RECONCILING THE PATENT EXHAUSTION AND CONDITIONAL SALE DOCTRINES IN LIGHT OF QUANTA COMPUTER V.

LG ELECTRONICS
Erin Julia Daida Austin*

INTRODUCTION Imagine that Seller owns a valid patent for technology incorporated into a machine that produces widgets. Buyer purchases the widget machine from Seller. As a condition of the purchase, Buyer promises to restrict his use of the machine in some respect. For example, Buyer may promise eventually to return the used machine only to Seller and not to any third-party refurbisher or reseller.1 Or Buyer may promise to use the machine to produce no more than one thousand widgets, after which point Buyer promises to dispose of the machine.2 Perhaps Buyer promises to use the machine only to produce widgets for personal use and not for commercial use.3 If Buyer violates such a promise, should Seller have a cause of action against Buyer for breach of contract, for patent infringement, or for both? Significant debate exists about whether or to what degree patentees4 should be able to enforce post-sale restrictions5 against

* J.D. Candidate (June 2010). I would like to thank my husband and daughter, Joel and Sophie, for their encouragement and support. Thank you also to Professor Alan Wolf, Victoria Elman, and Etan Chatlynne for their advice and comments on this Note. 1 This restriction is inspired by Ariz. Cartridge Remfrs. Assn v. Lexmark Intl Inc., 421 F.3d 981 (9th Cir. 2005). 2 The restriction on the number of widgets produced is inspired by Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992). 3 The restriction on the type of use is inspired by Gen. Talking Pictures Corp. v. W. Elec. Co., 304 U.S. 175 (1938). 4 A patentee is the owner of the monopoly rights under an issued patent. See infra note 10. An assignee of rights under the patent stands in the same shoes. E.g., DONALD S. CHISUM, CHISUM ON PATENTS 22.01 (Patents are subject to general legal rules on the ownership and transfer of property. The patent statutes provide that a patent shall have the attributes of personal property. They also provide that both patents and patent applications shall be assignable in law by an instrument in writing. (citing 35 U.S.C. 261)). 5 A patentee might desire to restrict the purchasers right to remake or repair, use, or resell the patented article. Principally at issue in this Note are limitations on the purchasers right to use the patented article.

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purchasers,6 as in the Seller-Buyer example presented, through a suit for patent infringement.7 Specifically, some see a conflict between the patent exhaustion doctrine, long established by the Supreme Court,8 and the conditional sale doctrine as recently implemented by the Federal Circuit.9 While a patent gives the owner the right to exclude others from making, using, or selling the patented invention within the United States,10 this right is limited by the exhaustion doctrine (also called the first sale doctrine), which holds that the first authorized sale11 of a patented article removes that article from the patent monopoly such that any subsequent use is not infringement.12 If patent rights have been exhausted by an authorized sale, post-sale restrictions can only be enforced, if at all, under a contract theory.13 But the Federal Circuit has held that a conditional sale, in which the patentee restricts the right of
6 A purchaser may buy a patented article directly from the patentee or assignee, or from an intermediate manufacturer licensed to make and sell the patented article. Additionally, the purchaser may be the end user of the patented good, or the purchaser may incorporate the patented article into another article that he then sells. If it should have legal significance whether the purchaser, e.g., buys directly from the patentee versus from an intermediate licensee, this Note so indicates. 7 See, e.g., Mark R. Patterson, Contractual Expansion of the Scope of Patent Infringement Through Field-of-Use Licensing, 49 WM. & MARY L. REV. 157 (2007); William P. Skladony, Quanta Computer v. LG Electronics: The US Supreme Court May Consider the Doctrine of Patent Exhaustion, 19 NO. 7 INTELL. PROP. & TECH. L.J. 1 (2007); Richard H Stern, The Unobserved Demise of the Exhaustion Doctrine in US Patent Law: Mallinckrodt v. Medipart, 15 EUR. INTELL. PROP. REV. 460 (1993). 8 See JAY DRATLER, JR., LICENSING OF INTELLECTUAL PROPERTY 7.05 (noting that the patent exhaustion doctrine is judicially created while the copyright exhaustion doctrine is statutory). 9 See, e.g., Skladony, supra note 7, at 1 (A tension has developed between these lines of cases, and it is focused for Supreme Court consideration.); Stern, supra note 7, at 461 (stating that the Mallinckrodt decision recognizing a conditional sale swept away a century or more of exhaustion doctrine). 10 35 U.S.C. 281 (2006) (giving a patentee remedy by civil action for infringement of his patent); 35 U.S.C. 271(a) (2006) ([W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.). 11 A sale is the transfer of a piece of property or the title for a price. BLACKS LAW DICTIONARY 631 (3d Pocket ed. 2006). Contrastingly, a license is the transfer of rights in property without transferring the ownership of the property. Dratler, Jr., supra note 8, at 1.01. 12 E.g., Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2115 (2008) ([T]he initial authorized sale of a patented item terminates all patent rights to that item.); U.S. v. Univis Lens Co., 316 U.S. 241, 250 (1942); Adams v. Burke, 84 U.S. (17 Wall.) 453, 455-56 (1873); Bloomer v. McQuewan, 55 U.S. 539, 549-50 (1852). In the Seller-Buyer widget machine example, finding that Sellers patent rights were exhausted would mean that Seller could not sue Buyer for patent infringement based on the manner in which Buyer used the machine. 13 55 U.S. at 549-50 ([H]e must seek redress in the courts of the State, according to the laws of the State and not in the courts of the United States, nor under the law of Congress granting the patent); O.W. HOLMES, JR., THE COMMON LAW 301 (1881) (The only universal consequence of a legally binding promise is, that the law makes the promisor pay damages if the promised event does not come to pass.). In the Seller-Buyer widget machine example, Seller could sue Buyer for breach of contract, but not for patent infringement, based on Buyers use of the machine in violation of his promise.

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the purchaser to use the patented article through an enforceable contract, can prevent exhaustion and preserve the patentees right to sue for infringement if the condition is not met or the restriction is violated.14 Thus, in the example above, the exhaustion doctrine would limit Seller to a suit for breach of contract while the conditional sale doctrine would allow Seller to sue Buyer for patent infringement and breach of contract. Whether patent rights may be preserved by a conditional sale is important because of several significant differences between a cause of action for patent infringement and a cause of action for breach of contract. First, activity that is found to be within the scope of a valid patent grant is subject to lower antitrust scrutiny than activity that is not conducted under the auspice of a patent.15 Second, whereas damages for breach of contract are generally compensatory,16 patentees may
14 E.g., B. Braun Med., Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997); Mallinckrodt v. Medipart, 976 F.2d 700, 709 (Fed. Cir. 1992); PATENTS AND THE FEDERAL CIRCUIT 14.3 (8th ed., BNA, 2007) ([The] exhaustion doctrine, however, does not apply to an expressly conditional sale or license.). For example, in the Seller-Buyer widget machine hypothetical, finding that the sale of the machine was conditioned on Buyers use of the machine and that Buyers use violated the condition would mean that Seller could sue Buyer for patent infringement. 15 Patterson, supra note 7, at 165 (noting that contractual restrictions do not receive any of the protection from antitrust scrutiny that might be accorded a restriction under patent law); DONALD S. CHISUM, CHISUM ON PATENTS: A TREATISE ON THE LAW OF PATENTABILITY, VALIDITY, AND INFRINGEMENT 19.04(2) (2008) (Both the misuse doctrine and the antitrust laws as applied to patent practices involve a common inquiry: Should the practice in question be treated as an appropriate exercise of the patentees statutory patent rights? If the answer to the inquiry is affirmative, then the practice is not an improper extension within the meaning of the patent misuse doctrine and should enjoy an immunity from antitrust liability even though but for the patent the practice would violate the antitrust laws.). But see Atari Games Corp. v. Nintendo of Am., Inc., 897 F.2d 1572, 1576-77 (Fed. Cir. 1990) (The fact that a patent is obtained does not wholly insulate the patent owner from the antitrust laws. When a patent owner uses his patent rights not only as a shield to protect his invention, but as a sword to eviscerate competition unfairly, that owner may be found to have abused the grant and may become liable for antitrust violations when sufficient power in the relevant market is present. (internal citations omitted)). 16 UCC 1-106 (The remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed but neither consequential or special nor penal damages may be had . . . .) (2007); ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS 55.3 (2008) (In determining the amount of this compensation as the damages to be awarded, the aim in view is to put the injured party in as good a position as that party would have been in if performance had been rendered as promised. . . . As a corollary to this proposition it is a basic tenet of contract law that the aggrieved party will not be placed in a better position than it would have occupied had the contract been fully performed.); Id. at 59.2 (Although such awards are increasingly important in tort litigation, punitive damages are usually not awarded in contract actions, no matter how egregious the breach. It is often said that the rules as to damages for breach of contract are applied for the purpose of giving compensation for injury done, and not for punishment of a wrongdoer.); E. ALLEN FARNSWORTH, FARNSWORTH ON CONTRACTS 12.8, at 189-90 (1990) (Furthermore, no matter how reprehensible the breach, damages that are punitive, in the sense of being in excess of those required to compensate the injured party for the lost expectation, are not ordinarily awarded for breach of contract.). But see id. at 191-96 (detailing the increasing frequency with which courts grant punitive damages in breach of contract cases).

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recover treble damages17 and attorneys fees18 for successful claims of willful patent infringement.19 Third, patentees may obtain injunctions to enjoin infringing activity for the remainder of the patent term,20 while
17 35 U.S.C. 284 (2006) ([T]he court may increase the damages up to three times the amount found or assessed.). A finding of willful infringement is a sufficient basis for increased damages. See, e.g., Johns Hopkins Univ. v. CellPro, Inc., 152 F.3d 1342, 1364 (Fed. Cir. 1998) ([I]t is well established that enhancement of damages may be premised upon a finding of willful infringement.); Beatrice Foods Co. v. New England Printing and Lithographing Co., 923 F.2d 1576, 1578 (Fed. Cir. 1991) ([I]t is well-settled that enhancement of damages must be premised on willful infringement or bad faith. (quoting Yarway Corp. v. Eur-Control USA, Inc., 775 F.2d 268, 277 (Fed. Cir. 1985))). However, a finding of willful infringement does not require an award of treble damages. Modine Mfg. Co. v. Allen Group, Inc., 917 F.2d 538, 543 (Fed. Cir. 1990) ([A] finding of willful infringement merely authorizes, but does not mandate, an award of increased damages.) (emphasis in original); Robert W. Morris, Note, Another Pound of Flesh: Is There a Conflict Between the Patent Exhaustion Doctrine and Licensing Agreements?, 47 RUTGERS L. REV. 1557, 1571 (2007) (The goal of monetary relief is to restore the patent owner to the financial position he would have enjoyed had the infringement not occurred.). 18 35 U.S.C. 285 (2006) allows the court to award the prevailing party attorneys fees in an exceptional case. Modine, 917 F.2d at 543 (An express finding of willful infringement is a sufficient basis for classifying a case as exceptional, and indeed, when a trial court denies attorney fees in spite of a finding of willful infringement, the court must explain why the case is not exceptional within the meaning of the statute.). 19 See Kimberly A. Moore, Empirical Statistics on Willful Patent Infringement, 14 FED. CIR. B.J. 227 (2004). Moore analyzed 1721 patent infringement cases for which litigation terminated from 1999-2000 and found that willful infringement was alleged in 92.3% of complaints. Id. at 232. Of 143 studied cases that went to trial, willfulness was found 55.7% of the time, and enhanced damages were awarded in 55.7% of cases where willfulness was found. Id. at 237. In other words, enhanced damages were awarded in 31.0% of the 143 tried cases. 20 35 U.S.C. 283 (2006) (The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.). A recent Supreme Court opinion rejected a general rule that injunctions should be the remedy for patent infringement. eBay, Inc. v. MercExhange, L.L.C., 547 U.S. 388 (2006). Granting a permanent injunction for the patentee, the Federal Circuit stated that courts will issue permanent injunctions against patent infringement absent exceptional circumstances. MercExchange, LLC v. eBay, Inc., 401 F.3d 1323, 1339 (Fed. Cir. 2005), revd 547 U.S. 388. The Supreme Court reversed, holding that injunctions should issue under the Patent Act according to the traditional four-factor test employed by courts of equity requiring the plaintiff to demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. 547 U.S. at 391-92. Nonetheless, injunctions are still often found to be an appropriate remedy in infringement suits: From at least the early 19th century, courts have granted injunctive relief upon a finding of infringement in the vast majority of patent cases. This long tradition of equity practice is not surprising, given the difficulty of protecting a right to exclude through monetary remedies that allow an infringer to use an invention against the patentees wishes-a difficulty that often implicates the first two factors of the traditional four-factor test. This historical practice, as the Court holds, does not entitle a patentee to a permanent injunction or justify a general rule that such injunctions should issue. . . . At the same time, there is a difference between exercising equitable discretion pursuant to the established four-factor test and writing on an entirely clean slate. . . . . in this area as others, a page of history is worth a volume of logic.

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injunctions are less frequently granted in contract cases.21 Fourth, while a claim for breach of contract can only be brought against one with whom the complainant has privity of contract22 or a third-party beneficiary relationship,23 a patent infringement suit requires no special relationship between the patentee and the alleged infringer.24 A fifth consideration is that the Federal Circuit has exclusive25 jurisdiction over appeals related to patent cases,26 whereas breach of contract is generally a state law issue.27 Patentees may prefer the Federal Circuit since it is
547 U.S. at 395 (Roberts, C.J., concurring) (internal citations omitted, emphasis in original); Benjamin Petersen, Note, Injunctive Relief in the Post-eBay World, 23 BERKELEY TECH. L.J. 193, 217 (2008) (Although injunctive relief is no longer nearly automatic, post-eBay district court decisions do not suggest that injunctions are now rare. Indeed, the effect of eBay seems limited almost exclusively to non-practicing patent holders who are not in direct competition with the infringer.). 21 HOLMES, supra note 13; 25 WILLISTON ON CONTRACTS 67:8 (4th ed.) ([A]s a general rule, before specific performance may be decreed for breach of a contract . . . the remedy at law, that is, damages, must first have been determined to be incomplete and inadequate to accomplish substantial justice.). 22 For an example of the formalistic view requiring privity, see Lawrence v. Fox, 20 N.Y. 268, 275 (1859) (Comstock, J. dissenting) (In general, there must be privity of contract. The party who sues upon a promise must be the promisee, or he must have some legal interest in the undertaking.). See also Brief of American Intellectual Property Law Association as Amicus Curiae in Support of Respondent at 32, Quanta Computer, Inc. v. LG Elec.s, Inc., 128 S. Ct. 2109 (2008) (No. 06-937) [hereinafter Brief of AIPLA] ([C]ontract remedies are not helpful since they are often inadequate to accomplish the objectives because they require privity . . . .); Kieff, infra note 168, at 326 (Even an innocent infringer, without knowledge of a patent, who makes something covered by a valid patent claim with her own hands from materials gathered from land she and her ancestors have owned free and clear since time immemorial, is nonetheless liable for patent infringement.). 23 Lawrence, 20 N.Y. at 271 ([W]here one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it.). 24 Cf. ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454 (1996) (A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create exclusive rights.). To illustrate, a patentee and alleged infringer need not have bargained for a promise by the alleged infringer that he would not infringe; rather, the patentee has a right to proceed against anyone who makes, uses, or sells her patented article in the United States without her authorization. Many of the cases discussed in this Note involve contracts between the relevant parties, or arrangements that might be classified as third-party beneficiary relationships. However, this Note suggests that whether a patentee can enforce her property rights under the patent law should not turn on whether she has privity with the infringer. 25 To be precise, the Federal Circuit has nearly exclusive jurisdiction over appeals in patent cases. The Federal Circuit does not have exclusive appellate jurisdiction where patent claims arise only in counterclaims and not in the complaint. Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S. 826 (2002). 26 28 U.S.C. 1295(a)(1) (2006); Atari, Inc. v. J.S. & A Group, Inc., 747 F.2d 1422 (Fed. Cir. 1984), overruled on other grounds by Nobelpharma Ab. v. Implant Innovations, 141 F.3d 1059 (Fed. Cir. 1998) ([T]his courts jurisdiction to hear appeals from district court judgments is unique and depends, by statutory direction, on whether the district courts jurisdiction was based, in whole or in part, on [a patent claim under] Section 1338.). 27 Power Lift, Inc. v. Weatherford Nipple-Up Systems, Inc., 871 F.2d 1082, 1085 (Fed. Cir. 1989) (A [patent] license agreement is a contract governed by ordinary principles of state contract law.); Aronson v. Quick Point Pencil Co., 440 U.S. 257, 262 (1979) (Commercial agreements traditionally are the domain of state law. State law is not displaced merely because

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perceived as being pro-patentee.28 Because of these differences, patentees may desire to retain patent rights, as opposed to mere contractual rights, by including restrictions in sales or licensing agreements.29 In Quanta Computer, Inc. v. LG Electronics, Inc.,30 the Supreme Court addressed the rights of patentee LG Electronics (LGE) with respect to a purchaser from LGEs licensed manufacturer. LGE licensed intermediate manufacturer Intel to make, use, and sell computer components that practiced LGEs patents.31 The language of the LGE-Intel licensing agreement purportedly reserved LGEs patent rights against Intels purchasers.32 Purchaser Quanta bought components from licensee Intel and assembled them into computers that practiced LGEs patents.33 When Quanta and Intels other purchasers refused to pay LGE licensing fees, LGE sued the purchasers for patent infringement.34
the contract relates to intellectual property . . . .). 28 For a list of several articles asserting this view, see Kimberly A. Moore, Markman Eight Years Later: Is Claim Construction More Predictable?, 9 LEWIS & CLARK L. REV. 231, 240 n.32 (2005). But see id. at 241 (noting that, at least with regard to claim construction, the Federal Circuit finds in favor of accused infringers more often than not, belying the claim the that court is pro-patentee). 29 Norman E. Rosen, Intellectual Property and the Antitrust Pendulum: Recent Developments at the Interface Between the Antitrust and Intellectual Property Laws, 62 ANTITRUST L.J. 669, 687 (1994) (stating that damages for patent infringement would generally exceed breach of contract damages); Elizabeth I. Winston, Why Sell What You Can License? Contracting Around Statutory Protection of Intellectual Property, 14 GEO. MASON L. REV. 93, 108 (2006) ([P]atent infringement . . . is likely to be a more lucrative action than breach of contract for violating a license restriction.). Of course, the two branches of law are not mutually exclusive. It is probably most desirable to have protection under both the patent law and private contract provisions. 30 128 S. Ct. 2109 (2008). 31 To practice a patent means to make and use the patented invention. For example, this could mean constructing and operating a patented machine or carrying out a patented process. 32 128 S. Ct. at 2114. Thus, LGE could sue Intels purchasers for patent infringement, but Intel would not be contributorily liable even though it had sold components designed to practice LGEs patents. Opinions differ as to whether this aspect of the LGE-Intel agreement was poor drafting, an attempt to trap Intels purchasers, or savvy strategy based on the state of the law at the time. Compare F. Scott Kieff, Quanta v. LG Electronics: Frustrating Patent Deals by Taking Contracting Options off the Table?, 2008 CATO SUP. CT. REV. 315, 315-16 (stating that one interpretation of the Quanta opinion is that the LGE-Intel contract was poorly written, but suggesting the real reason the Supreme Court heard the case was to comment on the types of patent licensing agreements that it approves) with Harold C. Wegner, Post-Quanta, Post-Sale Patentee Controls, 7 J. MARSHALL REV. INTELL. PROP. L. 682, 683 (calling LGEs licensing strategy ingenious) and id. at 690 (describing LGEs licensing strategy as taking full advantage of the Federal Circuit case law). Without speculating on LGEs intent, the author of this Note acknowledges that the particular language of these agreements creates some uncertainty as to how to interpret the reach of the Quanta opinion. 33 128 S. Ct. at 2113 (In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods.). 34 Complaint for Patent Infringement, LG Elecs. Inc. v. Q-Lity Computer Inc., No. C0120319, 2001 WL 36117917 (N.D. Cal. Apr. 16, 2001).

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The Court held that, under the exhaustion doctrine, Intels authorized sale of components that sufficiently embodie[d] LGEs patents terminated LGEs patent rights.35 The Court found that the LGE-Intel licensing agreement triggered exhaustion because it gave Intel unconditional authority to sell components that had no reasonable use other than practicing the LGE patents.36 The Quanta opinion did not explicitly address the broader question of whether patent owners can ever avoid exhaustion through a conditional sale. It is debatable whether the Courts finding regarding the lack of conditionality in the LGE-Intel licensing agreement was based on the specific language of the documents at issue, or whether it was a more general pronouncement against attempts by patentees to reserve rights against purchasers.37 In the wake of the Quanta decision, some commentators doubt the viability of the conditional sale doctrine as articulated by the Federal Circuit over the past two decades.38 They have suggested that the Courts conclusion regarding the LGE-Intel agreement implies that a

35 128 S. Ct. at 2122 (Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.). The Courts opinion drew heavily from United States v. Univis Lens Co., 316 U.S. 241 (1942), in which the sufficient embodiment test for exhaustion was first developed. See infra Part I.A. See also infra note 126 for a discussion of when an article sufficiently embodies a patent. 36 Id. at 2122 (No conditions limited Intels authority to sell products substantially embodying the patents.). This is the second prong of the exhaustion test set forth in Univis. See infra Part I.A. 37 See supra note 32 and accompanying text. 38 For commentary arguing that Quanta overrules the conditional sale doctrine articulated in Mallinckrodt, see, e.g., Chris Holman, Quanta and Its Impact on Biotechnology, Holmans Biotech IP Blog (June 11, 2008), http://holmansbiotechipblog.blogspot.com/2008/06/quanta-andits-impact-on-biotechnology.html (opining that Quanta implicitly overrules Mallinckrodt); Wegner, supra note 32, at 682, 691 (stating that Quanta sub silentio overrules Federal Circuit precedent holding that exhaustion does not apply to expressly conditional sales or licenses). For commentary asserting that Quanta leaves the conditional sale doctrine intact, see, e.g., Dratler, Jr., supra note 12, at 7.05 (stating that the Quanta opinion leaves open the question of the extent to which parties may limit the effect of the exhaustion doctrine through the language of their licensing agreement and that whether Mallinckrodt survives is an open question); David McGowan, Reading Quanta Narrowly, Patently-O (July 27, 2008), http://www.patentlyo.com/patent/2008/07/reading-quanta.html (arguing that Quanta did not address conditional licenses or pass-through conditions and therefore does not undercut Mallinckrodt); Shubha Ghosh, The Quandry of Quanta: Thoughts on the Supreme Court Decision One Week Later, Antitrust & Competition Policy Blog (June 17, 2008), http://lawprofessors.typepad.com/antitrustprof_blog/2008/06/the-quandry-of.html (discussing whether Quanta undercuts Mallinckrodt or whether the cases can be read as consistent with each other); Robert W. Gomulkeiwicz, The Federal Circuits Licensing Law Jurisprudence: Its Nature and Influence, WASH L. REV. (forthcoming 2009), available at http://ssrn.com/abstract=1281045, 42-43 (stating that Quanta actually affirms the Mallinckrodt line of cases on the conditional sale doctrine); Steven Z. Szczepanski, Updated by David M. Epstein, 2 ECKSTROMS LICENSING IN FOREIGN & DOMESTIC OPERATIONS 8:22 (Thomson Reuters West 2008) (calling Quanta an affirmation of the conditional sale doctrine).

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patentee can never avoid exhaustion via a conditional sale.39 On the other hand, the Quanta opinion can be read more narrowly as only holding that the LGE-Intel agreement before the Court was not a conditional sale,40 while reserving the decision as to whether patent rights may be preserved by other types of agreements.41 Part I of this Note begins by tracing the evolution of the exhaustion and conditional sale doctrines through the case law. Part I also describes the Quanta litigation and the Supreme Courts treatment of the case. Part II disputes the contention that there is a conflict between the exhaustion and conditional sale doctrines. It describes how the two doctrines may be read as consistent with each other and why preserving the conditional sale doctrine is desirable. Part III proposes an exhaustion analysis that incorporates principles from both Quanta and Mallinckrodt v. Medipart, the leading Federal Circuit case on the conditional sale doctrine. It also makes some observations and suggestions about structuring patent licensing agreements after Quanta. I. HISTORY OF THE EXHAUSTION AND CONDITIONAL SALE DOCTRINES A. The Supreme Courts Exhaustion Doctrine

A patentee may bring an infringement suit42 to prevent another43 from making, using, selling, or offering to sell a patented invention,44 and can recover damages for infringing activities.45 In response, the alleged infringer may, inter alia, defend her actions based on the theory that an earlier authorized sale of the patented article, whether by the patentee or her authorized licensee, terminated all patent rights with respect to that item.46 The exhaustion doctrine first arose in a series of nineteenth-century patent infringement cases addressed by the Supreme Court. In Bloomer v. McQuewan,47 the assignee48 of patent rights to make and sell the
See, e.g., Holman, supra note 38. See infra Parts I.C.ii and III.B. E.g., McGowan, supra note 38. 35 U.S.C. 281 (2006). 35 U.S.C. 283 (2006). 35 U.S.C. 271(a) (2006). 35 U.S.C. 284 (2006). E.g., U.S. v. Univis Lens Co., 316 U.S. 241 (1942); Adams v. Burke, 84 U.S. (17 Wall.) 453 (1873); Bloomer v. McQuewan, 55 U.S. (14 How.) 539 (1852); CHISUM, supra note 15, at 16.03(2)(a). 47 55 U.S. 539 (1852). 48 At the time, assignment was governed by R.S. 4898. See Keeler v. Standard Folding Bed Co., 157 U.S. 659, 661 (1894) ( [E]very patent or any interest therein shall be assignable in law by an instrument in writing, and the patentee and his assigns or legal representatives may in like
39 40 41 42 43 44 45 46

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Woodworth planing machine49 during an extension of the patent term50 sued a prior purchaser from the patentee for infringement.51 The assignee claimed that the purchaser infringed on his exclusive right by using the two previously purchased machines during the extended term.52 The Court held that the first sale by the patentee removed the purchasers machines from the patent monopoly53 and therefore exhausted the right of the patentee, or his assignee, to sue for infringement.54 Shortly thereafter, in Adams v. Burke,55 the Supreme Court explained that the exhaustion doctrine is premised on the idea that the patentee receives just compensation for disclosure of his invention from the first authorized sale.56 Adams and Keeler v. Standard Folding
manner grant and convey an exclusive right under his patent to the whole or any specified part of the United States.). It was often the case that the patentee divided the territory of the United States into twenty or more specified parts through assignments. Id. at 662; see also CHISUM, supra note 15 at 19.04(3)(h) (It is generally assumed that a patent owner may assign or license the right to practice the invention on a territorially restricted basis.). 49 A planing machine is a machine for smoothing or shaping wood. WEBSTERS THIRD NEW INTERNATIONAL DICTIONARY 1730-31 (Philip Babcock Gove, Ph.D., ed., G. & C. Merriam Co., 1976) (1961). 50 The Patent Act of 1836 allowed a patentee to obtain a seven-year extension of the original fourteen-year patent term upon a showing that such an extension was necessary for the patentee to obtain reasonable remuneration for his investment in the invention. Patent Act of 1836, ch. 306, 18, 5 Stat. 117, 124-25. Such renewal extended to assignees and grantees of the patent. Bloomer, 55 U.S. at 549. In 1861, Congress abolished the extension system and adopted a uniform seventeen-year patent term. Act of March 2, 1861, ch. 137, 16, 12 Stat. 246, 249; C. Michael White, Why a Seventeen Year Patent?, 38 J. PAT. OFF. SOCY 839 (1956). In 1994, Congress enacted the current twenty-years-from-filing patent term. 35 U.S.C. 154(a)(2) (2006); H.R. REP. NO. 103-826(I), at 8 (1994), reprinted in 1994 U.S.C.C.A.N. 3773. 51 55 U.S. at 548. Purchaser McQuewan bought from the patentee Woodworth the right to make and use two patented wood planing machines within the Pittsburgh area. Id. Subsequently, assignee Bloomer obtained the exclusive right to construct and use the patented machine in the greater Pittsburgh area during an extension of the patent term. Id. 52 Id. 53 Id. at 549 ([W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly. It passes outside of it, and is no longer under the protection of the act of Congress.). 54 Id. at 549-50. The court distinguished between a licensee of the rights to manufacture and sell the patented invention, who buys with respect to the patent term, and a purchaser of the right to use the machine. Id. at 549 ( But the purchaser of the implement or machine for the purpose of using it in the ordinary pursuits of life, stands on different ground.). 55 84 U.S. (17 Wall.) 453 (1873). Lockhart & Steelye obtained the right to make and sell patented coffin lids within a ten-mile radius of Boston (the Boston circle), while Adams obtained a similar right to make and sell the coffin lids outside the Boston circle. 84 U.S. at 454. Burke, an undertaker, purchased a coffin-lid from Lockhart & Steelye within the Boston circle, but then used it to bury a body within Adams territory. Id. The Court found that Adams (an assignee) could not maintain an infringement suit against Burke (a purchaser) because Burkes purchase from authorized sellers in Boston exhausted all patent rights with respect to the coffin lid in any territory. Id. at 456-57. 56 Id. at 456 ([W]hen the patentee, or the person having his rights, sells a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use.); see also Bloomer v. Millinger, 68 U.S. 340, 350 (1863) ([Patentees] are entitled to but one royalty for a patented machine, and consequently when a patentee has himself constructed the machine and sold it, or authorized another to construct and

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Bed57 also illustrated that a purchaser obtained the right to use58 and to resell59 the patented invention free and clear of geographic restrictions limiting the rights of the assignee seller. Construing the Sherman Antitrust Act and Clayton Act in the late nineteenth and early twentieth centuries,60 the Court also defined some limits on the types of restricted sales and tiered licensing agreements

sell it, or to construct and use and operate it, and the consideration has been paid to him for the right, he has then to that extent parted with his monopoly, and ceased to have any interest whatever in the machine so sold or so authorized to be constructed and operated.); William P. Skladony, Commentary on Select Patent Exhaustion Principles in Light of the LG Electronics Case, 47 IDEA 235, 238 (2007) ([W]ith respect to the conveyance of an article, the patent exhaustion doctrine is based on a fundamental notion that the patent owner gets only one bite at the apple.). Other rationales for the exhaustion doctrine include (1) the historical dislike of restraints on alienation or servitudes on personal property, (2) an ownership interest rationale, (3) concerns about anticompetitive effects, and (4) enforcing the scope of the statutory patent grant. See Brief of Various Law Professors as Amici Curiae in Support of Respondent at 3, Quanta Computer, Inc. v. LG Elec.s, Inc., 128 S.Ct. 2109 (2008) (No. 06-937) [hereinafter Brief of Various Law Professors] (noting the laws skepticism towards restrictive servitudes as well as the general understanding that no servitudes run with the sale of ordinary chattels); id. at 14-15 & n.4; Michael A. Carrier, Cabining Intellectual Property Through a Property Paradigm, 54 DUKE L.J. 1, 115 (2004) (analogizing the patent exhaustion doctrine to the common law prohibition of restraints on alienation); William A. Birdwell, Exhaustion of Rights and Patent Licensing Market Restrictions, 60 J. PAT. OFF. SOCY 203, 212-13, 216 (1978) (stating that the best rationale for the exhaustion doctrine is that since the exclusive patent right is a limited exception to the national competition policy . . . the exercise of this right should be cut off after the first sale of the patented goods because the sale provides adequate financial reward to stimulate invention . . . .); John W. Osborne, Justice Breyers Bicycle and the Ignored Elephant of Patent Exhaustion: An Avoidable Collision in Quanta v. LGE, 7 J. MARSHALL REV. INTELL. PROP. L. 245, 293 (2008) [hereinafter Justice Breyers Bicycle] (noting that patent exhaustion is reflective of the scope of patent rights granted by statute). 57 157 U.S. 659 (1895). The inventor of an improvement in wardrobe bedsteads assigned his patent rights to various parties in different geographic regions. Id. at 659. Keeler & Bros. purchased wardrobes from the Michigan assignee and resold the wardrobes in Massachusetts. Id. The Supreme Court held that the Massachusetts assignee could not sue purchaser Keeler for patent infringement because patent rights were exhausted by the authorized sale from the Michigan assignee. Id. at 662 ([T]he purchaser of a patented machine has not only the right to continue the use of the machine so long as it exists, but to sell such machine, and that his vendee takes the right to use.). The court reasoned, [W]hen the royalty has once been paid to a party entitled to receive it, the patented article then becomes the absolute, unrestricted property of the purchaser, with the right to sell it as an essential incident of such ownership. Id. at 664. The Court left open the possibility that the patentee might protect himself and his assignees by contracting directly with the purchaser. Id. at 666 (Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion.). 58 E.g., Bloomer v. McQuewan, 55 U.S. 539 (1853); Adams v. Burke, 84 U.S. 453 (1873). 59 Keeler, 157 U.S. at 661 ([I]t is obvious that a purchaser can use the article in any part of the United States, and, unless restrained by contract with the patentee, can sell or dispose of the same.). 60 For a brief history of the relationship between antitrust and intellectual property laws, see Herbert Hovenkamp, Innovation and the Domain of Competition Policy, 60 ALA. L. REV. 103, 108-14 (2008). For a thorough treatment of the antitrust-intellectual property relationship, see HERBERT HOVENKAMP, IP AND ANTITRUST: AN ANALYSIS OF ANTITRUST PRINCIPLES APPLIED TO INTELLECTUAL PROPERTY LAW (2002).

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patentees could enforce.61 At issue in Bauer & Cie v. ODonnell62 was whether a patentee could enforce vertical price restraints,63 which it included in a licensing contract and on a label license,64 via a patent infringement suit against a purchaser from its licensee. The patentee argued that its patent rights survived the authorized sale from a licensed refinery to a jobber65 because the products label stated a minimum resale price.66 The Court found that the sale from the licensee to the jobber exhausted the patentees rights67 and that the patent statute did not authorize the patentee to set the price of transactions beyond the initial authorized sale.68 Subsequently, the Court relied on the patent exhaustion doctrine to
61 After the passage of the Sherman Act in 1890, several antitrust cases involving the sale of patented articles presented opportunities for the Supreme Court to revisit the patent exhaustion doctrine. See William A. Birdwell, Exhaustion of Rights and Patent Licensing Market Restrictions, 60 J. PAT. OFF. SOCY 203, 203 (1978) (In addition to barring a patent infringement action to prevent the purchaser of patented goods from using or disposing of those goods as he chooses, this principle [the exhaustion doctrine] has been applied also to find contractual restraints on the use or disposition of such goods by their purchaser illegal under antitrust law.). Prior to these cases, the Supreme Court had declined to decide whether a patentee could place express restrictions or conditions on the sale of patented goods, saying that the patentee could exert any desired control through licenses or assignments to manufacturers. Morris, supra note 17 at 1579 n.115; Hobbie v. Jennison, 149 U.S. 355, 363 (1893) (It is easy for a patentee to protect himself and his assignees . . . . He can take care to bind every licensee or assignee, if he gives him the right to sell articles made under the patent, by imposing conditions which will prevent any other licensee or assignee from being interfered with.). 62 229 U.S. 1 (1913). 63 A vertical price restraint is price-fixing among parties in the same chain of distribution, such as manufacturers and retailers, attempting to control an items resale price. BLACKS LAW DICTIONARY 853 (8th ed. 2004). At the time of the Bauer decision, vertical price restraints were considered per se illegal. Bauer & Cie, 229 U.S. at 11-12 (citing Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), overruled by Leegin Creative Leather Prods. v. PSKS, Inc., 127 S. Ct. 270 (2007)). 64 A label license is a notice on an items package granting the purchaser a license to practice the process by using the item without additional payments to the licensor. BLACKS LAW DICTIONARY 939 (8th ed. 2004). 65 A jobber is one who buys from a manufacturer and sells to a retailer; a wholesaler or middleman. BLACKS LAW DICTIONARY 853 (8th ed. 2004). 66 The products label included a Notice to Retailer stating that the retail price was to be no less than one dollar, that anyone who sold the product for less than that amount would be liable to an injunction and damages (the typical remedies for patent infringement), and that purchase of the item was acceptance of these conditions. 229 U.S. at 8-9. The object of the notice is said to be to effectually maintain prices and to prevent ruinous competition by the cutting of prices in sales of the patented article. Id. at 11. Retailer ODonnell sold the article for less than the one-dollar minimum price set by the patentee, so the Bauer Chemical Company refused to supply him with additional product. Id. at 9. When ODonnell subsequently purchased the article from a jobber and resold it for less than one dollar, patentees Bauer & Cie sued him for patent infringement. 67 Id. at 17. 68 Id. (The right to vend conferred by the patent law has been exercised, and the added restriction is beyond the protection and purpose of the act.). The Court reasoned by analogizing to the exhaustion doctrine in copyright law. See Bobbs-Merrill v. Straus, 210 U.S. 339 (1908) (holding that the first authorized sale of a copyrighted work exhausted rights under the copyright statute). For an overview of the exhaustion doctrine in copyright law, see MELVILLE B. NIMMER, NIMMER ON COPYRIGHT 8.12 (Matthew Bender 2008).

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conclude that patentees could not tie69 the sale of unpatented articles to the use of patented ones.70 For example, the Court held that the patent laws did not permit a patentee to require purchasers of its patented movie projectors also to purchase its unpatented films or risk infringement for using the projector with another manufacturers film.71 The Court also applied the exhaustion doctrine, along with the Sherman Antitrust Act, to strike down an anticompetitive tiered licensing arrangement for the sale of a patented gasoline.72 The patentee attempted to control the parties to and prices of all sales of gasoline containing its patented additive.73 The Court held that the patentees rights were exhausted by its first sale of the gasoline to the licensed refiners.74 In its most recent opinion on patent exhaustion prior to Quanta, the Supreme Court set forth a two-prong test for patent exhaustion. At issue in United States v. Univis Lens Co.75 was whether the authorized
69 See BLACKS LAW DICTIONARY 1557 (8th ed. 2004) (defining a tying arrangement as [a] sellers agreement to sell one product or service only if the buyer also buys a different product or service . . . . Tying arrangements may be illegal under the Sherman or Clayton Act if their effect is too anticompetitive.). 70 Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917). Motion Picture Patents (MPP) owned patent rights directed toward a film-feeding mechanism used in motion picture projectors. Id. at 505. MPP required its manufacturing licensee Precision Machine Company to sell the projectors with an attached plaque that stated the projector could only be used with film that was also licensed by MPP. Id. at 506-07. MPP brought a patent infringement suit against a purchaser of one of the projectors, and against rival film-maker Universal, after its patent directed toward the film technology had expired. Id. at 507-08. 71 The Supreme Court held that, since MPP had market power with respect to the projectors, such a tying restriction was illegal. Id. at 508 (finding market power): Such a restriction is invalid because such a film is obviously not any part of the invention of the patent in suit; because it is an attempt, without statutory warrant, to continue the patent monopoly in this particular character of film after it has expired, and because to enforce it would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law as we have interpreted it. Id. at 518. 72 Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940). Ethyl Corporation owned patents directed toward the use of a gasoline additive. Id. at 446. The patentee derived its profits from the sale of the patented fluid to licensed oil refiners, but also instituted a licensing scheme to control the subsequent sale of the gasoline from the refiners to jobbers. Id. at 446, 450-52. In an antitrust suit brought by the government, the Court found that this licensing arrangement was an impermissible attempt to enlarge Ethyls monopoly and struck it down under the Sherman Act. Id. at 456-58. 73 Id. at 457-59. 74 The Court reasoned that Ethyls sale of the patented fuel to refiners exhausted its patent rights, and therefore Ethyl could not control the refiners sale of the fuel to jobbers under either patent or contract law. Id. at 457-59. 75 316 U.S. 241 (1942). Univis owned several patents directed toward the shape, size, and composition of pieces of glass of different refractive power fused together to create multifocal ophthalmic lenses. Id. at 246-47. The patentee instituted a tiered licensing scheme in which it granted licenses to wholesalers, finishing retailers, and prescription retailers that set forth from whom the licensees could buy unfinished lens blanks, to whom the licensees could sell the lenses they finished, and at what prices each licensee was to sell its products. Id. at 244-45. Univis

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sale of unpatented lens blanks76 could exhaust the patentees rights with the regard to the patented finished lenses that were produced from the blanks. The Court held that the sale of the blanks triggered exhaustion.77 This decision expanded the scope of the exhaustion doctrine by holding that the authorized sale of unpatented articles78 could exhaust patent rights if the articles sold (1) embodied the essential features of the patents, and (2) had no utility other than to practice the patents.79 Thus, the exhaustion doctrine terminates the right of a patentee to sue a purchaser for infringement when that purchaser has already paid a fair price to use, repair, and resell the article. Application of the doctrine requires a determination of whether there has been an unconditional and authorized sale of an article embodying the essential inventive features of the patent. Where such sale has occurred, the article has been removed from the patent monopoly and cannot be the subject of an infringement suit. B. The Federal Circuits Conditional Sale Doctrine

The conditional sale doctrine developed simultaneously with the exhaustion doctrine, albeit with less guidance from the Supreme Court. While an authorized and unconditional sale exhausts the patentees

argued its patent monopoly was a defense to the governments antitrust claims. Id. at 243. 76 The lens blanks at issue were rough opaque pieces of glass of suitable size, design and composition for use, when ground and polished, as multifocal lenses in eyeglasses. Id. at 244. 77 Id. at 249-50. Sale of a lens blank by the patentee or by his licensee is thus in itself both a complete transfer of ownership of the blank, which is within the protection of the patent law, and a license to practice the final stage of the patent procedure. In the present case the entire consideration and compensation for both is the purchase price paid by the finishing licensee to the Lens Company. 78 Licensed wholesalers sold unfinished lens blanks to licensed retailers, who then finished the lenses and sold the finished products at prices fixed by Univis. Id. at 244. The Court stipulated that Univiss patents were not fully practiced until the blanks were finished, but nonetheless held that Univis could not set prices for the sales by retailers. Id. at 248. 79 [E]ach blank embodies essential features of the patented device and is without utility until it is ground and polished as the finished lens of the patent. Id. at 249. We think that all the considerations which support these results lead to the conclusion that where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent, and has destined the article to be finished by the purchaser in conformity to the patent, he has sold his invention so far as it is or may be embodied in that particular article. The reward he was demanded and received is for the article and the invention which it embodies and which his vendee is to practice upon it. Id. at 250-51. See Wegner, supra note 38, at 685 (describing the Univis decision as plugging a loophole that would have allowed patentees to circumvent the exhaustion doctrine by selling unpatented goods to a purchaser who then finished them into the patented article).

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property rights,80 an unauthorized sale or conditional sale does not bar the patentee from reserving patent rights. The concepts of a conditional patent license and sale can be traced at least back to Mitchell v. Hawley,81 in which the Supreme Court, in 1873, recognized that a patent owner might grant a manufacturer a license to make and vend a patented invention limited to a fixed span of time.82 In that case, a licensee was granted manufacturing rights limited to the original patent term and expressly excluding any extension of the term.83 The Court held that a subsequent assignee during the extended term could bring an infringement suit against a purchaser from the licensee during the original term.84 The case illustrates that a patentee, or his assignee, can enforce restrictions on a purchasers post-sale use of a patented article through an infringement suit. The Supreme Court approved of field-of-use restrictions, which limit use of a patented invention to a specified application or market,85 in General Talking Pictures Corp. v. Western Electric Co.,86 where it held that patent owners could grant restricted licenses to manufacturers87 and enforce the restrictions against the licensees purchasers through infringement suits. Similar to its reasoning in
Supra Part I.A. 83 U.S. (16 Wall.) 544 (1873). Patentee Taylor granted Bayley a license to make, use, and license to others his patented felting machine in New England during, but explicitly not beyond, the original patent term. Bayley sold four of the machines to Hawley with notice of Taylors patent. Id. at 549-50. Subsequently, the patentee assigned his rights under an extended term to Mitchell, who sued Hawley for infringement based on his continued use of the machines during the extended term. Id. at 549. The Court held that assignee Mitchell could enjoin purchaser Hawley from using the four patented machines during the extended term. Id. at 549. The facts of Mitchell contrast those of Bloomer, supra Part I.A. and notes 47-53, in a manner that illustrates the relationship between exhaustion and conditional licenses. In Bloomer, the unconditioned license gave rise to exhaustion; in Mitchell, the conditioned license prevented exhaustion. 83 See supra text accompanying note 48. 84 The Court reasoned that licensee Bayley never had the authority to sell the right to use the patented machines indefinitely, and that [n]o one in general can sell personal property or convey a valid title to it unless he is the owner or lawfully represents the owner. Id. at 550. 85 See generally CHISUM, supra note 15, at 19.04(3)(a); R. CARL MOY, MOYS WALKER ON PATENTS at 18:34 (4th ed. 2008). 86 304 U.S. 175, rehg granted, 304 U.S. 587 (1938). American Telegraph & Telephone Co. (AT&T) owned several patents directed toward vacuum tube amplifiers that were used in different technological areas including telephony and motion picture projection. Id. at 176, 179. AT&T reserved for its subsidiary the exclusive right to make and sell the amplifiers in the commercial field (i.e. for use in movie theater equipment). Id. at 179. AT&T granted American Transformer Company (ATC) a license to make and sell amplifiers for private use only. Id. at 180-81. General Talking Pictures (GTP) purchased amplifiers from ATC and leased them to movie theaters in knowing violation of the restriction in the AT&T-ATC license. Id. at 180. AT&Ts subsidiary, Western Electric, sued ATC and GTP for patent infringement, to which GTP raised a defense of exhaustion via the ATC-GTP sale. Id. at 179-80. 87 Id. at 181 (Unquestionably, the owner of a patent may grant licenses to manufacture, use or sell upon conditions not inconsistent with the scope of the monopoly. . . . Patent owners may grant licenses extending to all uses or limited to use in a defined field.).
80 81 82

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Mitchell v. Hawley, the Court stated that the licensees purchaser could not obtain a right that the licensee was not authorized to sell.88 On rehearing,89 the court emphasized that restrictive patent licenses were historically recognized90 and legal.91 In Mallinckrodt v. Medipart,92 the Federal Circuit93 set forth its interpretation of the conditional sale doctrine. At issue was whether patentee Mallinckrodt could enforce single-use-only restrictions on the use of its patented nebulizers via infringement suits against parties that reconditioned and reused the nebulizers.94 The Federal Circuit held that, if the single-use restriction was a valid condition under sales law95 and within the scope of Mallinckrodts patent grant,96 Mallinckrodt could bring a claim of patent infringement against parties that violated the restriction.97 The court reasoned that, since a patentee has a complete right to exclude others from use under the patent grant,98 the patentee may choose to waive only a portion of that exclusive right.99

88 Id. (The Transformer Company could not convey to petitioner what both knew it was not authorized to sell. (citing Mitchell v. Hawley, 16 Wall. at 550)). 89 Gen. Talking Pictures Corp. v. W. Elec. Co., 305 U.S. 124, 127 (1938). 90 Id. at 127 (noting that [t]he practice of granting licenses for a restricted use is an old one). 91 Id. (That a restrictive license is legal seems clear. (citing Mitchell v. Hawley, 16 Wall. 544)). 92 976 F.2d 700 (Fed. Cir. 1992). 93 The Federal Circuit was established as an Article III court in 1982. See generally http://www.cafc.uscourts.gov/about.html. The Federal Circuit has nearly exclusive appellate jurisdiction over cases involving questions of patent law. 28 U.S.C. 1295; supra note 25. 94 Mallinckrodt owned patents directed toward the nebulizer and manifold components of a medical device used to administer radioactive or therapeutic compounds in an aerosol mist to the lungs of patients suffering from various lung diseases. Mallinckrodt, 976 F.2d at 701; Mallinckrodt, Inc. v. Medipart, Inc., 1990 WL 19535, *1, n.1 (N.D. Ill. 1990). The device was sold to hospitals bearing the inscription Single Use Only. Mallinckrodt, 976 F.2d at 702. However, some hospitals shipped used devices to Medipart, which would have the devices cleaned, repackaged, and sold back to the hospitals for subsequent use. Id. Mallinckrodt sued Medipart for patent infringement and inducement to infringe. Id. 95 The Federal Circuit did not pass on the question of whether the single-use-only label license was an enforceable contract condition. Id. at 701. Nor did the district court have the opportunity to decide this issue on remand because the parties settled. Stern, supra note 7, at 461. However, the Federal Circuit opinion did acknowledge that contractual conditions must not violate the antitrust or patent misuse laws. 976 F.2d at 708. 96 Id. (i.e., that it relates to subject matter within the scope of the patent claims). But see DRATLER, JR., supra note 8, at 7.05 (criticizing the Federal Circuits reliance on the scope of the patent analysis in Mallinckrodt as outmoded and dismissive of significant antitrust concerns). 97 Mallinckrodt, 976 F.2d at 709. 98 35 U.S.C. 154 (2006). 99 This right to exclude may be waived in whole or in part. 976 F.2d at 703. The rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the [patented] article, will be upheld by the courts. Id. (citing E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 91 (1902)).

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Subsequent Federal Circuit and district court decisions have relied on Mallinckrodt for the proposition that restricted licenses and conditional sales prevent the exhaustion of patent rights.100 In B. Braun Medical, Inc. v. Abbott Laboratories,101 the Federal Circuit explained that exhaustion does not apply to an expressly conditional sale or license because it is reasonable to infer that the parties negotiated a price that only reflected the value of the limited use rights conferred by the patentee.102 The Federal Circuits frequent reliance on its relatively recent Mallinckrodt opinion has prompted some to predict a collision between this line of Federal Circuit cases and older Supreme Court exhaustion precedent. C. 1. Quanta v. LG Electronics

Background and Proceedings Below

The tension between the exhaustion and conditional sale doctrines appeared to come to a head in the Quanta litigation.103 LGE owned a
100 E.g., Monsanto Co. v. McFarling, 302 F.3d 1291, 1293 (Fed. Cir. 2002) (upholding a preliminary injunction in favor of patentee Monsanto where Monsanto alleged that a purchasers use of second-generation genetically modified soybean seeds, in violation of a signed Technology Agreement prohibiting the purchaser from saving and using any subsequent-generation seeds, violated Monsantos patent directed toward the genetically modified seeds); Monsanto Co. v. Scruggs, 459 F.3d 1328, 1335-36 (Fed. Cir. 2006) (upholding a preliminary injunction in favor of patentee Monsanto against a purchaser who allegedly infringed Monsantos patent for genetically-modified soybean seeds by saving, replanting, and selling second-generation seeds); Ariz. Cartridge Remfrs. Assn v. Lexmark Intl, Inc., 290 F. Supp. 2d 1034, 1045 (N.D. Cal. 2003) (finding that patent exhaustion would not apply where patentee Lexmark validly conditioned the sale of its patented printer ink cartridges on the purchasers implicit agreement to return the used cartridges only to Lexmark), affd Ariz. Cartridge Remfrs. Assn, Inc. v. Lexmark Intl Inc., 421 F.3d 981 (9th Cir. 2005) (based on a finding that Lexmark had a facially valid contract with its purchasers under Californias adoption of UCC 2-204). Compare Lexmark to Hewlett-Packard Co. v. Repeat-O-Type Stencil Mfg. Corp., 123 F.3d 1445 (Fed. Cir. 1997) (holding that it was not infringement for a company to refill patented printer cartridges because the exhaustion doctrine applied). 101 124 F.3d 1419 (Fed. Cir. 1997). 102 Id. at 1426. Patentee Braun sold Abbot its patented reflux valves on the condition that Abbot would only incorporate the valves into specific articles that did not compete with Brauns own product lines. Id. at 1422. Abbot then bought allegedly infringing valves from another manufacturer and incorporated them into products that were prohibited under the Braun-Abbot sales agreement. Id. When Braun sued Abbot for infringement, Abbot argued that placing postsale field-of-use restrictions on patented articles constituted patent misuse. Id. The Federal Circuit disagreed; it held that Braun could sue for patent infringement if the lower court found that the use restriction was within the scope of Brauns patent grant and passed the rule of reason test. Id. at 1426-27. 103 See LG Elecs., Inc. v. Asustek Computer Inc., 2002 WL 31996860 at *2, 65 U.S.P.Q.2d 1589 (N.D. Cal. 2002) [hereinafter Asustek I], modified by LG Elecs., Inc. v. Asustek Computer, Inc., 248 F. Supp. 2d 912 (N.D. Cal. 2003) [hereinafter Asustek II], reversed in part by LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364 (Fed. Cir. 2006), reversed by Quanta Computer,

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portfolio of patents directed toward computer components.104 In 2000, LGE entered into a broad cross-licensing agreement105 with Intel,106 pursuant to which Intel paid LGE a sum of money and agreed to provide discounts on future purchases107 in exchange for the right to make, use,
Inc. v. LG Elecs., Inc., 128 S. Ct. 2109 (2008). 104 At issue in Quanta were three patents owned by LG Electronics directed toward computer components and processes. See LG Elecs., 453 F.3d at 1368. Representative claims are as follows: A data processing system including one or more central processing units, main memory means, and bus means . . . and means for detecting whether data corresponding to the address of said transferred data unit and determined to be stored in said cache memory means may be different in content from said transferred data unit and, if so, transmitting said data from said cache memory means to said bus means for reception by the bus connection requesting the data unit [i.e., ensuring the most current data is retrieved from memory]. U.S. Patent No. 4,939,641 (filed June 30, 1998). A memory control unit for controlling a main system memory of a data processing system, the main system memory being comprised of at least one memory unit . . . for comparing a received read address to write addresses stored in said write address buffer means . . . . [i.e., coordinating requests to read and write from main memory]. U.S. Patent No. 5,379,379 (filed Sept. 6, 1990). A method for determining priority of access to a bus among a set of devices coupled to the bus . . . the method comprising the steps of: receiving an access request in a node from a represented device; determining whether any node with a higher priority has received an access request; if no such node has received an access request, permitting the device to access the bus; counting a number of accesses by the device to the bus; and in response to predetermined number of accesses to the bus, giving another node the highest priority. U.S. Patent No. 5,077,733 (filed Sept. 11, 1989). Microprocessors carry out the main functions of computer systems by interpreting program instructions, processing data, and controlling other devices. 128 S. Ct. at 2113. A microprocessor is connected to the other devices via a set of wires called a bus and a chipset. Id. The components disclosed in the LGE patents had to be combined with standard parts in order to create a functioning computer. Id. at 2119. 105 A patent license is a waiver of liability for infringement and may provide immunity against claims of contributory infringement. See W. Elec. Co. v. Pacent Reproducer Corp., 42 F.2d 116, 117 (2d Cir. 1930), cert. denied 282 U.S. 873 (1930) (In its simplest form, a license means only leave to do a thing which the licensor would otherwise have a right to prevent. Such a license grants to the licensee merely a privilege that protects him from a claim of infringement by the owner of the patent monopoly.); De Forest Radio Tel. & Tel. Co. v. United States, 273 U.S. 236, 242 (1927) (As a license passes no interest in the monopoly, it has been described as a mere waiver of the right to sue by the patentee.); ROGER M. MILGRIM & ERIC E. BENSEN, 2 MILGRIM ON LICENSING 15.47 (describing a license as an assurance of immunity from suit). Crosslicensing agreements are prevalent in the semiconductor industry. See, e.g., Mehdi Ansari, LG Electronics, Inc. v. Bizcom Electronics, Inc.: Solving the Foundry Problem in the Semiconductor Industry, 22 BERKELEY TECH. L.J. 137, 138 (2007) (stating that leading semiconductor manufacturers have used broad cross-licensing agreements to provide patent peace and allow[] development of parallel technology); Dan Callaway, Note, Patent Incentives in the Semiconductor Industry, 4 HASTINGS BUS. L.J. 135, 137 (2008) ([L]arge semiconductor companies encourage their rivals to enter cross-licensing agreements.); Morris, supra note 17, at 1560 (stating that broad cross-licensing agreements were commonly used by semiconductor manufacturers to increase their freedom of design in the early days of the industry). 106 See Morris, supra note 17, at 1589 (describing Intels strategy of accumulating patents and entering broad cross-licensing agreements to achieve patent peace). 107 Asustek I at *2.

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sell (directly or indirectly), offer to sell, import or otherwise dispose of its own products that practiced the LGE patents.108 Thus, Intel could manufacture and sell the systems claimed in the LGE patents and devices designed to practice LGEs method claims without liability for infringement. The licensing agreement stated that no license was granted by LGE to any third party that purchased components from Intel.109 A separate master agreement between LGE and Intel required Intel to notify its customers, which it did, that while Intel had obtained a broad license from LGE, such license would not extend to any product made by combining an Intel product with a non-Intel product.110 The master agreement specified that failure to give the required notice would not terminate Intels license.111 Quanta purchased microprocessors and chipsets from licensee Intel that were designed to practice the LGE patents.112 Quanta combined these components with standard, non-Intel components to make computers that practiced the LGE patents.113 Patentee LGE sued Quanta for patent infringement based on this allegedly unauthorized

Asustek I at *4; Quanta Computer, 128 S. Ct. at 2114. No license is granted by either party hereto . . . to any third party for the combination by a third part of Licensed Products of either party with items, components, or the like acquired . . . from sources other than a party hereto, or for the use, import, offer for sale or sale of such combination. 128 S. Ct. at 2114. One author has suggested this language was employed to avoid the foundry problem, in which a chip foundry with a broad cross-license (e.g., Intel) is employed by the licensors competitors to make infringing products that the competitor takes free and clear of the patentees rights. Ansari, supra note 105, at 151-52; see also Kieff, infra note 154, at 320 (arguing that Intel intended to purchase patent peace, or freedom to operate, only for itself and leave its purchasers to deal with patentee LGE as they saw fit); supra note 32 (for additional interpretations of the LGE-Intel contracting language). The licensing agreement also stated that it did not alter the rules of patent exhaustion. 128 S. Ct. at 2114 (Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.). See Brief of Various Law Professors at 6 (stating that, in Mitchell v. Hawley, the Supreme Court treated the first sale doctrine is a default rule that parties could opt out of contractually); Kief, infra note 154, at 322 (describing exhaustion as a default rule that parties can contract around). 110 Brief for LG at *9. It was stipulated that Quanta received this notice. Asustek II at 914 (Defendants were informed of this limitation in the LGE-Intel License when, several days prior to entering into the LGE-Intel License, Intel sent a letter to all its customers . . . .). See Justice Breyers Bicycle, supra note 56, at 274 (interestingly characterizing this arrangement as classic tying). 111 128 S. Ct. at 2114 ([A] breach of this Agreement shall have no effect on and shall not be grounds for termination of the Patent License. (citing Brief for Petitioners at 9)). Other authors have noted that the facts of this case complicate the issue of patent exhaustion. David L. McCombs, et al., Intellectual Property Law, 61 SMU L. REV. 907, 917 (2008). See also supra note 36 and accompanying text. 112 128 S. Ct. at 2114. The purchased components could not practice LGEs patents until combined with other standard components. Id. at 2118. 113 Id. at 2114.

108 109

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combination.114 The district courts first opinion held that the LGE-Intel licensing agreement was an exhaustion-triggering unconditional first sale115 and therefore granted summary judgment to the defendant purchasers, including Quanta.116 Upon motion for reconsideration, the district court reversed itself with regard to exhaustion of LGEs method claims.117 The district court maintained that Intels sales were unconditional,118 but followed Federal Circuit precedent in holding that method claims could

114 LGE originally sued multiple defendants for infringement of at least seven patents. See, e.g., LG Elecs., Inc. v. Q-Lity Computer, Inc., WL 36117917 (complaint). Only three patents were at issue in the appeal that reached the Supreme Court. 128 S. Ct. at 2113. The defendants premised their theories of non-infringement on the patent exhaustion and implied license doctrines. Implied license is an equitable doctrine that prevents a patentee from maintaining an infringement claim when the patentees own conduct implied a license to practice the patented invention. See Asustek I at *3; see also LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1369 (Fed. Cir. 2006) (stating there is implied license where the circumstances of the sale . . . plainly indicate that the grant of a license should be inferred) (internal quotations and citations omitted). This theory was considered by the District Court, but was not critical to its first decision in favor of the defendant purchasers. Asustek I at *14 (holding that the Court need not determine whether the implied license doctrine also applies to the sale of Intel microprocessors and chipsets). With regard to exhaustion, LGE argued that Intels sale of the microprocessors could not have exhausted its patent rights because its claims were to systems that required combination of the microprocessors with additional components in order to practice the patented methods; thus, Intel had not sold the patented articles. Asustek I at *4; see also LG Elecs., 453 F.3d at 1368 (LGE brought suit against defendants, asserting that the combination of microprocessors or chipsets with other computer components infringes LGEs patents covering those combinations. LGE did not assert patent rights in the microprocessors or chipsets themselves.) (emphasis original). 115

Therefore, because LGE licensed to Intel the right to practice LGEs patents and sell products embodying its patentsand Intels production and sale of its microprocessors and chipsets are covered by this agreementLGE forfeited its potential infringement claims against those who legitimately purchase and use the Intel microprocessor and chipset. Asustek I at *4. 116 Asustek I at *14. In finding that the unpatented components sold by Intel exhausted LGEs patents, the district court employed the essential embodiment/no reasonable non-infringing use test from Univis. Asustek I at *11 ([T]he patent exhaustion doctrine also applies to the sale of non-patented devices which have no use other than as components in a device that practices the patent.). 117 35 U.S.C. 101 sets forth four categories of patentable inventions: process, machine, manufacture, or composition of matter. Claims to processes are also called method claims. See generally Chisum, supra note 15, at 1.03 regarding method claims. 118 Austek II at 917 (Defendants purchase of the microprocessors and chipsets from Intel was unconditional, in that Defendants purchase of microprocessors and chipsets was in no way conditioned on their agreement not to combine the Intel microprocessors and chipsets with other non-Intel parts and then sell the resultant products.). The district court found that the letter from Intel was not sufficient to demonstrate that its purchasers agreed to LGEs conditions. Id. Note that Asustek II focuses on the unconditional nature of the Intel-Quanta transaction whereas the opinion in Asustek I described the operative unconditional sale as that between LGE and Intel. The Supreme Courts opinion confirms that the Asustek II analysis is correct and the exhausting transaction was the Intel-Quanta sale.

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not be exhausted by the sale of an article.119 The Federal Circuit reversed on the question of whether there was a conditional sale. Citing a Uniform Commercial Code provision governing additional terms in contracts between merchants,120 the panel found that Intels notice conditioned the Intel-Quanta sale and therefore preserved LGEs patent rights against Quanta.121 2. The Supreme Court Reverses on Conditionality and Exhaustion

The unanimous Supreme Court opinion addressed whether the exhaustion doctrine applied to the sale of unpatented components122 that must be combined with other components to practice patented methods.123 Finding that the components sold by Intel essentially embodied the inventive aspects of the LGE patents124 and had no reasonable use other than to practice the LGE patents,125 the Court held that the sale from Intel to Quanta exhausted LGEs patent rights.126
119 Asustek II at 918. The Federal Circuit previously held that a patentees rights under claims to methods of using equipment were not exhausted by the sale of the equipment itself. Bandag, Inc. v. Al Bolsers Tire Stores, Inc., 750 F.2d 903 (Fed. Cir. 1984); Glass Equip. Dev., Inc. v. Besten, Inc., 174 F.3d 1337 (Fed. Cir. 1999). The district court also found that Quanta did not receive an implied license to combine the Intel products with non-Intel components. Asustek II at 918. 120 U.C.C. 2-207(2)(c) (2003). 121 LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006). It is questionable whether this application of UCC 2-207 was correct. UCC 2-207(2)(b) says that additional terms proposed in an acceptance or written confirmation do not become part of the contract if they materially alter it. It seems plausible that Intels notice disclaiming that its purchasers received an implied license to use the purchased components materially altered Quantas understanding of what it was purchasingwhy else, other than to use them in manufacturing computers, would Quanta have bought the Intel products? LGE suggested Quanta could sell the microprocessors abroad or as replacement parts, but the Supreme Court found these suggestions unreasonable. 128 S. Ct. 2119, n.6. 122 See supra note 112 and accompanying text. 123 128 S. Ct. at 2113. 124 Id. at 2120 (Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the Intel Products.). 125 Id. at 2119 (A microprocessor or chipset cannot function until it is connected to buses and memory. And here, as in Univis, the only apparent object of Intels sales to Quanta was to permit Quanta to incorporate the Intel Products into computers that would practice the patents.). 126 Id. at 2122 (Intels authorized sale to Quanta thus took [Intels] products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta.). LGE argued unsuccessfully that Intels sale of unpatented microprocessors could not exhaust LGEs patents directed toward combinations of the microprocessors with other components. See id. at 2118-19. Quanta expands the exhaustion doctrine articulated in Univis by showing that patent rights to a combination of elements are exhausted by the sale of a subset of such elements where the invention is substantially embodied in the sold article and the article has no reasonable non-infringing use. See id. at 2122. The Quanta opinion helps to clarify the analysis of whether an article substantially

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In determining whether the sale was conditional, the Court noted that no limitations were placed on Intels right to sell components designed to practice LGEs patents under the LGE-Intel agreement.127 Whereas the Federal Circuit focused on whether Intels notice created a valid condition with regard to the Intel-Quanta sale,128 the Supreme Court focused on the absence of conditions129 in the LGE-Intel licensing agreement, and in particular on the fact that Intels failure to provide notice would not have terminated the LGE-Intel licensing agreement.130 Since Intels sales to Quanta were authorized and unconditional, they exhausted LGEs patent rights.131

embodies a patented invention such that its sale triggers exhaustion. The Court rejected LGEs arguments that the article had to physically consist of all the elements of the claimed invention and that the sale of a component should never exhaust a patent to a combination that includes that component. Id. at 2118-19. While Univis taught that an exhausting article can still require the application of standard processes in order to practice the invention, 316 U.S. 241, 248-49 (1943), Quanta teaches that an exhausting article may also lack standard additional components. Intels chips substantially embodied LGEs system patents because only standard components needed to be added via standard steps in order to form the claimed combinations. Quanta Computer, 128 S. Ct. at 2120 ([T]he incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts.). Quanta also illustrates that the reasonable noninfringing use prong of the Univis test for exhaustion is an objective inquiry. Id. at 2122. LGE argued that non-infringing uses of Intels microprocessors and chipsets might have included use overseas or as replacement parts. Brief for LG Elecs., Inc., the Respondent at *21-22 n.10. The Court found these suggestions unreasonable and inconsistent with the apparent object of the LGE-Intel licensing agreement. 128 S. Ct. at 2119. The Court stated that the focus should be on whether the function performed by the components is within the scope of the patent claims, not whether extrinsic factors (such as the geographic location of the components use) would make use non-infringing. Id. at 2119 n.6 (Univis teaches that the question is whether the product is capable of use only in practicing the patent, not whether those uses are infringing. Whether outside the country or functioning as replacement parts, the Intel Products would still be practicing the patent, even if not infringing it.) (citation omitted) (emphasis original). 127 Quanta Computer, 128 S. Ct. at 2114; id. at 2121-22. In any event, the provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intels authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quantas decision to abide by LGEs directions in that notice. . . . And exhaustion turns only on Intels own license to sell products practicing the LGE Patents. Id. Although the Court did not explicitly define what constitutes a valid conditional sale, its reasoning is consistent with the definition suggested by the Solicitor Generals amicus brief. Brief for United States as Amicus Curiae Supporting Petitioners at *20-21, Quanta Computer, Inc. v. LG Elecs., Inc, 128 S. Ct. 2101 (2008) [hereinafter Solicitor Generals Brief] ([A] conditional sale would have been understood as an agreement to sell where title would not convey until performance of a condition precedent.). 128 LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006). 129 The Quanta opinion defines what type of condition is necessary to prevent exhaustion. See infra Part III.B. 130 Quanta Computer, 128 S. Ct. at 2121-22. 131 Id. at 2113.

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II. THE QUANTA OPINION AVOIDS THE POTENTIAL CONFLICT BETWEEN THE EXHAUSTION DOCTRINE AND THE CONDITIONAL SALE DOCTRINE A. Quanta and the Mallinckrodt Conditional Sale Doctrine

After the Federal Circuit held in Mallinckrodt132 that a single-useonly restriction on the use of patented nebulizers could theoretically be enforced via a patent infringement suit, some argued that the Federal Circuits conditional sale doctrine was inconsistent with the Supreme Courts exhaustion precedent.133 These scholars asserted that allowing a patent infringement suit against a purchaser based on the purchasers use of the patented article was allowing the conditional sale doctrine to whittle[] away134 or swallow[]135 the exhaustion doctrine, and that Supreme Court exhaustion precedent was inconsistent with allowing restrictions on purchasers to be enforced under the patent laws.136 It was predicted that the exhaustion and conditional sale doctrines were on a collision course in Quanta.137 In its amicus brief to the Supreme Court in support of purchaser Quanta, the Solicitor General
132 See supra Part I.B and notes 92-99 for a discussion of the facts and holding in Mallinckrodt. 133 See, e.g., Stern, supra note 7, at 461 (calling Mallinckrodt the Federal Circuits remarkable (and largely unnoticed) overruling of a century of Supreme Court decisional law under the exhaustion doctrine . . . .); Patterson, supra note 7, at 167 (The Court of Appeals for the Federal Circuit . . . has replaced the Supreme Courts substantive approach with a formal one. The source of the formal approach is Mallinckrodt, Inc., v. Medipart, Inc. . . . .); Wegner, supra note 38, at 682, 688 (citing Braun as an example of the Federal Circuit allowing contractual proscriptions to overrun the exhaustion doctrine); Moy, supra note 85, 18:34 (calling the Mallinckrodt opinion a misread[ing] of the general rule permitting field-of-use restrictions). But see Skladony, supra note 56, at 246 (stating that the legal underpinnings for the conditional sale doctrine can be found in early Supreme Court patent exhaustion cases); Justice Breyers Bicycle, supra note 56, at 246 (Mallinckrodt can be rationalized with Supreme Court precedent without eliminating field of use restrictions entirely.); id. at 283 (Mallinckrodt simply recognized and upheld common field of use restrictions which have been part of patent licensing practice for hundreds of years in complete accord with Supreme Court precedent.). 134 Wegner, supra note 38, at 683. 135 Stern, supra note 7, at 461. 136 E.g., Patterson, supra note 7, at 161 (stating that the Federal Circuit has allowed patentees to use contract law to transform previously permissible conduct into patent infringement); id. at 211 (By allowing infringement suits against downstream purchasers who were the first to fail to comply with the license terms, the courts have effectively allowed patent rights to be revived after a first sale that should have exhausted those rights.); Wegner, supra note 38, at 686-89 (describing the evisceration of the exhaustion doctrine by the Federal Circuit, particularly by the Mallinckrodt and Braun opinions). 137 See, e.g., William P. Skladony, Quanta Computer v. LG Electronics: The US Supreme Court May Consider the Doctrine of Patent Exhaustion, 19 NO. 7 INTELL. PROP. & TECH. L.J. 1, 1 (2007) (A tension has developed between these lines of cases, and it is focused for Supreme Court consideration.). Skladony predicted that the Supreme Court would inevitably have to grapple with two different lines of patent law cases . . . that have finally intersected in Quanta Computer if it granted certiorari. Id.

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urged the Court to resolve this apparent conflict between Mallinckrodt and the Courts exhaustion precedent.138 The defendant Quanta also argued that Mallinckrodt confused the exhaustion doctrine.139 However, the Quanta opinion conspicuously does not mention or cite the Mallinckrodt decision. Various commentators have interpreted this silence in different ways,140 ranging from the conclusion that Mallinckrodt is implicitly overruled141 to the conclusion that it is implicitly affirmed.142 In addition to clarifying and slightly expanding the exhaustion doctrine,143 the Quanta opinion may be read for hints as to the Supreme Courts view of the Federal Circuits application of the conditional sale doctrine.144 Although the Court did not expressly address the Mallinckrodt decision, its exhaustion analysis suggests that it considered the Federal Circuits conditional sale doctrine and purposefully distinguished that line of cases.145 The following sections analyze the purported conflicts between the exhaustion and conditional sale doctrines and explain to what extent Quanta affects the understanding of both. 1. Patent Infringement Suits Against Purchasers

One criticism of the Mallinckrodt decision is that it involves a

138 Solicitor Generals Brief, supra note 127, at *20 (The precedents of this Court foreclose the Federal Circuits view that patent exhaustion is merely a default rule to be discarded whenever patentees choose to impose explicit restrictions on authorized purchasers use or resale.). The test adopted by the Federal Circuit in Mallinckrodt thus reflects a fundamental misunderstanding of the role and scope of the patent exhaustion doctrine. Id. at *23. The reasoning [of Univis, Boston Store v. American Graphophone, and Motion Picture Patents] is irreconcilable with the Federal Circuits treatment of patent exhaustion. Id. at *20. But see Justice Breyers Bicycle, supra note 56, at 246, 260 ([T]he Solicitor General errs in characterizing the Federal Circuits Mallinckrodt decision as inconsistent with Supreme Court precedent. . . . The consternation by the Petitioners and the Solicitor General in Quanta v. LGE regarding the Federal Circuits 1992 Mallinckrodt decision is much ado about nothing. Mallinckrodt simply followed Supreme Court precedent to allow a single use restriction on very specific facts.). 139 Brief for Petitioners at *12, Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109 (2008) (No. 06-937) [hereinafter Brief for Quanta]. See also William P. Skladony, Quanta Computer v. LG Electronics: The US Supreme Court May Consider the Doctrine of Patent Exhaustion, 19 NO. 7 INTELL. PROP. & TECH. L.J. 1, 1 (2007) (predicting that, if the Supreme Court granted certiorari in Quanta, it would have to grapple with the intersection of the patent exhaustion and conditional sale doctrines). But see Justice Breyers Bicycle, supra note 56. 140 See supra note 38. 141 E.g., Holman, supra note 38. 142 E.g., Gomulkiewicz, supra note 38. 143 Supra note 126. 144 See, e.g., Ghosh, supra note 38 (calling Mallinckrodt the dog that did not bark in the Quanta opinion and suggesting that Quanta weakens or limits the conditional sale doctrine). 145 Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2121-22 (2008).

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restricted sale to an end purchaser146 of the patented article rather than a restricted license to an intermediate manufacturer.147 Critics argue that the Supreme Court never approved a patentees enforcement of restrictions against an end purchaser under the patent laws.148 One rationale for this response could be that purchasers for use in the ordinary pursuits of life149 should be treated differently from commercially sophisticated entities.150 But reading the Quanta opinion in light of early Supreme Court cases like Mitchell v. Hawley151 and General Talking Pictures152 suggests that the manufacturing licensee versus purchaser distinction is not dispositive with regard to application of the exhaustion doctrine. LGEs error was not that it sought to enforce restrictions against a purchaser,153 but rather the manner in which it attempted to create the restrictions.154 Intels notice to its purchasers, which Quanta stipulated
146 The term end purchaser is difficult to define. For example, in Mallinckrodt was the end purchaser the hospital that bought the nebulizer or the patient who paid for medical treatment? In Adams, was the end purchaser of the coffin lid the undertaker who bought it to use in his business or the undertakers client? Patterson uses the phrase ultimate purchaser to mean a party that purchases the completed patented good, as opposed to a licensed manufacturer who makes the good. Mark R. Patterson, Reestablishing the Doctrine of Patent Exhaustion, 2007 PATENTLY-O PAT. L.J. 38, 39-40, http://www.patentlyo.com/lawjournal/quanta.patterson.pdf. Under this definition, both the hospital in Mallinckrodt and the undertaker in Adams would be end purchasers. 147 E.g., id. at 39 (stating that the manufacturing licensee-end purchaser distinction mirrors a difference in Europe drawn between sales and technology transfer agreements). 148 E.g., Stern, supra note 7, at 460 ([C]ourts have thus far allowed virtually any limitation on the scope of a license to manufacture a patented product unless the limitation was shown to be a device to form an industry cartel. On the other hand, it seemed clear that a patentee could go virtually nowhere in limiting customers conduct except for restrictions necessary to protect health, safety, and product reliability.) (internal citations omitted). These critics consider General Talking Pictures in tension with other Supreme Court exhaustion precedent and try to explain away its approval of an infringement suit against a purchaser by focusing on the restriction in the agreement between the patentee and the manufacturing licensee. See Mallinckrodt, Inc. v. Medipart, Inc., 1990 WL 19535, *6 (N.D. Ill. 1990); Patterson, supra note 7, at 164 (A case like General Talking Pictures, in which the use restriction is imposed on a manufacturing licensee, differs from recent use-licensing cases, in which the restrictions have been imposed on the ultimate purchasers of the patented product.). 149 Bloomer v. McQuewan, 55 U.S. 539, 549 (1852). 150 See also Patterson, supra note 7, at 159 (stating that anticompetitive concerns are greater where the patentee imposes restrictions on the ultimate purchaser rather than on a manufacturing licensee). 151 83 U.S. (16 Wall.) 544 (1872); see supra text accompanying notes 82 and 84. 152 304 U.S. 175 (1938); see supra notes 86-91 and accompanying text. 153 This note does not characterize Quanta as an end purchaser because Quanta bought microprocessors from Intel to incorporate into computers that it then sold. The retail buyers of Quantas assembled computers are the end purchasers for use in the ordinary course of life. 154 See supra notes 32 and 109. Compare Skladony, supra note 56, at 289 (characterizing LGEs theory as allowing the patent owner to set a trap for the purchaser of the authorized article) and Brief for Quanta at *53 (stating that the price Quanta paid to Intel reflected Quantas belief that exhaustion occurred and that LGE was holding the computer industry hostage in order to extract a windfall) with F. Scott Kieff, Quanta v. LG Electronics: Frustrating Patent Deals by Taking Contracting Options Off the Table?, 2008 CATO SUP. CT. REV. 315, 316-18

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that it received, disclaimed any implied license for the purchasers to practice LGEs patents,155 yet stated that Intel was fully licensed to sell the components,156 creating ambiguity. Given the holding in Univis (i.e., the sale of an article that substantially embodies the inventive nature of a patent and has no other uses but to practice the patent exhausts patent rights), it would have been reasonable for Quanta to assume it could put the microprocessors it bought from Intel to their intended use. On the other hand, the notice implied that LGE thought it was reserving patent rights against Intels purchasers.157 One function of the exhaustion doctrine is to resolve this sort of ambiguity about rights reserved with respect to goods traded in commerce.158 Ambiguity about whether one is purchasing limited or unlimited rights to use an article can discourage transactions and thus slow the spread of new technologies.159 The default rule should be that sales of patented goods are presumed unconditional, and that this presumption can only be overcome by a showing that the purchaser had notice of any conditions when negotiating the transaction.160 It is also incorrect that the Supreme Court has never allowed

(characterizing LGE, Intel, and Quanta as sophisticated parties that well understood the express terms of the relevant contract) and id. at 315, 317 (stating that the price of the LGE-Intel license reflected the fact that it excluded Intels customers). 155 Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2114 (2008). 156 Id. 157 Cf. Kieff, supra note 154, at 317 (contending that the price of the LGE-Intel licensing agreement was low because the parties intended that it was only buying peace, i.e., immunity from suit, for Intel and not for third-party purchasers). 158 See Brief for American Intellectual Property Law Assn as Amicus Curiae supporting Respondents at 17, Quanta Computers, Inc. v. LG Elecs., Inc. 128 S. Ct. 2109 (2008) (No. 06937) (noting that the patent exhaustion doctrine serves the goal of eliminating uncertainty once a product is bought; sound policy endorses transactions being free from further obligation unless there is an agreement to the contrary); DRATLER, JR., supra note 8, 7.05 (stating that one positive feature of the exhaustion doctrine is that it provides a clear line that facilitates transactions). 159 E.g., The doctrine avoids burdening purchasers of protected chattels with the inconvenience, increased transaction costs and general inefficiency that would attend requiring them to trace the patent pedigree of every object in their possession and comply with various restrictions upon their use or resale to which the purchasers had never agreed. DRATLER, JR., supra note 8, 7.05. 160 Concern may arise about how to deal with parties who do not investigate the patent rights associated with the goods that they buy. E.g., infra note 165. But see, e.g., Kieff, supra note 154, at 326-29 (noting that patent law does not have a good-faith purchaser rule but describing other doctrines that may protected purchasers of patented goods from unfair results). Requiring restrictions to be expressly stated in patent licensing agreements would help protect the licensees purchasers. The express terms of the license would motivate the licensee to disclose these restrictions to his customer since the licensee could be liable for contributory infringement based on his customers subsequent use. Aligning the interests of the licensee and his customers gives the licensee an incentive to act in a manner that will benefits his customers when the licensee is negotiating with the patentee.

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infringement suits against purchasers. Mitchell v. Hawley161 involved a suit by the assignee of patent rights against a purchaser. In General Talking Pictures162 the Court approved of an infringement suit brought by the patentee against a purchaser from its licensee.163 If a patentee can temporally divide rights to make and sell her invention by express restrictions in a licensing agreement, she should also be able to sell limited use rights by express provisions in a sales contract. There is a long history of recognizing a patentees freedom to contract regarding her different rights under the patent grant.164 At least in cases of an express limitation on the rights being sold,165 the patentee should not have fewer options when selling her invention herself than when she goes through an intermediate manufacturer.166 Imagine that a patentee licensed a manufacturer to make her patented nebulizers on the condition that the licensee could only sell the nebulizers for single-use. The licensee manufactured the nebulizers, stamped them with a single-use-only label, and sold them to a hospital
83 U.S. (16 Wall.) 544 (1872). 304 U.S. 175 (1938). See supra notes 86-91 and accompanying text. But see DRATLER, JR., supra note 8 (stating that the Court in General Talking Pictures upheld the infringement suit against a purchaser from the manufacturing licensee on the explicit ground that the purchaser had actual knowledge of the restraint); Moy, supra note 85, 18:34 ([I]t is likely that the imposition of liability onto the third party customer in Talking Pictures stemmed from the particular facts of that case; it is unlikely that the same result should attach to third party uses generally.). 164 See, e.g., Mitchell v. Hawley, 304 U.S. 175, 181 (1972); Justice Breyers Bicycle, supra note 56, at 283 (stating that field of use restrictions have been part of patent licensing practice for hundreds of years in complete accord with Supreme Court precedent). Compare Patterson, supra note 7, at 216-17 (arguing that historically permitted field-of-use restrictions were directed at real uses [whatever that may mean] whereas recent cases have approved restrictions on rights, such as the rights of repair and resale, that previous case law determined the patentee could not restrict under the patent laws) with Justice Breyers Bicycle, supra note 56, at 265 (suggesting that the proper analysis is whether the conveyed restricted use has some nonzero value) and Skladony, supra note 56, at 281-82 (distinguishing Quanta and Mallinckrodt on the fact that Mallinckrodt acknowledged that the purchaser had authorization to use the patented article for at least some commercially practical use). 165 One concern might be that while a patentee and manufacturing licensee are presumably commercially sophisticated parties, an end purchaser, e.g., a retail consumer, may not be sophisticated and therefore may not be in a position to negotiate an appropriate price based on the limited rights she is buying. Requiring that any limitations be express would help to level the playing field. 166 But see Holman, supra note 38 (interpreting the Quanta decision to mean that patentees cannot use patent law to enforce conditions against purchasers, and noting that this interpretation produces an anomalous outcome that seems to make little economic sense in light of, e.g., General Talking Pictures). Holman notes that the Solicitor Generals brief supporting purchaser Quanta called the distinction between the rights of licensee and purchasers a necessary and explicable result of the differences in their respective positions. Id. The author of this Note suggests that while licensees and purchasers may be in different positions, purchasers who buy directly from the patentee should be in substantially the same position as purchasers who buy through an intermediate manufacturing licensee. Rather than interpreting Quanta broadly in a manner that creates anomalous differences between these two classes of purchasers, this Note suggests it is preferable to read Quanta more narrowly in a manner that avoids the anomaly.
161 162 163

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that had actual knowledge of the restriction. If the hospital nonetheless used the nebulizers multiple times, the situation would be analogous to that in General Talking Pictures. Even proponents of the manufacturing licensee-purchaser distinction would have to agree that the patentee could sue the hospital for infringement because the sale to the hospitals was unauthorized. There is no reason why the patentee should be able to achieve this result when she licenses an intermediate manufacturer but not when she makes and sells the patented devices herself. 2. The Quanta Opinion Is Consistent with the Conditional Sale Doctrine

The Supreme Court avoided the apparently inevitable collision between the exhaustion doctrine and the conditional sale doctrine by the manner in which it framed the issue in its Quanta opinion. The Court agreed with the district court that Intel possessed an unconditional license to sell microprocessors and chipsets designed to practice the LGE patents.167 Considering this finding, the Quanta opinion can be read as consistent with the Mallinckrodt line of conditional sale cases.168 Taken all together, these cases illustrate the dichotomy that an authorized sale exhausts patent rights whereas a conditional sale, in which the condition is not met, preserves patent rights. Despite some weaknesses in the cases it cites for support,169 the
Quanta Computer, Inc., v. LG Elecs., Inc., 128 S. Ct. 2109 at 2122 (2008). But see Kieff, supra note 154 (arguing that Quanta should not been seen as a decision about poor contracting but rather as the Supreme Courts assertion as to what type of patent contracting can be done). 169 For example, the opinion relies on E. Bement & Sons v. Natl Harrow Co. for the proposition that a patentee can impose any conditions that are not per se illegal. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703 (1992) (citing Bement, 186 U.S. 70 (1902)). The contracts at issue in Bement fixed the conditions, including the price, at which the licensee could sell the patented machines. 186 U.S. at 72-75. While E. Bement & Sons does address the rights of a patentee to impose conditions regarding the price at which a manufacturing licensee can sell patented goods, it does so in the context of a suit for liquidated damages for breach of contract and not for patent infringement. 186 U.S. at 70-71, 91, 93. Thus, the Bement Courts decision that the contracts at issue were valid does not necessarily imply that breach of the contractual conditions would give rise to a claim for patent infringement. Bement is also insufficient to support the idea that conditions can be enforced in a lawsuit against a purchaser because it is a suit by the patentee against a manufacturing licensee. The Mallinckrodt opinions citations to Rubber Company v. Goodyear, 76 U.S. (9 Wall.) 788 (1869) and Gamewell Fire-Alarm Telegraph Co. v. Brooklyn, 14 F. 255 (E.D.N.Y. 1882) for the proposition that restricted patent licensing is a long-sanctioned practice are also misleading. See 976 F.2d at 705. Certain types of restrictions in contracts between patentees and manufacturing licensees have long been recognized as enforceable under the patent laws. E.g., Birdwell, supra note 56, at 214 ([I]t has been recognized that time, territorial and use restrictions in patent licenses are enforceable by patent infringement action.). But the context in which Judge Newman cites these cases could suggest they illustrate a history of the Supreme Court
167 168

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Mallinckrodt opinion should be sustained because it is consistent with the Supreme Court precedent set in Mitchell v. Hawley170 and General Talking Pictures.171 Given that the unanimous Quanta opinion does not overrule General Talking Pictures but rather distinguishes it, the conditional sale doctrine should still be viewed as good law.172 Further support for this proposition can be drawn from the fact that the Quanta opinion traces the development of the exhaustion doctrine through cases that all involved unconditional sales.173 As to the line of
approving use restrictions imposed on purchasers, which they do not. The Mallinckrodt opinion describes Goodyear as approving a field-of-use restriction limiting the types of products the licensee could make with the patented process. Mallinckrodt, 976 F.2d at 707. However, the Courts opinion actually hinged on the contractual language limiting the application of the license to just the licensee, himself, as exercised in his own place of business and forbidding him from contracting to sell goods made from the patented rubber to the government. Goodyear, 76 U.S. at 799. The Court did not actually address the issue of whether Goodyear could enforce a restriction on the manner in which a licensee might use a patented material under the patent law. While Gamewell Fire-Alarm Tel. Co. v. Brooklyn involved a restricted license obtained by Gamewell to practice patents owned by Western Union Telegraph, at issue in the case was whether the licensee could sue the City of Brooklyn for patent infringement without joining the patentee as a plaintiff. See Gamewell, 14 F. at 256. The court did not actually pass on the enforceability of the field-ofuse restrictions under the patent law. Finally, the Mallinckrodt opinions discussion of American Cotton-Tie v. Simmons as a case in which a single-use only label license stamped on the patented article was relevant to whether the patentee could maintain a patent infringement suit is questionable. See Mallinckrodt, 976 F.2d at 707. While the patented cotton ties at issue in the case were stamped with single-use only inscription, the Supreme Courts decision regarding infringement turned on the difference between permissible repair and impermissible reconstruction, not on the implications of the single-use restriction. See 106 U.S. at 93-95 (analyzing at length whether the ties constructed by the defendant infringe the patents at issue); see also Patterson, supra note 7, at 197-98 (discussing American Cotton Tie as a repair-reconstruction case and concluding that Justice Whittakers statement that the label license was important to the decision was baseless); James B. Kobak, Jr., Contracting Around Exhaustion: Some Thoughts About the CAFCs Mallinckrodt Decision, 75 J. PAT. & TRADEMARK OFF. SOCY, 550, 556 (1993) (stating that American Cotton Tie was decided on the basis of the repair-reconstruction doctrine). In fact, the Court explicitly declined to address whether reuse of the labeled buckle, alone, would have constituted infringement of the patents. American Cotton-Tie, 106 U.S. at 95 (We do not decide that they are liable as infringers of either of the three patents merely because they sold the buckle considered apart from the band or from the entire structure as a tie.). The Courts reference to Whatever right the defendants could acquire to the use of the old buckle . . . , id. at 93, also shows that they did not pass on this issue. 170 83 U.S. (16 Wall.) 544 (1872). 171 304 U.S. 175 (1938); 305 U.S. 124 (1938). Compare Kieff, supra note 154, at 321-22 (arguing that the Federal Circuits conditional sale doctrine is not only consistent with, but mandated by, Supreme Court precedent) with DRATLER, JR., supra note 8, 7.05 (The Federal Circuit was disingenuous at best in interpreting the entire line of early Supreme Court decisions on the first-sale doctrine as supporting restrictions in conditional sales, for those cases did not directly present the issue.). Compare Moy, supra note 85, 18:24 (suggesting that the preSherman Act cases relied on by the Federal Circuit in Mallinckrodt are arguably no longer good law post-Sherman Act) with DRATLER, JR., supra note 8, 7.05 (noting that the judge-made exhaustion doctrine pre-dates the Sherman Act and is not necessarily limited to the same principles of application as the antitrust laws). 172 See Holman, supra note 38. 173 See, e.g., Birdwell, supra note 56, at 206 (discussing Bloomer v. McQuewan): While the Court used rather broad language . . . it is significant that the defendant had not actually purchased the machine, but had constructed it himself, and that no express

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exhaustion cases discussed in Part II.A that arose in the wake of the Sherman Act, it is important to remember that the basis of the antitrust violation in those cases was the trade-restraining intent or effect of the patentees actions, not the mere existence of a restriction on the use or sale of the patented goods.174 That so much care was taken to avoid and distinguish cases involving conditional sales suggests that the Court did not want to disrupt that existing body of law. Rather than considering cases such as Mitchell v. Hawley and General Talking Pictures as in tension with the exhaustion cases or as anomalies, they should be considered a separate, contrasting, and complementary line of precedent.175 3. Policy Considerations

The benefits176 of allowing parties significant freedom to contract regarding rights to make, use, or sell patented inventions weigh in favor of considering the conditional sale doctrine good law until it is explicitly overruled.177 For example, field-of-use restrictions allow
restriction on the use of the machine was at issue. Therefore, the case did not establish any principle for restrictions on goods which are purchased. See also id. at 207 (describing Adams v. Burke as an unconditional sale); id. at 208 (describing Keeler as an unconditional sale). Birdwell concludes that the early Supreme Court cases do not conclude that restrictions cannot be placed on the sale of patented goods, they merely hold that no restrictions are to be implied. Id. at 208. 174 Birdwell, supra note 56, at 219. 175 See, e.g., Birdwell, supra note 56, at 206-07 (concluding from a comparison of Bloomer v. McQuewan and Mitchell v. Hawley that: [T]he reasonable conclusion from them is that where patented goods are sold without condition, the interest acquired by the purchaser entitles him to the absolute right to their use and disposition; but where sold subject to condition, the interest acquired is limited and violation of that condition is an infringement of the patent right. 176 See, e.g., STEVEN Z. SZCZEPANSKI, UPDATED BY DAVID M. EPSTEIN, 2 ECKSTROMS LICENSING IN FOREIGN & DOMESTIC OPERATIONS 8E:22, available at Westlaw ECKLICN (describing pro-competitive effects of field-of-use licensing, including allowing efficient and effective exploitation of intellectual property, creating incentives for licensees to invest in commercialization and distribution of products that embody the licensed intellectual property, and providing incentives for the development of additional applications of the licensed property). 177 Cf. Justice Breyers Bicycle, supra note 56, at 269 (predicting that one effect of finding LGEs patent rights exhausted would be to encourage licensors to either obtain a full royalty for components embodying the essential features up front, or licensing systems integrators rather than component manufacturers); Kieff, supra note 154, at 317 (listing potential negative implications of restricting patent licenses to all-or-nothing deals including higher transaction costs, a reduced incentive to invest in patent assets, and sellers engaging in costly protective mechanisms); id. at 320 (While the law should allow parties the option to do such all-up-front deals if they so desire, it should also leave them the option to strike more dynamic deals, such as those that let each customer get exactly the terms it prefers at the time it develops that preference.); Andrew Beckerman-Rodau, et al., EBay v. MercExchange and Quanta Computer v. LG Electronics, 4 J. BUS. & TECH. L. 5, 25 (2009): [I]f the Quanta case comes out with a strong first sale rule, then if you want to strike a

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price discrimination178 between different target audiences179 such that new technologies can be more widely disseminated than if field-of-use restrictions were not permitted.180 General Talking Pictures181 illustrates this benefit. The patentee chose to reserve the exclusive right in the commercial field for its own subsidiary.182 This allowed the company to reap the rewards of its invention by selling to large customers, namely commercial theaters.183 The patentee and its subsidiary presumably did not have an interest in selling to small-scale private customers. Field-of-use restrictions that were enforceable against both the licensee and the licensees customer allowed the technology to reach customers in the private field even though the patentee did not wish to pursue this market.184 In that case, it was stipulated that all parties were aware of the field-of-use restrictions, so there was no element of surprise about what the licensees customers were buying and the price could be negotiated accordingly.185
deal with anyone in the industry, you have to realize that you are striking a deal with everybody in the industry, and that is going to mean that the price you pay will be very, very high. . . . Economic success is about private ordering. Private ordering is about flexibility to strike the deals you want on the terms you want and a little bit of flexibility for the government. Not the kind of flexibility to allow the court to enforce when it wants, but for the court to enforce deals that were struck. 178 Price discrimination, also known as differential pricing, is the setting of the price of a product or service differently for different customers. BLACKS LAW DICTIONARY 208, 560 (3d Pocket ed. 2006). 179 See Birdwell, supra note 56, at 226 (describing the principal object of field-of-use restrictions as separating customer markets to exercise price discrimination in order to take advantage of differing elasticities of demand). 180 See Justice Breyers Bicycle, supra note 56, at 246 (arguing in favor of continuing to allow field-of-use restrictions because this longstanding practice has served to facilitate the efficient dissemination of patented technologies); Department of Justice-Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (Apr. 6, 1995) 2.3, available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf (stating that the integration of licensed products with complementary factors of production can benefit consumers through reductions in cost and the introduction of new products); DRATLER, JR., supra note 8, 7.04 (stating that fieldof-use restraints are common practice in licensing because they allow patentees to realize the full market value of the licensed subject matter in each of the fields of use and because exclusive licenses covering different fields of use can encourage the various licensees to invest substantial money and effort and accept substantial start-up risk). 181 304 U.S. 175 (1938); 305 U.S. 124 (1938). 182 304 U.S. at 179. 183 See Department of Justice-Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (Apr. 6, 1995) 2.3, available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf (stating that restrictive licenses may also increase the licensors incentive to license, for example, by protecting the licensor from competition in the licensors own technology in a market niche that it prefers to keep to itself). 184 See Birdwell, supra note 56, at 227 (stating that market restrictions can beneficially increase interbrand competition); id. at 228 (It can be shown that market restrictions not only can increase profit to the patentee, but more importantly, also can increase the extent to which consumer demand for the patented products is met.); id. at 229 ([W]hile subject to abuse, such restrictions can result in greater production and utilization of innovations, and may be necessary to encourage distribution contracting by the patentee.). 185 See, e.g., Brief of Various Law Professors, supra note 56, at 11:

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An analogy can be drawn to flexible licensing practices used for copyrighted software,186 which facilitate greater access to products by allowing parties to construct licensing arrangements that suit their particular needs.187 Software owners can sell a limited use right for an appropriate price, and users can choose to buy only what they require and can afford. For example, a large institution may be willing and able to pay a significant price for unlimited use of a copyrighted software product. On the other hand, an infrequent user with more limited means may want to pay a smaller price for use rights that are limited, e.g., in length of time or number of uses. Field-of-use restrictions can facilitate the ability of the patentee to exploit its patent rights in different markets, technologies, or applications,188 with end users benefiting from this wider exploitation.189 Because of these benefits, the law should allow parties freedom of contract with regard to the right to use patented inventions. Developments in biotechnology present another reason to allow patentees to sell restricted rights to use a patented invention.190 Patent protection of biotech inventions is desirable because they have the
[A]n all-or-nothing rule would require patentees to transfer more in a license than they might want in given cases, thereby reducing flexibility and decreasing interest in licensing. Similarly, it would require licensees to buy more than they might want in a given case, thereby decreasing their interest in licensing as well. . . . [O]ne size of settlement does not fit all parties under all circumstances. 186 See ESTHER C. RODITII, COMPUTER CONTRACTS 8.05 (Matthew Bender 2008) (describing the scope of use rights that may be limited with regard to licensed software); Gomulkeiwicz, supra note 38, at 11 (stating that end-user licensing is an important innovation in an information economy and describing customizable software programs and price differentiation for different types of users); see also RAYMOND T. NIMMER, 1 INFORMATION LAW 11:69 (2008) ([U]nder copyright and trademark law, works and marks are routinely licensed, rather than sold, and, at least in copyright law, the statute expressly recognizes the right of a copyright owner to distribute copies subject to technological controls that limit or regulate access to the work.); see generally UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT. 187 But see, e.g., Alice Haemmerli, Why Doctrine Matters: Patent and Copyright Licensing and the Meaning of Ownership in Federal Context, 30 COLUM. J.L. & ARTS 1 (2006) (discussing differences between patent and copyright licensing). 188 See, e.g., Brief of AIPLA, supra note 22, at 2-3 (arguing that a patentees use of tiered licensing, with adequate notice to sophisticated purchasers, allows for the appropriate and proper exploitation of intellectual property rights and that the public interest is best served by allowing patentees to arrange commercially appropriate licenses . . . that allow them to recoup their investments in an efficient manner); id. at 4-5 (outlining some of the factors that make tiered licensing economically efficient); Department of Justice-Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property (Apr. 6, 1995) 2.3, available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf (Field-of-use, territorial, and other limitations on intellectual property licenses may serve procompetitive ends by allowing the licensor to exploit its property as efficiently and effectively as possible.). 189 See, e.g., Brief of AIPLA, supra note 22, at 31-32 (stating that a patentees ability to distribute royalty burdens among various licensees creates mutually-beneficial financial arrangements that ultimately promote competition and serve the marketplace). 190 See Wegner, supra note 38, at 683, 684, 695-99 (describing how Quanta may have widespread effects on the biotechnology industry, including the patented seed industry and sales of living microorganisms).

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potential to bring important developments to fields such as agriculture and medicine;191 but they are expensive to produce.192 The selfreplicating abilities of living organisms193 raise concerns about how a patentee can recapture the cost of bringing a new biotech invention to the market.194 Allowing the sale of restricted rights to use patented biotech inventions,195 such as genetically modified crop seeds or biological medicines, is one way to encourage investment in these areas while providing access to, for example, small scale farmers or individual patients who could not afford to pay large fees for unlimited use rights.196 III.
THE CONDITIONAL SALE DOCTRINE IN LIGHT OF QUANTA

While the conditional sale doctrine is viable after Quanta, courts should still consider the implications of Quanta in their application of the doctrine. For one, the Quanta opinion illustrates that one aspect of determining whether a sale was authorized, such that it triggers exhaustion, is analyzing whether the sale was conditional.197 If
191 Brief of the Biotechnology Industry Organization as Amicus Curiae in Support of Neither Party, Quanta Computer, Inc. v. LG Elecs., Inc. 128 S. Ct. 2109 (2008) (No 06-937) at 7 [hereinafter BIO Brief] ([M]any of the important advances in medicinal and agricultural biotechnology, such as cell lines, DNA sequences, or transgenic seed, involve DNA, which selfreplicates through the ordinary process of cell division, but is also routinely capable of artificial replication.); id. at 2 (Biotechnology innovations provide life-saving medical treatments and diagnostic procedures, disease- and herbicide-resistant crops, and a host of promising scientific solutions for modern environmental, medical, and agricultural challenges.). 192 Id. (The biotechnology industry is the most research and development-intensive and capital-focused industry in the world. Biotechnology research and development expenditures are more than double the average of the pharmaceutical industry, which itself is several times more intensive than any other industry. (quoting National Institute of Health: Moving Research from the Bench to the Bedside: Hearings Before the Subcomm. on Health of the House Comm. on Energy and Commerce, 108th Cong., 1st Sess. 47 (2003) (testimony of Phylliss Gardner, M.D.))). 193 See Diamond v. Chakrabarty, 447 U.S. 303 (1980) (holding that human-made living organisms are patentable). 194 See BIO Brief at 7: Absent such a restriction, the first salewhich is often for a reduced price to permit universities and small companies to participate in researchwould effectively extinguish the patentees rights, because the purchaser would obtain, in effect, a neverending supply of the product that it could use, sell, and market in competition with the patentee. See also Monsanto Co. v. McFarling, 302 F.3d 1291 (Fed. Cir. 2002); Monsanto Co. v. Scruggs, 459 F.3d 1328 (Fed. Cir. 2006). 195 E.g., Monsanto Co. v. McFarling, 302 F.3d 1291 (2002); Monsanto Co. v. Scruggs, 459 F.3d 1328 (2006). 196 See, e.g., DRATLER, JR., supra note 8, 7.05 (arguing that it was reasonable to uphold the use restriction on patented soybean seeds at issue in Monsanto v. McFarling because it was the only alternative that would both preserve the patent incentive in like cases and make economic sense). 197 See Quanta Computer, Inc. v. LG Elecs.,Inc.,128 S. Ct. 2109, 2121-22 (2008).

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conditionality is viewed as a subpart of the authorized first sale inquiry, one can develop an exhaustion analysis that is consistent with both the exhaustion and conditional sale precedent.198 A. Proposed Exhaustion Analysis

In light of the Quanta decision, this Note proposes the following analysis for deciding whether exhaustion terminates all patent rights with respect to a conveyed article or whether exhaustion is avoided by a conditional sale such that post-sale events can give rise to infringement liability. First, exhaustion is only a concern if it appears that the patentee might be trying to take multiple bites at the apple.199 A patentee can generally bring an infringement suit where she has not yet received any consideration in exchange for the right to use her invention.200 Where it looks like the patentee may be trying to get more than her due, the transactions at issue should be examined for the presence of conditions. If the patentee has tried to impose a condition, the effect of that condition should be analyzed according to standard contract law principles, specifically, whether there was assent and consideration.201 While the Quanta opinion does not state whether exhaustion can only be prevented by express, as opposed to implied, conditions, it suggests that there should be a clear manifestation of consent by either the purchaser or the intermediate licensee.202 Requiring a clear manifestation of assent would still be consistent with the conditional sale precedent.203 And, as discussed previously, requiring express
See infra Part III.A. See supra note 56 and accompanying text; see also DRATLER, JR., supra note 8, 7.05 (noting that a patentee may select alternative strategies for reaping the rewards of her invention, including collecting a licensing fee for allowing another to manufacture and sell the invention or charging a royalty based on the use of the patented invention). 200 See, e.g., U.S. v. Gen. Elec. Co., 272 U.S. 476 (1926) (finding that a patentee could set the retail sale price of the patented lamps sold by its retail sales agents where the patentee received no compensation for the lamps until they were sold). Cf. U.S. v. Masonite Corp., 316 U.S. 265 (1942) (finding that a licensing arrangement between a patentee and its competitors was an illegal conspiracy to reduce competition where the parties agreed to let the patentee fix the retail price of the goods, and distinguishing General Electric on the basis of intent). 201 See CORBIN, supra note 16, at 30.10 (describing express conditions and implied conditions). But see id. 30.11 (describing constructive conditions imposed by courts). 202 Osborne suggests that conditions involving the sale of a patented article must be clear, explicit, and otherwise lawful to preclude operation of the exhaustion doctrine. Justice Breyers Bicycle, supra note 56, at 257. This suggestion is consistent with the idea that one function of the exhaustion doctrine is to avoid ambiguity with respect to rights of goods traded in commerce. See supra Part II.B.i and note 158; see also DRATLER, JR., supra note 12, at 7.05 (stating that the Quanta opinion will force patentees to be more explicit regarding restrictions in their licensing agreements). 203 For example, in Mallinckrodt, the Federal Circuit did not decide whether the label license
198 199

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consent would also lend certainty to transactions.204 Following the Mallinckrodt opinion, another part of the analysis as to whether the transaction is conditional is whether the conditions survive antitrust scrutiny.205 Even if the condition is express and the purchaser assents in return for consideration (such as a discounted price), the patentee still may not use a patent monopoly right to engage in conduct that is a per se violation of antitrust laws.206 But beyond the antitrust and patent misuse laws, parties should be given freedom to contract as they see fit.207 If, based on the foregoing analysis, the sale is unconditional, then the exhaustion doctrine applies and the patentee may not sue a purchaser for infringement based on post-sale activities. But if the transaction is conditional, exhaustion is staved off until the condition is met. If the condition does not come to pass, the patentees rights are not exhausted and she may sue the purchaser for infringement.208 In cases where the satisfaction of a condition depends on post-sale activities, the court will have to examine the continuing conduct of the parties even after the sale. But this should pose no greater burden than dealing with a breach of contract claim under the same circumstances. B. Recommendations for Licensing Agreements in Light of Quanta

The Quanta opinion makes clear that an exhaustion-avoiding condition must be a classic contract law condition209 and not a
was contractually effective; its holding that Mallinckrodt could sue for infringement was contingent upon a finding that the label was contractually binding. Mallinckrodt v. Medipart, 976 F.2d 700, 701, 709 (Fed. Cir. 1992). Monsanto v. McFarling is also consistentthe purchaser, McFarling, signed a Technology Agreement form that clearly stated the prohibition against saving and using the second-generation seeds. Monsanto Co. v. McFarling, 302 F.3d 1291, 1293 (Fed. Cir. 2002). In Lexmark, the district court found that purchasers of the Prebate cartridges had notice of the condition and received adequate consideration for their assent to it. Ariz. Cartridge Remfrs. Assn v. Lexmark Intl Inc., 421 F.3d 981, 987 (9th Cir. 2005). 204 Cf. Morris, supra note 17, at 1603 (describing as a positive result of the exhaustion doctrine that a prospective purchaser is thus assured that any authorized purchase of a patented invention terminates the patent owners rights in the purchased product). 205 For example, a condition that created a tying arrangement, or other per se antitrust violation, would be void under the antitrust laws. See Mallinckrodt, 976 F.2d at 708. 206 See e.g., id.; United States v. Univis Lens Co., 316 U.S. 241, 251 (1942); U.S. v. Masonite Corp., 316 U.S. 265, 276-77 (1942); Ethyl Gasoline Corp. v. U.S., 309 U.S. 436, 452, 456-58 (1940); Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 US. 502, 518 (1917). 207 See supra Part II.B.iii. 208 Cf. Birdwell, supra note 56, at 211 (interpreting the General Talking Pictures opinion as finding that the licensees sale was infringement and the purchaser induced infringement). 209 See supra note 127; see also CORBIN, supra note 16, at 30.6 (defining condition as an operative fact or event, one on which the existence of some particular legal relation depends and emphasizing the contingent quality of a condition); RESTATEMENT (SECOND) OF CONTRACTS 224 (A condition is an event, not certain to occur, which must occur, unless its non-occurrence is

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covenant.210 For example, since it was not a breach of the LGE-Intel licensing agreement for Intel to sell components to Quanta,211 the IntelQuanta sale was unconditional, authorized, and exhaustion-triggering. Impliedly, if it had been a breach of the LGE-Intel contract for Intel to sell its components for combination with non-Intel parts, the authority of Intels sale to Quanta would have been conditioned on how Quanta subsequently used the components. If Quanta combined them with nonIntel parts, the Intel-Quanta sale would be unauthorized and therefore LGEs right to sue Quanta for infringement would have been preserved.212 Such an arrangement would resemble the facts of Mitchell v. Hawley,213 in which the Court found that the licensee could not sell the patented articles free and clear of the patentees rights.214 As discussed above, conditional sales and restricted licenses are still viable contracting options in light of the Quanta decision. However, given the Courts scrutiny of the LGE-Intel licensing agreement, a patentee probably has the best chance of preserving patent rights against purchasers, if she so wishes, by making any conditions or restrictions express in the sales contract and/or in the licensing agreement if applicable.215 Requiring express assent to such conditions by either the manufacturing licensee or the purchaser216 is a safer strategy than, for example, relying on a label license.217 Another strategy to avoid exhaustion might be to avoid licensing arrangements in favor of other types of commercial relationships. For
excused, before performance under a contract becomes due.). Cf. Solicitor Generals Brief, supra note 127, at *20-21 (But at that time [referring to the Mitchell decision], a conditional sale would have been understood as an agreement to sell where title would not convey until performance of a condition precedent.). 210 See CORBIN, supra note 16, at 30.12 (The word covenant has come to be not much more than a synonym of promise . . . . [I]t is not itself a condition of the duty of the covenantee to keep his return promise or covenant. . . . [A covenant] creates a legal duty in the promisor; [a condition] limits and postpones a promisors duty.). 211 Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109, 2122 (2008) (Intels authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quantas decision to abide by LGEs directions in that notice.). 212 See NIMMER, supra note 186, 2:48 (2008) (If the transaction between Intel and LG had restricted Intels right to sell products to cases in which the sale was conditional on buyer agreeing to not use the product in a third party configuration, then exhaustion would not apply.). 213 83 U.S. 544 (1873). 214 See id. at 550 ([N]o one can convey in such a case any better title than he owns.). 215 See Skladony, supra note 56, at 292. 216 For example, as done with the Technology Agreement in Monsanto. Monsanto Co. v. McFarling, 302 F.3d 1291, 1293 (Fed. Cir. 2002). 217 Cf. Skladony, supra note 56, at 280 (writing, before the Supreme Courts decision in Quanta, that the Federal Circuit did not seem to require actual assent to a condition of sale); id. at 291 (nonetheless recommending that it is a better practice to establish enforceable conditions in a written and signed agreement between the seller and the purchaser); see also Chemagro Corp. v. Universal Chem. Co., 244 F. Supp. 486, 489 (E.D. Tex. 1965) (finding that a label license effectively limited a purchasers right to use a patented insecticide where the purchaser had actual notice of the restriction on the label).

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example, the use of a covenant not to assert,218 instead of a license to manufacture and sell, may be one way around the undesirable consequences of the exhaustion doctrine in the licensing context. Another proposed solution for biotech inventions is for patentees to engage in bailment219 rather than licensing arrangements.220 Whether the patentee chooses to grant a license or a covenant not to assert, she will be best served if she makes all conditions or restrictions clear to the other parties involved in the transaction.221 CONCLUSION Despite the predicted clash between the patent exhaustion doctrine and the conditional sale doctrine, the Supreme Courts opinion in Quanta suggests that these doctrines can coexist and complement each other. Rather than striking down the conditional sale doctrine, the Supreme Court chose to distinguish the conditional sale line of cases and therefore leave that precedent intact. Policy considerations weigh in favor of allowing parties flexibility in structuring their licensing and sales agreements, including allowing patentees to implement field-ofuse restrictions on the sale of patented goods. Taking a cue from the Quanta opinion, courts should analyze the conditionality of an agreement as one element of whether there was an exhaustion-triggering first sale.

218 A covenant not to assert provides that the contracting parties will not assert patent rights against each other. See U.S. DEPT OF JUSTICE & FED. TRADE COMMN, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION 88 (2007), available at www.usdoj.gov/atr/public/hearings/ip/222655.pdf. But see supra note 105. 219 Bailment is a delivery of personal property by one person (the bailor) to another (the bailee) who holds the property for a certain purpose under an express or implied-in-fact contract. Unlike a sale or gift of personal property, a bailment involves a change in possession but not in title. BLACKS LAW DICTIONARY 59 (3d Pocket ed. 2006). 220 Wegner, supra note 38, at 697 (suggesting that bailment arrangements might be suitable for fully developed products, but noting that it may not be ideal for parties who wish to combine their biological materials to create new products (citing Stephen B. Maebius, Biotech Transfers: From Bailing Mice to Selling Hybridomas, 76 J. PAT. & TRADEMARK OFF. SOCY 601, 613 (1994)). 221 See also Justice Breyers Bicycle, supra note 56, at 269 (suggesting that patentees could choose to derive their royalties from licensing system integrators rather than component manufacturers).