Patent licensing after the Quanta decision

Infotech and the law | Legal insights for today's market

Patent owners have turned their attention to the terms and conditions of patent licenses now that the Supreme Court has recently expanded the scope of patent exhaustion through its Quanta Computer v. LG Electronics decision. "Patent exhaustion" is a term of art that generally means a patent owner can profit from the sale of a product covered by the patent only until the first sale of the product.

Before Quanta, a patent owner could limit a sale of the product in such a way so as not to lose complete rights to the product after the sale. This provided patent owners with the potential for obtaining licensing fees from various purchasers in the supply chain. Now, in Quanta the Supreme Court has held that the first authorized sale of the patented product exhausts the patent owner's rights such that subsequent sales of it may not generate additional patent licensing fees for the owner. By triggering exhaustion at the first authorized sale, the intent is for the product to move more freely through the market because purchasers will worry less that patent infringement may limit their use of the product.

Patent holders and customers can consider and use various strategies in this post-Quanta era. For instance, they can use different approaches to negotiating new licenses, reviewing and renegotiating existing licenses whose terms Quanta might have vastly altered, and considering different strategies when seeking patents from the Patent and Trademark Office.

When negotiating new licenses, patent holders should consider where the authorized sale to be made to maximize the license revenue lies in the supply chain. For example, for electronic components, patentees might seek to license final assembly works, where the value of the finished product is highest. Similarly, pharmaceutical manufacturers might consider marketing their drugs for their highest and best human use rather than, say, for veterinary use with limited retail value. In each situation, patentees and customers might seek to negotiate additional contractual terms that are beneficial and consistent with the Quanta opinion. For the patentee, those terms might include negotiating a list of approved customers, defining a list of patents that are specifically excluded from the license and licensing additional know-how or training that could be used at various points in the product's life cycle. For the customers, that might include assurances that the patentee's future patents also will be licensed for the products.

When reviewing existing agreements, patentees and customers need to consider whether rights in the patents being considered have already been exhausted and if future licensing fees might be due. Patentees and customers might also consider whether additional patents have been unknowingly licensed by the patentee, because these additional patents were necessary to use the product in foreseeable downstream applications of the product. In other words, if a licensed product has a reasonable and foreseeable use beyond what is covered by the licensed patent, other patents that cover these additional uses may potentially be considered to have been licensed by the patent holder as well, even if the other patents are not mentioned in the license agreement.

To limit the need to knowingly license multiple patents when a product is sold, patentees could elect to prosecute device claims in a single patent and method claims that may not use the patented components in a different patent. Obtaining patents this way can limit the number of patents that are licensed when the first authorized sale occurs.

By its decision in Quanta, the Supreme Court has altered the patent licensing landscape. The exact scope of its effect and the manner in which the courts will interpret the nuances of the opinion remain to be seen. As this jurisprudence develops, patentees and customers are encouraged to weigh the influence Quanta and its progeny might have on their licensing, purchasing and patenting practices.

Fred T. Grasso (fredgrasso@pillsburylaw.com) is counsel in the McLean, Va., office of Pillsbury Winthrop Shaw Pittman LLP.

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