Contractual Restriction In License Agreement Prevents Patent Exhaustion By Restricting Scope Of Licensed Sales Rather Than Use Of Products After Authorized Sale By Licensee

Abstract

The doctrine of patent exhaustion provides that the initial authorized sale of a patented item, directly or through a licensee, terminates all patent rights to that item. And a contractual restriction in a license agreement on the use of an otherwise-licensed product does not prevent patent rights from being exhausted. In a recent case, a Texas court found that a contractual restriction in a license agreement did not result in patent exhaustion because the restriction limited the scope of sales that were licensed rather than limiting the use of products after an authorized sale by the licensee. Therefore, the licensee's sale outside the scope of the license agreement did not exhaust the patent owner's patent rights.

An authorized sale of a patented product exhausts all patent rights to that product. Patent exhaustion is "uniform and automatic." It applies to sales made by the patent owner and sales the patent owner authorizes a licensee to make. If a patent owner imposes contractual restrictions on how the patented product may be used after an authorized sale, such restrictions may be enforceable against the licensee under contract law, but are not enforceable through patent law against the licensee's customers.

In Chrimar Systems, Inc. et al. v. Alcatel-Lucent Enterprise USA, the court found that a contractual restriction in a license agreement prevented patent exhaustion because the restriction limited the scope of sales that were licensed under the agreement rather than the use of products after an authorized sale by the licensee. In other words, because the license limited the scope of customers that the licensee could sell to, sales outside that scope were unauthorized and did not trigger patent exhaustion. As a result, the patent owner could sue and recover damages from its licensee's customer for such unauthorized sales under patent law.

Background

Patent owner Chrimar prevailed in an infringement action against Alcatel-Lucent and received past damages and on-going royalties for Alcatel-Lucent's sale of infringing products. In a separate lawsuit, Chrimar accused one of Alcatel-Lucent's suppliers, Accton, of infringement for selling and importing of some of the same products involved in the lawsuit against Alcatel-Lucent. Chrimar and Accton finalized a settlement agreement after the jury reached a verdict against Alcatel-Lucent, but before a final judgment was entered. Under the settlement agreement, infringing products...