tive legends on bags of seeds that purport to forbid purchasers to plant second-generation seeds derived from purchased seeds.) Failure to abide by such restrictive legends, in the CAFC’s view, gives rise not only to liability for breach of contract, but also for patent infringement.

Certain statements in Quanta suggest the patent exhaustion ruling in Mallinkrodt is wrong. Among other things, Quanta states that “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” Thus, when Mallinkrodt sold its medical devices to hospitals, its patent rights were exhausted because these were “initial authorized sale[s]” under Quanta.

It is, of course, a separate question whether Mallinkrodt could sue the hospitals for breach of a single-use-only term of its sales contracts. Some Supreme Court and other precedents cast doubt on the notion that putting a restrictive legend on a product creates a contractual obligation to abide by the restriction. Yet, some cases have enforced restrictive terms of non-nego-tiated mass market licenses.

Even so, Medipart should not be liable for breach of contract, as it was not a party to the sale between Mallinkrodt and the hospitals. Contracts only bind those who entered into them, not all others in the world.

License Versus sale?

It is also a separate question whether exhaustion applies if patentees “ license” rather than “sell” their products to customers. Negotiated license restrictions will likely be enforceable as between a patentee and its licensees, but should IP rights be exhausted as to mass-market software just because developers characterize their contractual arrangements with customers as “licenses” rather than as “sales”?

The case law thus far is mixed about how much deference courts should give to such designations. Vernor v. Autodesk, Inc. is the most recent U.S. case to consider this issue. The lawsuit arose because Autodesk objected to Vernor’s efforts to sell used copies of Autodesk software on eBay. Vernor sought a declaratory judgment that his sale of the software on eBay was

it is a separate
question whether
exhaustion applies
if patentees “license”
rather than “sell”
their products to
customers.

protected by copyright’s exhaustion doctrine.

Autodesk moved to dismiss Vernor’s lawsuit by arguing that the exhaustion doctrine didn’t apply because Autodesk doesn’t sell its software to customers, but only licenses it on terms that expressly forbid retransfer of the software. (Remember, there must be “an initial authorized sale” to exhaust IP rights.) Autodesk further claimed that Vernor’s sale of the software infringed Autodesk’s copyright as an unauthorized distribution of its software to members of the public.

The court in Vernor took note of Autodesk’s characterization of the transaction as a “license,” but did not consider this designation to be controlling. Instead, it examined the nature of Autodesk’s commercial dealings in this software and decided they were more aptly characterized as sales than licenses. Hence, exhaustion protected Vernor from copyright liability. Autodesk has appealed this ruling.

conclusion

Quanta was an important step in preservation of IP exhaustion rules. The decision provides a sound basis for thwarting other end runs around IP exhaustion rules such as efforts to impose conditional sales and mass market license restrictions on customers. It remains to be seen whether the CAFC and other courts will recognize that the logic of Quanta should produce this result.

 

Pamela Samuelson ( [e-mail]) is the richard m. sherman distinguished professor of law and information at the university of California, berkeley.

Calendar
of Events

november 13–16
Koli ’08: 8th Koli calling
international conference on
computing Education research,
Finland,
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november 13–16
4th international conference on
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