The Software IP Report

Patent Exhaustion Based on Foreign Sales

By Charles Bieneman

Categories: Patent Exhaustion, Patent Licenses, The Software IP Report

Sales outside the United States exhausted a patent owner’s rights in its U.S. patent, according to Multimedia Patent Trust v. Apple, Inc., No. 10-CV-2618-H (KSC), 2012 U.S. Dist. LEXIS 167479 (S.D. Cal. Nov. 9, 2012). Therefore, among rulings on summary judgment motions addressing a myriad of issues, the Court granted summary judgment to Canon on its affirmative defense of patent exhaustion based on Canon’s purchase of accused products from Fujitsu outside the United States. Fujitsu held an unconditional worldwide license to the patent in question, having received this license from AT&T, the patent’s former owner.

MPT, the plaintiff, had alleged that Canon and other defendants variously infringed four patents related to video compression technology, including U.S. 5,136,377. Canon was accused of infringing only the ’377 patent, based on encoding and decoding functions of Fujitsu chips in Canon products.

Fujitsu had licensed the ’377 patent from AT&T, its prior owner. Licensed patents, of which the ’377 patent was one, included those “issued at any time in any or all countries of the world.” The Fujitsu chips at issue were indisputably covered products under the patent license agreement. Contrary to MPT’s arguments, there were no genuine issues of material fact concerning whether the agreement was still in effect, or whether the Fujitsu chips were sold under the agreement.

Therefore, the Court turned to the question of whether Canon’s exhaustion defense failed as a matter of law because, as MPT argued, “sales occurring outside of the United States do not exhaust patent rights.” In support of this proposition, MPT cited cases including Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), Fuji Photo Film Co., Ltd. v. Benun, 463 F.3d 1252 (Fed. Cir. 2006), Fujifilm Corp. v. Benun, 605 F.3d 1366 (Fed. Cir. 2010), and Ninestar Tech. Co. v. ITC, 667 F.3d 1373 (Fed. Cir. 2012).

The Court distinguished the cases that MPT cited, explaining that “those cases only involved foreign sales made directly by the patentee and did not involve sales made pursuant to a unconditional worldwide license.” In this case, the sales in question were made under AT&T’s unconditional worldwide license to Fujitsu. Canon’s motion was accordingly governed by Tessera, Inc. v. ITC, 646 F.3d 1357 (Fed. Cir. 2011), because “AT&T gave Fujitsu and its subsidiaries an unconditional grant of license to ‘make, have made, use, lease, sell and import’ the accused chips.” The license was worldwide. The Court concluded that, “[t]herefore, Fujitsu Electronics was authorized under the ’377 Patent to sell Canon the accused chips, and the doctrine of patent exhaustion applies to these sales.”

The Court further explained its reasoning in a footnote that is worth reading in full:

The Court declines to allow a patentee who has granted unconditional worldwide rights in a license and received royalties from that license to sue downstream customers of the licensee simply because the products traveled to another country. To allow an infringement lawsuit to proceed under those circumstances would be contrary to the rationale behind the exhaustion doctrine. Under the exhaustion doctrine, the unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of that item thereafter because the patentee has bargained for and received the full value of the goods. [Citation omitted.] MPT’s interpretation of the exhaustion doctrine would also substantially hinder the rights of the licensee. Under MPT’s view of exhaustion, an overseas component manufacturer like Fujitsu would have to possess a distribution network that would allow it to import and sell its component parts in each country where its components might eventually be used and sold by its downstream customers. This would be the only way that the licensee could ensure that its downstream customers would not be later liable for patent infringement. This circumstance is contrary to the licensee’s possession an unconditional worldwide license to practice the patent.

The Court made a number of other interesting rulings in this case, at least one of which may be a subject of the future post. In that ruling, the Court granted other defendants’ motion for summary judgment of no willful infringement.