in rejecting the notion that method claims aren’t exhaus­ted by sale “of an item that embodied the method.”  Quanta v. LG, 128 S. Ct. at 2117.  Judge O’Malley, however, concur­red only in the result of exhaustion, justifying it on a different theory, and rejecting the panel majority’s view that what gets exhausted is an entire patent at a time.

The second recent Federal Circuit decision on exhaustion, arguably more expansive than Keurig, is Lifescan Scotland v. Shasta Technologies, LLC, No. 13-1271 (Fed. Cir. Nov. 4, 2013).  In Lifescan, the technology involved the widely pre­scribed sort of test strips used in measuring blood glucose level by pricking a finger, placing some of the resulting blood on the test strip, and having an electronic glucose level displaying machine (the “meter”) contact the test strip and ascertain the glucose level.  As in Keurig,the patentee had both non-method claims covering the machine sold, and method claims reciting steps carried out by the machine sold.

The sole asserted claim recited the method of providing the strips, pricking one’s finger (“applying the sample liquid to said measuring device”), and operating the meter to determine glucose level. The panel majority held, however, that if the patient bought the meter from the patentee, the patentee could not thereafter assert the method claims at issue against the test strips used in the meter, because the authorized sale of the meter had exhausted the method and non-method claims alike.

The patentee argued that the meters have substantial noninfringing uses, and so their sale should not have exhausted the method claim.  After all, as we noted above, Quanta had spoken of “‘the authorized sale of an article which is capable of use only in practicing the patent’” (emphasis added), and the meter here suppo­sedly had other capabilities.  The panel majority, however, did not believe that this fact neces­sarily avoided exhaustion.  Rather, the test to be applied was whether the meter “embo­dies the claimed invention.”

How does one know when this “embodies” test is met?  Two of the three judges on the Lifescan panel (Judges Dyk and Prost) thought the meter “embodied the claim invention,” and dissenting Judge Reyna thought that it did not.  The majority’s reasoning can be simply stated: the test strips were not patented, therefore they were not inventive, and so the invention of the method claim had to be “embodied” somewhere else, i.e., in the meter.  Judge Reyna viewed the situation the other way around.  He argued in dissent that “[b]ut for the specialized test strips required by LifeScan’s patented method, the blood glucose meter alone could not perform the . . . steps [recited by the asserted method claim] viewed by the majority as essential to the patented method.”

The Lifescan patentee also argued that it gave away many meters, and that giving something away did not exhaust patents reading on it the way a sale for money would.  However, the panel was uncon­vinced that this should be the legal rule.

Interesting questions will remain on remand.  The appeal in Lifescan was taken from a preliminary injunction rather than a final decision.  Under American procedural law, preliminary determinations of this sort are decided by the judge rather than by a jury.  However, if the remanded case were to proceed to trial, the parties’ factual disputes will likely be decided by a jury, and it is common for juries to revisit issues decided by judges in granting a preliminary injunction.  Will the jury be asked to revisit whether the meter “embodies the claimed invention”?  After all, that very issue was given to the jury in the famed 2012 Apple v. Samsung trial.  The trial judge in that case instructed jurors that in order to decide whether the patents in that case were exhausted, it was for the jurors to determine whether devices sold by a Samsung licensee and incorporated in Apple’s accused devices “substantially embod[ied]” Samsung’s asserted patents; and the jury, rather than the judge, found that Samsung’s patents were exhausted.

In the wake of Quanta and these more recent progeny of Quanta, it is easy to predict that exhaustion of patent rights under the first sale doctrine will continue to be an increasingly popular argument among those accused of patent infringement in the United States.

Kenneth J. Weatherwax and Flavio M. Rose, Goldberg Lowenstein & Weatherwax LLP.