Precedent-setting cases on the doctrine of patent exhaustion
- There may be functions performed by the Qualcomm claims and practiced by Apple that may prevent patent exhaustion.
- The expansion of the doctrine in this case could be contrary to the teachings of the Supreme Court in Quanta, and may do harm to existing patterns of licensing.
- Even if all the licensed patents are exhausted, given that patent exhaustion is unsettled law and only one factor, absent bad faith it is debatable whether Qualcomm’s conduct amounts to unfair competition.
Apple v. Qualcomm, Case 3:17-cv-00108-GPC-MDD (S.D. Cal.) and the FTC v. Qualcomm, Case 5:17-cv-00220-LHK (N.D. Cal). Two very different U.S. patent battles in two different federal district courts over Qualcomm licensing practices. Both charge unlawful conduct under § 5(a) of the FTC Act, 15 U.S.C. §45(a), pleading patent exhaustion as one factor bearing on unfair competition. Among other charges, Apple also sued for a declaration of noninfringement of several Qualcomm U.S. patents, pleading the doctrine of patent exhaustion as an affirmative defense.
Under attack in both litigations is the licensing practice of Qualcomm to withhold its baseband processors unless a customer accepts a license to standard-essential patents (SEPs) on terms preferred by Qualcomm, including elevated royalties that the customer must pay when using competitors’ processors (“no license-no chips”). FTC Complaint para 3a. Apple Complaint para. 71. (“The foundation of this commercial relationship is Qualcomm’s supply of chipsets and licenses for use in Apple-designed iPhones and iPads.”)
The recent decision by the court in the FTC case that Qualcomm is required to license its SEPs to modem chip suppliers, if it survives appeal, may mean that Apple can start to source modems from competitors since the competitors will be licensed under the Qualcomm standards-essential patents. But a purchase of a chipset from a competitor licensed under Qualcomm’s standards-essential patents, or for that matter the chipsets that Apple continues to source directly from Qualcomm, doesn’t necessarily mean that all of the patents that Qualcomm presently licenses to Apple at the OEM level are necessarily exhausted.
In Quanta, the Supreme Court, following Univis, considered whether the authorized sale of an article triggered exhaustion of method claims by asking if the article “substantially embodied” the claimed method. Quanta, 553 U.S. 617, at 637, 638 (2008); United States v. Univis Lens Co., 316 U.S. 241, at 250–51 (1942). The Court summarized the inquiry as asking whether the sold article “had no reasonable noninfringing use and included all the inventive aspects of the patented methods.” Quanta, 553 U.S. at 638.
To show that all the patents declared “standard-essential” are “substantially-embodied” in the chipsets (wherever sourced), Apple and the FTC may need to show that the chipsets authorized for sale under the “standards-essential” patents under TIA and ATIS had no reasonable noninfringing use outside the “standards” and that the “standards” included all the inventive aspects of the patented claims.
It is the inventive aspects of the claims declared standards-essential outside the standards that are likely to pose the greatest challenge for Apple and the FTC. If there remain non-standards infringing inventive aspects in the licensed claims, there may be functions performed by the claims and practiced by Apple or a licensee that may prevent the application of the doctrine. The claims may, for example, include complementary innovation to enhance the value of the standards-essential features. The expansion of the doctrine to exhaust these claims would be contrary to the teachings of the Supreme Court in Quanta and could do harm to existing patterns of licensing.
Apple and the FTC will likely argue that every claim of every licensed patents, as falling under “standard-essential” patents under TIA and ATIS, are subsumed by the applicable standards, and then read the standards against the chipsets to show that every claim of every licensed patent is exhausted by the sale of the chipsets. However, to prevail, Apple and the FTC will likely need to, among other things, read many patents of different scope against the standards to prove that all of the inventive aspects of every claim of every licensed patent cannot be used without infringing the standards.
Even if the court allows Apple’s reading of the standard on the chipsets as proof of exhaustion, given the number of Qualcomm patents likely involved in the Qualcomm licenses under challenge, proving that every inventive aspect of every claim of every licensed patent reads on the standards is likely to be daunting. And any inventive aspect of any claim of any licensed patent falling outside the standards having a substantially non-standards infringing use may still support the Qualcomm license. And even if all the licensed patents are exhausted, given that patent exhaustion is unsettled law and but one factor bearing upon unfair competition, absent bad faith it is debatable whether Qualcomm’s conduct amounts to unfair competition.
The Qualcomm patent cases stand as precedent-setting cases on the doctrine of patent exhaustion. Good licensing practice mandates that every licensing practitioner craft and negotiate license agreements that properly factor in the effects of patent exhaustion on any authorized sale under a patent.