GW/Harvard conference: licensing and exhaustion

Licensing and Exhaustion
Moderator:  Prof.
Robert Brauneis, George Washington University Law School
Eric M. Reifschneider, The Marconi Group: There are deals
that have died just b/c of exhaustion uncertainty.  What triggers exhaustion?  At one time, many practitioners thought that
a covenant not to sue wouldn’t trigger exhaustion; in 2009, Fed. Cir. said that’s
not the case. There was a point when people thought that if you withheld the
right to use from a license grant, that would avoid exhaustion b/c a right
couldn’t be conveyed broader than the license itself. That’s not correct
either: exhaustion comes from sale, not the right to use. There’s no way to
stop companies trying to do business from attempting to structure contracts in
a way to achieve business objectives—avoidance, not evasion. These days,
covenant to sue last/covenant to exhaust remedies: before I sue you, I will sue
your customer.  But if I can’t, I reserve
the right to come back and assert patents against you. That doesn’t authorize
sale or grant license.  You’d think that
would work, but we don’t know b/c there’s no court that’s decided the issue.  Enough language out there makes it sound like
avoidance is a bad thing.
Aaron M. Panner, Kellogg, Huber, Hansen, Todd, Evans &
Figel, PLLC: more ready finding of exhaustion than in pre-Quanta law. Substantial
embodiment now gets litigated: when does the product sold substantially embody
the patent, critical for method patents as well as compounds. Real hostility to
slicing and dicing rights in any way you want; transactions should be chunked
to avoid worries about separate IP rights. 
[That is a very Henry Smith-/numerus clausus-sounding justification.]
That’s why the SCt got Kirtsaeng
wrong.  The whole idea of “made under
this title” was understood by the Second Circuit to be “made in the US,” and
that can’t be right.  But “made under
this title” as “made under some authorization under the law” makes more
sense.  If I authorize printing a book in
England for sale worldwide, that’s made under this title b/c a right under US ©
law has been conferred on the printer, whereas if I authorize English sale only
I’ve done nothing that implicates my rights under US law.  Lexmark
will raise this same Q under a statute with no such language; we need to figure
out when you’re exercising your rights and when not.
Prof. John F. Duffy, University of Virginia School of Law:
First authorized sale could mean you lose all your rights worldwide; or you
could lose nothing as long as you specify it clearly enough in your
license.  That’s about as big a range of
possibilities as one can imagine.  Does
the statute help? 
Sarang V. Damle, U.S. Copyright Office: Kirtsaeng leaves not so much left under §109. What we’ve been
thinking about in post-sale restrictions: software-enabled consumer
products.  Suppose you want to patch your
own toaster’s vulnerability. You may have to reproduce software to examine it;
maybe you create a derivative work. Those aren’t exhausted rights.  Do we characterize books and movies as
licensed when they’re digital, as we’ve done w/software? Think about basic
commercial law principles. There are still exhaustion-related Qs to be examined
in ©.
Duffy: commercial law/Title 9 deals with encumbering
property after it’s sold/transferred. You can say “you can’t use a research
laser for a commercial purpose” and put a security interest on it and the
interest follow the good. There are some limits; there are notice rules. What
exhaustion is trying to do is not make patentable goods an encumbrance-free zone;
conditional sales are possible, but you need to use this other area of law, and
there’s a reason behind that—this is what courts were saying when they created
this doctrine. The debate in IP is about conditional sales—that was a term in
the 19th C. in commercial law, a forerunner of the security
interest. But the UCC now just expressly incorporates that into the concept of
security interests; UCC abolished conditional sales.

Why is exhaustion so inflexible when even tying is now
flexible? It’s just a domain limitation. Just like the line b/t Virginia and
North Carolina is very formalistic.  That
makes sense because of what the line is there to do.  For a security interest, there’s a stronger
notice requirement: the consumer has to affirm it actively, not just click yes
on a contract of adhesion.

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