Does Your Company Have the Patent Licenses it Needs?

It is fundamental that one thing every company needs are the rights to use the property it owns and to produce and sell the products and services it provides. Virtually every product is protected by patent rights, which raises the fundamental question: Does your company have the patent licenses it needs? This article provides the “short course” allowing you to address that complicated question!

First, each country has its own patent system. Therefore, the license to make and use equipment in one country does not necessarily provide the same license in another country (more on this issue later).

It is basic patent law that a patentee’s exclusive right under his United States patent is exhausted by his first sale of a product covered by his patent. That is what the United States Supreme Court held in Adams v. Burke, 17 Wall 453 (1883). However, that holding assumes that no license terms were stated. When no license terms are stated and it is the patentee selling the product, a complete license under the patent with respect to the sold product is implied by operation of law.

Subsequent cases note that the patentee has the right to restrict the license granted upon the first sale of a product covered by the patentee“s patent. That is what the United States Supreme Court held in General Talking Pictures Corp. v. Western Electric Co., reh'g, 305 U.S. 124, 127, 39 USPQ 329, 330 (1938). Thus, if there is an explicit license, then the terms of the license govern.

If there is a restrictive license under a United States patent, then the terms of the explicit license define the scope of the license. Violation of valid license conditions entitles the patentee to a remedy for either patent infringement or breach of contract. That is the conclusion of the Court of Appeals for the Federal Circuit (CAFC) in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 24 USPQ2d 1173 (Fed. Cir. 1992). The CAFC is the court in the United States that hears appeals from all of the trial courts and from the United States Patent and Trademark Office on issues of patent law.

Moreover, restrictive license provisions that constitute a misuse of the patent are unenforceable. Misuse of the patent means that the restrictive license has imposed a condition that, in effect, (1) broadens the scope of the patent beyond what its claims cover and (2) is anti-competitive. That is what the CAFC stated in Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995, 1001-02, 228 USPQ 562, 566 (Fed. Cir. 1986).

Several cases deal with the issue of the scope of a license granted by a patentee to a manufacturer of patented products. In these cases, the manufacturer has sold product covered by the patent to third parties, and the patentee has sued the manufacturer and the third party for patent infringement. That is what happened in Intel Corp. v. ULSI System Technology Inc., ___ F.3d ___, ___, 27 USPQ2d 1136, 1139 (Fed. Cir. 1993). See also Lisle Corp. v. Edwards, 777 F.2d 693, 227 USPQ 894 (Fed. Cir. 1985). In these cases, the issue is: Did the license restrict the manufacturer from making and selling to a third party product covered by the patent? While each of these cases depends upon its own facts, my impression is that the courts narrowly construe the license provisions to favor allowing the manufacturer to sell products covered by the patent to a third party. Therefore, great care should be exercised when drafting this type of licensing agreement.

Many companies are interested in the effects of a license on importing product into the United States. In that situation, the scope of a license depends upon the terms of the license. However, note that an explicit license under a foreign patent is not necessarily a license under a corresponding (i.e., claims covering the same invention) United States patent. In fact, rights of a licensee under a foreign patent have no bearing on the rights accorded under United States patent laws. That is what the United States Supreme Court held in Boesch v. Graff, 133 U.S. 697 (1889). Moreover, this issue (right to import product based upon a foreign license) was raised in a relatively recent case in the United States International Trade Commission (ITC). The ITC hears certain patent infringement cases involving imported products. In the In re Reclosable Plastic Bags, 192 USPQ 674 (US ITC 1977), the ITC stated that:

Since the reclosable plastic bags at issue are protected by a U.S. patent (reissue patent No. 28,969), no foreign license on the same product can interfere with the rights granted the U.S. patentee by U.S. patent laws. [At page 679.]
This statement means that the ITC construed an explicit provision to a license under a corresponding foreign patent to imply no license under the United States patent. Therefore, foreign manufacturers that wish to license a United States patent need to carefully draft their agreements and explicitly state certain rights under the license to ensure that they have those rights.

Copyright Richard A. Neifeld.

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