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License Agreement Restrictions Can Provide a Real Advantage to Patent Holders

November 20, 2017

Generally, a patent owner's rights are exhausted after an authorized sale; the patent owner cannot sue a downstream customer who purchased an authorized patented product from a third party reseller. So how can a patent owner control the resale of a patented product?

Do all sales exhaust your patent rights? Not according to a recent court opinion handed down in the Eastern District of Texas.1

While the topic of patent exhaustion has been considered several times recently by the Supreme Court and Federal Circuit, the distinction between an authorized or unauthorized sale of a licensed product is not a new one. The 1938 case General Talking Pictures 2
held that a sale outside the scope of a license was without authority (an unauthorized sale) and therefore does not trigger patent exhaustion principles.

The Chrimar case is interesting because of certain license restrictions involved. The license in this case did not, as is more typically attempted, restrict the use of products after an authorized sale by the licensee - a type of downstream control that courts have consistently struck down. Instead, the agreement between Chrimar and licensee Accton restricted the scope of Accton's sales. The license agreement's definition of Unlicensed Products includes:

PoE Devices that Accton sells to a Licensee of Chrimar or a company currently in litigation with Chrimar are Unlicensed Products under this Agreement, even if such PoE Devices otherwise meet the definition above for Licensed Accton Products. An approximate list of Chrimar's licensees and companies currently in litigation with Chirmar is attached hereto as Exhibit D.

And among the companies listed in Exhibit D was Alcatel. The Court determined that the license does not include a post-sale restriction but rather a restriction on sales to certain entities. As a consequence, sales made by Accton to Alcatel violate the restriction and are thus unauthorized; therefore, they do not exhaust the patent rights held by Chrimar in the sold products. With patent rights still extant, Alcatel could be sued for patent infringement, whether for use or resale of the subject devices.

Patent owners might consider similar licensing arrangements if they wish to control or limit the sale of their products downstream. This can be a productive strategy for keeping patented products out of competitors' hands, to maintain different royalty levels for different product applications, or to maintain multiple royalty streams when patented goods are incorporated into downstream products or systems.

1 Chrimar Systems et. al. v. Alcatel-Lucent et. al.
2 304 U.S. 175 (1938), affirmed on rehearing, 305 U.S. 124 (1938)

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