You Pay for What You Get: The Argument for Allowing Parties to Contract Around Patent Exhaustion

In today's business environment, patentees are using new and creative ways to maximize the value of their patents. Patentees are now frequently choosing licenses as their method of bringing their inventions to the marketplace. This wave of patent licensing has placed a number of new issues in front of the Supreme Court that have tested numerous intellectual property doctrines. Patent licenses are an interesting way to distribute the patentee's technology throughout a particular industry. Patent licenses are a unique creature of patent law, state contract law, and federal policy. While the license grants the licensee the ability to use, sell, or make the invention, or some combination thereof, the license is still a legally enforceable contract. Patentees resort to licenses in order to maximize the value of the patent. This includes licensing different levels in the supply chain, with each level privy to certain components of the patented whole. More often, patentees use licenses to get their product to market while retaining some rights to exercise in the future. In those instances, the patentee will sometimes place a field-of-use condition on the license. These conditions confine the licensee to practicing the patented art in a certain field or medium. A patentee can use field-of-use conditions to restrict the markets to which a manufacturing licensee may sell the licensed product. The patent exhaustion doctrine has needlessly confused and complicated the relationship between patent law and contract law. The patent exhaustion doctrine currently provides that an initial authorized sale of a patented item terminates all patent rights to that item, including the right to sue a third party for infringement. Patentees would rather sue under the patent laws because the difference in available remedies for patent infringement and for breach of contract is quite remarkable. For instance, injunctions are commonplace in patent infringement cases whereas they are rarely available in breach of contract cases. But based on current Supreme Court precedent, when the licensee violates the patent license agreement, the patentee's only remedy is limited to a breach of contract action; he is unable to seek injunctive relief under patent law. The latest applicable Supreme Court case, _Quanta Computer, Inc. v. LG Electronics, Inc._, resurrected the patent exhaustion doctrine and applied it as an absolute rule. In _Quanta_, LG Electronics granted a license to Intel to make and sell microprocessors and chipsets using LG's patents. According to the license and pursuant to a separate agreement, Intel agreed to give notice to any purchasers that the license did not cover any combination of the patented Intel products with non-Intel products. Nevertheless, Quanta purchased the patented Intel products and combined them with non-Intel products. LG sued Quanta, claiming that by combining the Intel products with non- Intel products, Quanta violated the license and infringed LG's patents. Quanta argued that LG exhausted their rights by licensing the patents to Intel. The Supreme Court held that the authorized sale to Quanta exhausted LG's right to sue Quanta for infringement. This Comment argues that the Court should change its view on the patent exhaustion doctrine and apply it only in cases where the parties have not expressly retained any rights. This Comment begins in Part II with an explanation and history of the patent exhaustion doctrine. Part III explains the interaction between the exhaustion doctrine and post-sale conditions. Part IV argues that the Supreme Court should apply the exhaustion doctrine only as a default rule instead of an absolute rule. In doing so, Part IV discusses why patents should be ruled by property principles, why the Court should respect parties' contractual terms, and why public policy promotes the enforcement of post-sale conditions free of the exhaustion doctrine.