Patent Exhaustion

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 What Is Patent Exhaustion?

Patents are a form of intellectual property. Patent exhaustion is sometimes referred to as the doctrine of first sale. Essentially, the rule states that the patent owner cannot control a patented item’s resale if the seller obtained it lawfully. In the event that the product is sold, the patent for that product is “exhausted.”

Under the patent exhaustion doctrine, patent law cannot be used to control resale prices or what end users do with patented products.

However, there is a recent trend of allowing contract law to overtake the doctrine of patent exhaustion. For example, one case held that a printer manufacturer could warn consumers not to refill ink cartridges on the box. According to the court, if the license is clearly written and visible, it amounts to a contract that the user signs when purchasing the product.

There Are Times When Patent Exhaustion Does Not Apply

Patent exhaustion does not always apply. You still hold the patent on your product if it is sold outside the United States and imported back without your permission.

Patent exhaustion does not apply if you have a license agreement that specifies what the licensee can do with your product and the terms, conditions, and use. Selling your product to another company is the most common example of this.

Be very specific in your language when creating a license agreement for your product’s use, distribution, and sale.

  • Your license should specify exactly what the licensee can do with your product.
  • Provide a list of what the licensee cannot do.
  • You should specify which patent claims are protected or prohibited in your agreement.

Exhaustion of Patents Can Be Avoided

The unintended exhaustion of a patent occurs when a product has both a product claim and a method claim. You must list the claims for your invention when you file your patent – what it is, what it does, and how it is used. The majority of companies list all the claims under one patent.

When you’re ready to patent your invention, consider its market value and potential revenue streams. In order to sell other products around your invention, you will need multiple patents, such as:

  • An invention or product patent with claims about how it works.
  • Replaceable parts patents.
  • Patents on how the product can be used, known as method claims.
  • Patents on other products you may want to sell for use with your invention.

Patent applications will take longer and cost more, but they may save you money in the long run.

Contested Patent Exhaustion Examples

Patent exhaustion often goes to the Supreme Court. In some cases, it is clear, and in others, it is not:

  • Adams v. Burke: One of the earliest cases, this helped establish what we know today as patent exhaustion. Licensees made, used, and sold patented coffin lids in 1873. Coffin lids were purchased from a licensee in one area and used outside that area by an undertaker. There was an objection from the owner of the patent. According to the court, the value of the patented coffin lids lies in their use, and the patent holder received full benefit from the sale of the lid regardless of where it was used. Patent rights were exhausted in this case.
  • LifeScan v. Shasta: This is a case of needing multiple patents to protect your future revenues. Blood glucose meters were made and sold by LifeScan for people with diabetes. Approximately 40 percent were sold for less than the cost of making them, while the rest were given away for free to healthcare providers. In order to make money, LifeScan planned to sell test strips for their meters. LifeScan sued Shasta after it began selling strips. LifeScan lost the case since it hadn’t patented the method separately.
  • Quanta v. LG Electronics: One of the most notorious patent exhaustion cases, it involves making sure your license holders do what they’re supposed to do. LG Electronics acquired a portfolio of computer patents related to data transfers. LG Electronics licensed Intel to make, use, or sell products using its patents. LG Electronics licensed Intel’s products to their customers. Intel had to include this licensing language in agreements with their customers. Additionally, the license was supposed to exclude anything made by combining Intel products with non-Intel products. Their agreements did not include this language.
    • Companies like Quanta did exactly what LG Electronics did not want them to do. By combining Intel items with non-Intel items, it made computer products. LG Electronics filed a Supreme Court case against Quanta and lost the case. Any attempt by a company to restrict what a purchaser can do after the sale of its product is disfavored by the court. However, Quanta’s license agreement did not include the language that said it could not combine non-Intel and Intel parts in this case. Despite losing the patent exhaustion case, LG Electronics could have sued Intel for breach of contract if it wanted to.
  • Lexmark International, Inc. v. Impression Products, Inc.: Lexmark manufactures toner cartridges used in laser printers and owns several patents. Cartridges are sold in the United States and abroad. If the toner runs out, you cannot reuse the cartridges or give the empty cartridges to anyone other than Lexmark. By buying empty cartridges, repairing them, and reselling them, Impression Products violated the rule. Lexmark sued for patent infringement after finding out. Impression Products asked the courts to decide two issues:
    • Can a patent holder bypass the exhaustion doctrine by adding restrictions to how a buyer can use a product?
    • According to Impressions Products, patents automatically expire when sold outside the United States.

According to the Federal Circuit Court, a patent holder can place those restrictions on their product, and international sales do not exhaust a patent. The Supreme Court heard the appeal of Impression Products.

Although it is unclear when the Supreme Court will hear the case, the United States Solicitor General was asked to review the case and issue an opinion. Solicitor General Ian Gershengorn has issued a report. He disagrees that a patent holder can restrict their product as Lexmark did. However, he agrees that sales outside of the U.S. do not automatically exhaust a patent. Until the Supreme Court weighs in, it is unclear what this means for patent holders.

Patent Exhaustion Mistakes

Patent exhaustion occurs when a patented product is legally purchased. The following mistakes should be avoided by companies and inventors who want to avoid patent exhaustion unnecessarily:

  • Patents that include both product and method claims
  • Not considering future revenue options
  • Creating license agreements that fail to specify specific patent violations

Is it Necessary to File Multiple Patents for the Same Invention or Product?

There are some exceptions. Consider other patents if you plan to make extra revenue from parts, repairs, or methods of use.

Is Patent Exhaustion Followed in Other Countries?

Patent laws vary from country to country. Many countries are members of the World Intellectual Property Organization’s Standing Committee on the Law of Patents.

Do I Need a Lawyer?

If you have an issue with a patent or the first sale doctrine, you should contact a patent lawyer for help. Your lawyer will protect your rights and represent your best interests.

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