Our August 23, 2009 article “International Exhaustion of Patents?” discussed the “exhaustion” principle, also known as the “First Sale Doctrine.” Patent exhaustion is prompted by a first authorized and unrestricted sale of a patented product, and operates to terminate all patent rights to a protected product. In other words, the patent holder may control the first sale or license of a patented product, however it may not restrict the use of the product after subsequent sales or licenses. Thus, the patent holder may not sue a downstream customer who infringes the patent. For example, a patent holder who sells a patented product to a wholesaler, who resells to a retailer, may not sue the retailer or its customers for patent infringement. The theory behind the exhaustion doctrine is that the patent holder has already bargained for, and received, an amount equal to the full value of the goods.
The 2009 Federal Circuit case TransCore LP v. Electronic Transaction Consultants Corp. expands the patent exhaustion doctrine. TransCore holds that a covenant not to sue may trigger the patent exhaustion doctrine and preclude a patent holder from suing a subsequent third party purchaser for infringement.
II. Current State of the Law
In 2008, the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., stated that the “authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post sale use of the article.” In Quanta, the Court was concerned that downstream purchasers of a product could be liable for infringement even though the product had been “once lawfully made and sold” pursuant to a license agreement between a patentee and an original purchaser.
In TransCore, the Federal Circuit addressed “whether an unconditional covenant not to sue authorizes sales by the covenantee for purposes of patent exhaustion.” The court found that a covenant not to sue, like a license, is an “authorization,” i.e. a promise by the patent holder not to sue the licensee or covenantee. Thus, a patent holder’s unrestricted covenant not to sue authorizes “all acts that would otherwise be infringements: making, using, offering for sale, selling or importing” and exhausts the patent holder’s rights to the covenantee’s future sales. Consequently, an unconditional covenant not to sue precludes suit against parties who otherwise may be liable for inducement to infringe or contributory infringement.
In view of TransCore, patent holders should be mindful of the patent exhaustion doctrine when settling patent infringement cases with a covenant not to sue. A covenant not to sue, without restriction, terminates the patent holder’s rights against third parties who sell, offer to sell, make, import or use the patented product. Accordingly, patent holders should consider restricting the rights granted in a covenant not to sue. Another approach is to limit the covenant not to sue to certain fields of use—the court stated that the patent holder may have avoided patent exhaustion by limiting the covenant no to sue to “making” or “using” the patented product.