United States: Federal Circuit Declines To Extend The Reach Of Patent Exhaustion Doctrine

In Helferich Patent Licensing, LLC v. New York Times Co., Nos. 14-1196, -1197, -1198, -1199, -1200 (Fed. Cir. Feb. 10, 2015), the Federal Circuit reversed the district court's grant of SJ of noninfringement under the doctrine of patent exhaustion.

Helferich Patent Licensing, LLC ("Helferich") sued defendants New York Times Co., G4 Media LLC, CBS Corporation, Bravo Media LLC, and J.C. Penney Corporation, Inc. (collectively "Defendants"), alleging infringement of various claims of U.S. Patent Nos. 7,280,838; 7,499,716; 7,835,757; 8,107,601; 8,116,741; 8,134,450; and 7,155,241 (collectively "the patents"), all deriving from a common specification. Helferich licensed the patents to a group that, at the time, constituted most of the manufacturers of mobile handsets for sale in the United States. One subset of the claims consists of apparatus and method claims directed to handsets and receiving and/or requesting certain content ("handset claims"). Another subset of the claims consists of system and method claims for storing and updating information of various types (content) and sending it to handsets ("content claims"). The content claims are practiced by content providers, not possessors of handsets.

In individual suits against each Defendant, Helferich alleged infringement based on Defendants' conduct in storing content and delivering it to customers via mobile-device applications, text-messaging subscription services, and third-party networking programs. Defendants jointly moved for SJ of noninfringement, asserting the affirmative defense of patent exhaustion. Helferich cross-moved for SJ, alleging that exhaustion was inapplicable as a matter of law. The district court granted Defendants' SJ and denied Helferich's motion. The district court found that "because Helferich had authorized 'every' mobile-phone manufacturer to sell handsets under its license agreements, its ability to assert its claims had been exhausted" against both handset acquirers as well as content providers acting as third parties interacting with the handsets. Slip op. at 11. On reconsideration, the district court left the substantive aspects of its decision unchanged. Helferich appealed.

On appeal, the Federal Circuit first clarified the premise upon which Defendants based their "effort to affirm the one-fell-swoop judgment as to all of the asserted claims, without differentiation among those claims." Id. at 13. The Court concluded that "the premise of [D]efendants' exhaustion defense is that all handsets in the United States are licensed and that the asserted claims contemplate a use of handsets by handset owners/possessors, one that does not necessarily practice any of Helferich's claims." Id. at 17. The Court further explained that it was this premise that permitted Defendants to "urge across-the-board exhaustion, without differentiation among asserted content claims." Id.

The Federal Circuit then reviewed the exhaustion defense as framed by Defendants with this premise as a guide, holding that the exhaustion defense does not bar Helferich's claims. The Court rejected Defendants' reliance on "the reciprocal enhancement of utility" when arguing that the patentee's licensing to a "first group" practicing one invention terminates the patentee's rights against a "second group" practicing a second invention, "when practicing the second invention in some way contemplates the first group's use of a product made under the license." Id. The Court recognized that "the exhaustion doctrine's lifting of patent-law restrictions on a licensed product has never been applied to terminate patent rights in such complementary activities or goods in these circumstances." Id.

The Federal Circuit examined the judicial precedent in the area of patent exhaustion, finding that a "common feature" was present in decisions finding exhaustion. Id. at 20. Exhaustion has been found "only when the patentee's assertion of infringement was, or depended on, an assertion that an authorized acquirer was using the same invention by infringing the asserted claims." Id. The Court held that this common feature was not present in this case.

The Federal Circuit further held that finding exhaustion in the present case would be contrary to U.S. Supreme Court precedent standing for the proposition that "even though an authorized buyer of product X was free of the patent owner's patent on that product, the buyer could not, by virtue of his purchase, prevent the patent owner from enforcing his patent as to product Y, even though Y was specifically designed to be used with X and, at a minimum, made X more useful than it otherwise would be and, indeed, was essential to X's utility." Id. at 23. The Court held that finding for Defendants in the present case would violate this principle because, "here, it is not even the owner of X but someone else who is using Y, to the indirect benefit of X's owner." Id. at 24.

The Federal Circuit also held that although patent exhaustion is a "judicially fashioned doctrine without a specific source in congressionally enacted text," that does not mean that "Congress has granted the courts a license to erase those boundaries and expand the doctrine into difficult new territory unmapped by lines drawn, or even sketched, by Congress." Id. at 24, 25. The Court further noted that expanding the doctrine in the manner urged by Defendants would have a number of other disadvantages, including dramatic economic implications and harm to existing patterns of licensing. The Court explained, "Caution about expanding the reach of exhaustion is of a piece with the broader judicial practice of generally maintaining the contours of property rights in the absence of legislative prescriptions." Id. at 29.

The Federal Circuit also rejected Defendants' arguments based on the precedent established in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008). In Quanta, the Court set forth a two-question test for determining whether the authorized sale of an article triggered exhaustion of method claims (1) if the article "included all the inventive aspects of the patented methods" and (2) "had no reasonable noninfringing use." Id. at 32 (quoting Quanta, 553 U.S. at 638). With respect to the first question, the Court held that "if the inquiry compares handset claims and content claims, we cannot find that either set wholly contains the invention found in the other." Id. With respect to the second question, the Court held that it "cannot say that the inventions of the asserted content claims have no reasonable use other than one involving someone's practicing of the handset claims, because we cannot say that the asserted content claims call on use of the inventive features of the handset claims." Id. at 33. Accordingly, the Court rejected Defendants' argument that preserving Helferich's patent rights in the asserted content claims would render the licenses to the handset manufacturers worthless.

The Federal Circuit concluded that there is "no sound basis for expanding exhaustion doctrine to hold that authorized sales to persons practicing the handset claims exhaust the patentee's rights to enforce the asserted content claims against different persons." Id. at 36. However, the Court noted that an exhaustion defense that is "tied to particular handset claims and targets particular content claims" is not foreclosed. Id. Accordingly, the Federal Circuit reversed the district court's SJ of noninfringement.

Judges: Taranto (author), Bryson, Chen

[Appealed from N.D. Ill., Judge Darrah]

This article previously appeared in Last Month at the Federal Circuit, March 2015.

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