Licensing and Exhaustion
Moderator: Prof. Robert Brauneis, George Washington University Law School
Eric M. Reifschneider, The Marconi Group: There are deals that have died just b/c of exhaustion uncertainty. What triggers exhaustion? At one time, many practitioners thought that a covenant not to sue wouldn’t trigger exhaustion; in 2009, Fed. Cir. said that’s not the case. There was a point when people thought that if you withheld the right to use from a license grant, that would avoid exhaustion b/c a right couldn’t be conveyed broader than the license itself. That’s not correct either: exhaustion comes from sale, not the right to use. There’s no way to stop companies trying to do business from attempting to structure contracts in a way to achieve business objectives—avoidance, not evasion. These days, covenant to sue last/covenant to exhaust remedies: before I sue you, I will sue your customer. But if I can’t, I reserve the right to come back and assert patents against you. That doesn’t authorize sale or grant license. You’d think that would work, but we don’t know b/c there’s no court that’s decided the issue. Enough language out there makes it sound like avoidance is a bad thing.
Aaron M. Panner, Kellogg, Huber, Hansen, Todd, Evans & Figel, PLLC: more ready finding of exhaustion than in pre-Quanta law. Substantial embodiment now gets litigated: when does the product sold substantially embody the patent, critical for method patents as well as compounds. Real hostility to slicing and dicing rights in any way you want; transactions should be chunked to avoid worries about separate IP rights. [That is a very Henry Smith-/numerus clausus-sounding justification.] That’s why the SCt got Kirtsaeng wrong. The whole idea of “made under this title” was understood by the Second Circuit to be “made in the US,” and that can’t be right. But “made under this title” as “made under some authorization under the law” makes more sense. If I authorize printing a book in England for sale worldwide, that’s made under this title b/c a right under US © law has been conferred on the printer, whereas if I authorize English sale only I’ve done nothing that implicates my rights under US law. Lexmark will raise this same Q under a statute with no such language; we need to figure out when you’re exercising your rights and when not.
Prof. John F. Duffy, University of Virginia School of Law: First authorized sale could mean you lose all your rights worldwide; or you could lose nothing as long as you specify it clearly enough in your license. That’s about as big a range of possibilities as one can imagine. Does the statute help?
Sarang V. Damle, U.S. Copyright Office: Kirtsaeng leaves not so much left under §109. What we’ve been thinking about in post-sale restrictions: software-enabled consumer products. Suppose you want to patch your own toaster’s vulnerability. You may have to reproduce software to examine it; maybe you create a derivative work. Those aren’t exhausted rights. Do we characterize books and movies as licensed when they’re digital, as we’ve done w/software? Think about basic commercial law principles. There are still exhaustion-related Qs to be examined in ©.
Duffy: commercial law/Title 9 deals with encumbering property after it’s sold/transferred. You can say “you can’t use a research laser for a commercial purpose” and put a security interest on it and the interest follow the good. There are some limits; there are notice rules. What exhaustion is trying to do is not make patentable goods an encumbrance-free zone; conditional sales are possible, but you need to use this other area of law, and there’s a reason behind that—this is what courts were saying when they created this doctrine. The debate in IP is about conditional sales—that was a term in the 19th C. in commercial law, a forerunner of the security interest. But the UCC now just expressly incorporates that into the concept of security interests; UCC abolished conditional sales.
Why is exhaustion so inflexible when even tying is now flexible? It’s just a domain limitation. Just like the line b/t Virginia and North Carolina is very formalistic. That makes sense because of what the line is there to do. For a security interest, there’s a stronger notice requirement: the consumer has to affirm it actively, not just click yes on a contract of adhesion.