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Limits on Conditions Subsequent

Case and Court:

Tessera, Inc. v. Int’l Trade Comm’n, 2010-1176 (Fed. Cir. May 23, 2011).

Yesterday the Federal Circuit upheld a decision of the ITC regarding patent exhaustion: Tessera, Inc. v. International Trade Commission. The patent holder permitted its licensees to sell the patented invention and received royalty payments later. When some licensees failed to pay, the patent holder argued that its authorized sales had been transformed into unauthorized sales and thus that the licensees’ customers were infringing the patent. The Federal Circuit rightly disagreed,

These agreements expressly authorize licensees to sell the licensed products and to pay up at the end of the reporting period. Thus, in these agreements, Tessera authorizes its licensees to sell the licensed products on credit and pay later. That some licensees subsequently renege or fall behind on their royalty payments does not convert a once authorized sale into a non-authorized sale. Any subsequent non-payment of royalty obligations arising under the TCC Licenses would give rise to a dispute with Tessera’s licensees, not with its licensees’ customers.

Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment is hollow and unpersuasive. The parties do not dispute that the TCC Licenses permit a licensee to sell licensed products before that licensee pays royalties to Tessera. But according to Tessera, that licensee’s sale, permitted under the TCC License, would later become unauthorized if that licensee somehow defaulted on a subsequently due royalty payment. That absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion—to prohibit postsale restrictions on the use of a patented article. See, e.g., Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1852) (stating “when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly”).

It is this same absurd result and the same cloud of uncertainty that results after every sale of a copy of software in light of the Ninth Circuit’s worst copyright opinion in decades: Vernor v. Autodesk, 621 F.3d 1102 (9th Cir. 2010). By permitting postsale restrictions on the use of software the Ninth Circuit has adopted a view of the Copyright Act wholly inconsistent with the fundamental purpose of copyright exhaustion–i.e., the first sale doctrine.

Vernor’s counsel has recently filed an excellent brief petitioning for a writ of certiorari, and one can only hope that the Supreme Court will choose to straighten this out so that we can get opinions in the copyright context as cognizant of the harms of ignoring exhaustion principles as this opinion is in the patent context.

Categories: Copyright Limitations and Exceptions, Patent.

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