The Software IP Report

With License Ambiguous, Patent Exhaustion Heads to Jury

In Audio MPEG, Inc. v. Dell Inc., the Eastern District of Virginia denied summary judgment of patent exhaustion because it was ambiguous whether a license between Audio MPEG and Dell’s supplier Microsoft covered the allegedly infringing software, leaving the issue to the jury.

Audio MPEG asserted that Dell’s sales of computers infringed three of its patents on encoding and decoding digital audio signals. Dell sold computers with both Microsoft Windows and third-party audio software preinstalled. The parties primarily disagreed on two factual questions: (1) Did Audio MPEG’s license agreement with Microsoft cover Windows codecs called by the third-party software? (2) Did the preinstalled third-party software only call the codecs or does it contain infringing programming? (According to the expert witness quoted by the court, “A codec is a piece of software that encodes and/or decodes a digital data stream. Codecs typically exist as a part of a shared library, such as a DLL, so they can be utilized by more than one software program.”)

In denying summary judgment of patent exhaustion, the court noted the stakes based on the resolution of these two questions: “if the Windows codecs are included under the License Agreement and the third party software calls the Windows codecs, this third party software would not infringe the patents-in-suit under the terms of the applicable license agreements. However, if the Windows codecs are not considered ‘PC Software’ under the Audio MPEG-Microsoft License Agreement, and thus are not licensed to allow third party software access, then, regardless of whether the infringing software calls the Windows codecs (the second genuine dispute of material fact), the software would still allegedly infringe the patents in suit.”

The doctrine of patent exhaustion starts with the proposition that a sale of a product embodying the patent exhausts the patent, in other words, the patentee cannot sue for infringement based on the sold product. Sales by a third party that are covered by a license from the patentee also trigger patent exhaustion. But, on the other hand, sales outside the terms of a license do not trigger patent exhaustion. The district court received additional briefing from the parties on the recent Supreme Court case Impression Products, Inc. v. Lexmark Int’l, Inc., and this last point—no exhaustion of sales outside the scope of a license—is an important caveat to the Supreme Court’s general holding that patent law cannot be used to enforce downstream restrictions on the use of products.

The real question before the court, then, was a question of contract interpretation. The court found the license from Audio MPEG to Microsoft ambiguous with respect to codecs called by third-party software, kicking the question to the jury. The license covered “PC Software,” defined as, among other requirements, software “offered for license to or suitable for use by an end user.” Moreover, the license excludes “rights to any other software or product that decodes or receives the encoded or broadcast information.” The court found that the third-party codec calls fell between the two clear-cut cases anticipated by the license: Microsoft audio software used by end users (unambiguously covered), and third-party audio software that performs its own encoding and decoding (unambiguously excluded).

Because the court found the license ambiguous, the parol evidence could be analyzed by the factfinder. The court remarked on the volume of parol evidence but did not analyze any, leaving that task to the jury.

Lessons for Practice

Even after Impression Products, licenses remain an important means for patentees to control downstream distribution of their products. If the restriction is a restriction of the scope of what the licensee is permitted to sell, then the patentee can still vindicate the restriction through patent law.

When using a license, how does one avoid such an ambiguity? When drafting the license, be clear on the scope. Moreover, make sure that those knowledgeable about the industry think creatively about the possibilities and weigh in on the language. Only someone knowledgeable about software would think to ask, “What if a third-party program accesses a codec?” At some point when attaching parol evidence to a summary-judgment motion, it should become clear that a question of material fact exists and the motion won’t be granted; that point is probably before the second binder of exhibits begins.