Distribution, Competition, and Antitrust / IP Law

Free Product Distribution or Discounted Component Distribution Likely Does Not Exhaust Patent Rights

OneTouch Ultra2 is being used by a diabetic pa...

OneTouch Ultra2 is being used by a diabetic patient. (Photo credit: Wikipedia)

In LifeScan, Inc. v. Shasta Technologies, LLC, 2013 U.S. Dist. LEXIS 38677 (N.D. Cal. Mar. 19, 2013), Judge Davila granted plaintiff’s motion for a preliminary injunction to address claims of patent infringement, and addressed whether patent exhaustion doctrine applies to free distribution of product or to discounted distribution of only one component of a product.

I previously covered patent exhaustion doctrine here.  In a nutshell, the patent monopoly is exhausted after a patentee sells the patented invention in whole, or under certain circumstances, in part. (A license to use technology in a certain field of use, however, generally does not trigger the exhaustion doctrine, also known as the first sale doctrine.)

In LifeScan, the plaintiff markets and sells the “OneTouch Ultra System,” a glucose monitoring system. The system is composed of both a meter and disposable test strips. A patent covering “DoubleSure Technology” specifies a method designed to improve the reliability and accuracy of glucose measurements. The technology uses a self-testing strip design using multiple sensors.

Defendants made strips for use in the OneTouch Ultra System (thus prompting the patent suit), and argued that LifeScan’s patent rights were exhausted for two reasons. The court rejected each argument.

First, LifeScan has doctors distribute free OneTouch Ultra kits, comprised of meters and test strips, to diabetic patients. The court held – at least at the preliminary injunction stage – that LifeScan could likely show that this free distribution did not exhaust its patent rights. LifeScan receives no remuneration at the moment it parts with the patented invention. The fact that LifeScan distributes the kits in consideration of patients’ anticipated future repeat purchases of disposable test strips was not enough. According to the court, the common theme running through prior case law – which did not squarely address the issue before the court – was that there must be consideration at the time of the authorized sale in order for the patent exhaustion doctrine to attach.

Second, LifeScan sells OneTouch Ultra meters alone at a reduced price. But this practice too, the court held, likely does not trigger patent exhaustion, because the patent at issue is a method patent that requires both a meter and a test strip for an individual to practice it. “As such, the sale of the meter by itself does not necessarily convey the entire invention of the . . . patent to the purchaser, casting the applicability of exhaustion into doubt.”

The decision reaches the appropriate result – patent rights should not be lost merely because of a novel distribution system, one that is likely pro-competitive because it fosters dissemination of new technology.

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Speaking on the Nine Potential Patent Licensing “No-Nos”

On March 13, 2013 at 1:00 p.m. Eastern Time, I’ll be speaking at a Licensing Executives Society webinar on the nine patent licensing no-nos.  You can find more information about the webinar here.

Readers of this blog will know that I recently wrote a series of posts on this topic.

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DOJ Antitrust Head Cautions on Patent Risks

According to this article in Law360 (may be behind a paywall), acting assistant attorney general Joseph Wayland recently warned at a conference that patent holders could get themselves into difficulties even if they are not trying to enforce standard-essential patents. 

“I have made this a priority at the division … use or misuse of patents that goes beyond standard-essential patents,” Wayland said. “Let’s suppose that there are contractual terms that a holder of intellectual property has and insists that in order to license this patent you need to promise the following things, some of which may impact competition outside of that market or may lock in, attempt to lock in an advantage outside the expiration of the patent. Those are the kinds of things that might be of interest of us.”

Readers of this blog can read about patent / antitrust issues in other posts on, inter alia, the nine potential patent licensing no-nos.  You can browse by category or use the search function to find them.

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FTC May Expand Premerger Reporting Requirements to Include Pharmaceutical Patent Exclusive Marketing and Sales Licenses

Earlier this week, the FTC (in cooperation with the DOJ) announced that it is considering making changes to the premerger notification rules that would require pharmaceutical companies to make Hart-Scott-Rodino (HSR) filings for patent deals that grant exclusive marketing and sales rights to another company.

Apparently, the FTC has become concerned that where a licensor manufactures solely for the use of a licensee, and the licensee has exclusive marketing and sales rights, the transaction may be economically indistinguishable from one actually giving the licensee the exclusive right to manufacture. It thus proposes to focus the new rule on “all commercially significant rights”:

[I]n licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize. In fact, the right to manufacture is often retained by the licensor who has the relevant manufacturing expertise and facilities. As a result, pharmaceutical companies often enter into licenses in which the licensee receives the exclusive right to use and sell under the license, but the licensor retains the right to manufacture exclusively for the licensee. As the licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license.

The proposed rule would treat this kind of exclusive license agreement as a potentially reportable asset acquisition. This aspect of the rule is a significant change in the weight given to manufacturing rights in determining whether or not exclusive rights to a patent are being transferred. Under the proposed rules, if the licensor retains the right to manufacture exclusively for the licensee, it is a potentially reportable asset acquisition because all commercially significant rights, as discussed below, will still have passed to the licensee.

The FTC has in recent years taken a special interest in the pharmaceutical industry, and has been relatively hostile to so-called reverse patent settlements, where a pharmaceutical patentee settles patent litigation against a would-be generic manufacturer, and the generic manufacturer agrees to stay off the market for some time period in return for a cash payment. The FTC’s proposed HSR amendment, which is limited to the pharmaceutical industry, continues its efforts to pay special attention to pharmaceuticals.

It is not clear how many additional transactions will be reported if the amended rule goes into effect (the FTC itself estimates about 30 more per year). Comments to the proposed rule are due on or by October 25, 2012.

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Is Professional Licensing a Drag on the Economy?

The Planetmoney folks have an interesting episode entitled “why it’s illegal to braid hair without a license.”  The episode discusses the experience of one part-time African-style hair braider in Utah whose business was shut down by a state licensing board.  The episode presents the viewpoint that over-licensing is often unnecessary, sometimes exclusionary, and interferes with the supply and movement of labor in the labor market (not necessarily a good thing in an economic downturn).

Some of these arguments are familiar, but one statistic in the episode caught my ear: some 50 years ago, only one out of 20 workers was licensed.  Now, the statistic is one out of three. 

I suspect that statistic defines “license” rather broadly (perhaps to include any sort of registration requirement).  Nevertheless, it’s quite striking.

Here’s my take on the licensing system in the U.S. legal system.

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Nine Potential Patent Licensing “No-Nos”

Check the List of “No Nos”

I’ve now completed this series.  For ease of reference, here is a list of all the posts.

1. Patent/Product Tying

2. Requiring the Licensee to Assign Back Subsequent Patents

3. Restricting the Right of the Purchaser of the Product in the Resale of the Product

4. Restricting the Licensee’s Ability to Deal in Products Outside the Scope of the Patent

5. A Licensor’s Agreement Not to Grant Further Licenses

6. Mandatory Package Licenses

7. Royalty Provisions Not Reasonably Related to the Licensee’s Sales

8. Restrictions on a Licensee’s Use of a Product Made by a Patented Process

9. Minimum Resale Price Provisions for the Licensed Products.

Thanks for reading.

Potential Patent Licensing “No-No” #9: Minimum Resale Price Provisions for the Licensed Products

Yes or No?

This post is the last in the series of nine posts concerning potential patent licensing “no-nos.” The previous post can be found here.

Today, generally speaking, restrictions on a licensee’s resale prices are not per se illegal as a matter of federal law.  Recent non-patent cases have breathed new life into old doctrine in this area.

In the early 20th century, the Supreme Court held that an IP owner could condition an IP license on the licensee’s agreement to sell licensed product at a specified price. See United States v. General Electric Co., 272 U.S. 476 (1926).  “We think [the patentee] may [limit the sales price], provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.”  Id. at 490.

The exclusive right of a patentee, the Court wrote, “is to acquire profit by the price at which the article is sold.” Id. The Court concluded that this right extended to ensuring that licensees do not undercut the licensor and destroy its margins.

General Electric diverged from the basic rule announced in Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and reconciling the decisions was not entirely easy.  Arguably, General Electric may have been limited to the situation where a patent owner itself manufactures and sells the patented product and also licenses licensees to sell the product.

Since General Electric, courts have further limited its application. See, e.g., United States v. Line Material Co., 333 U.S. 287, 312 (1948); (multiple patentees may not enter a cross-licensing scheme that establishes the resale price of products to be manufactured under cross-licenses); Newburgh Moire Co. v. Supreme Moire Co., 237 F.2d 283, 293-94 (3d Cir. 1956) (“[T]he patent laws were not intended to empower a patentee to grant a plurality of licenses, each containing provisions fixing the price at which the licensee might sell the product or process to the company, and that, if a plurality of licenses are granted, such provisions therein are prohibited by the antitrust laws.”).

The 1995 DOJ/FTC Antitrust Guidelines for Intellectual Property went further and suggested that the agencies will enforce the per se rule against resale price maintenance (“RPM”) in the intellectual property context.  The agencies took the position that General Electric had been effectively overruled, and that fixing a licensee’s resale price was per se illegal.  In the agencies’ view, General Electric actually concerned the first sale of a licensed product, not the resale.  Cf., e.g.United States v. Univis Lens Co., 316 U.S. 241 (1942); Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940) (suggesting IP RPM is in fact unlawful).

However, today, after State Oil Co. v. Khan, 522 U.S. 3 (1997), and Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), vertical agreements on price are no longer per se illegal under federal law. Although Khan and Leegin did not involve patents, there is little reason to think that the federal antitrust rule would be different for patented products.

There is an important caveat: as discussed repeatedly on this blog, state law can and does differ. Some states continue to treat RPM (or at least minimum RPM) as per se illegal. Thus, some continued caution is necessary.

* * *

That’s the end of the nine no-nos series.  As we’ve seen, in very many cases, what used to be a clear “no-no” is now no longer so, and is often permissible.

Potential Patent Licensing “No-No” #8: Restrictions on a Licensee’s Use of a Product Made by a Patented Process

Yes or No?

This post is the eighth in a series concerning potential patent licensing “no-nos.” The previous post can be found here.

Here, we’re concerned with what are vertical restraints: for example, requirements that a licensee sell only to certain customers, or in certain territories. Such restraints are often pro-competitive. See DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property § 2.3 and Example 1.

See also In re Yarn Processing Patent Validity Litig., 541 F.2d 1127, 1135 (5th Cir. 1976) (“But in this case, if the patents are assumed to be valid, then the restrictions on sale were within the scope of the patent grant because they were applied to a manufacturing licensee . . . and because they did no more than to prevent contributory infringement by resale to unlicensed users.”).

However, because of the first sale doctrine (which I’ve covered in prior posts in this series – see here), patent rights are exhausted after the first true sale (not license) of a product. Thus, a territorial restriction on a customer of a licensed manufacturer would not be enforceable under the Patent Act. Nevertheless, it might be enforceable as an ordinary vertical restraint under traditional antitrust law. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).

We’re down to one more post in this series: minimum resale price provisions for licensed products. I’ll publish that post by next week.

Non-Payment of Patent Royalties Doesn’t Render Sales “Unauthorized”

Patent exhaustion is triggered by a sale “authorized” by the patent holder.  Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617, 636, 128 S. Ct. 2109  (2008).  I previously covered the doctrine of patent exhaustion here and here.  The doctrine prevents patentees from enforcing patent rights against downstream product purchasers.

In Tessera, Inc. v. ITC, 646 F.3d 1357 (Fed. Cir. 2011), the Federal Circuit held the doctrine of patent exhaustion applies even when a licensee has not yet paid royalties (or has been late paying some royalties).  This Tuesday, the Supreme Court declined to review the Federal Circuit’s decision.

According to the Federal Circuit, there was “nothing in any of the license agreements [at issue] to even remotely suggest that the existence of a condition subsequent, namely, the payment of royalties, operates to convert initial authorized sales into unauthorized sales for purposes of patent exhaustion.”  In focusing on whether the sales were authorized, the Federal Circuit noted that the license agreements expressly authorized licensees to sell licensed products and to pay up at the end of a reporting period.  A subsequent non-payment of royalties would be a licensor/licensee dispute, not a licensor/licensee’s customer dispute.  The Federal Circuit found Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment to be “hollow and unpersuasive.”

Could any non-payment of royalties prevent application of the exhaustion doctrine?  This is not entirely clear, I would say.  One can imagine very clear and precise license language that demonstrates the parties’ express agreement that no sale is authorized until all royalties are paid.  That case, however, has not yet been decided.

(Disclosure: Orrick represented some of the downstream chip manufacturers/purchasers in the Tessera case.)

Patent Law and Self-Replicating Technologies

I blogged about patents, the first-sale doctrine, and self-replicating technologies (genetically-modified plants) here.

I recently came across an interesting post by Jeremy Sheff on application of the first-sale doctrine in the context of self-replicating technologies.  You can find it on the Patently-O blog.  Link below.

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