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03/17/17 04:55:24 PM

Patent Exhaustion

On March 21, the U.S. Supreme Court will hear arguments in a case that could upend rules of the road that currently allow U.S. patent holders to 1) leverage the threat of a patent infringement lawsuit (including the possibility of injunctions and triple damages) to extract onerous terms and conditions as well as exert control over products after the point of sale, and 2)enforce a U.S. patent on a product lawfully sold outside the U.S. and then imported into the U.S. The case holds potential significance to patent licensing companies (including some in the technology sector), and firms vulnerable to arbitrage due to pricing models that set the price of U.S. products higher than products sold outside the U.S. (e.g., pharmaceuticals), among others. Based on CFRA's review of the briefs, the law, and other factors, we see high odds that the U.S. Supreme Court rules against the interests of patent holders, at least in part.

The case Impression Products, Inc. v. Lexmark, Inc. involves the complex issue of patent exhaustion, explained below. The case has potentially enormous commercial significance, as the large number of amicus briefs submitted to the Court from companies such as Qualcomm, Nokia, Dolby Labs, Medtronic, Intel, Costco and others attests.

Patent exhaustion addresses the question of whether (and to what extent) a patent holder may enforce conditions or limitations following the first authorized "sale" of a patented good. At a high level, the more strictly exhaustion is applied, the less powerful are patents.

In our view, the U.S. Supreme Court is likely to circumscribe the rights of U.S. patent holders when it rules some time before its current term ends (on or before June 30, 2017). Potential impacts of the Court's likely ruling could include 1) fresh challenges to Qualcomm's practice of collecting revenue for both the sale of a patented baseband chip and patent royalties on the same chip, 2) pressure on single or limited-use business models (ink cartridges, certain medical equipment/supplies), and 3) increased arbitrage of patented products where prices outside the U.S. are much lower than U.S. prices on the same products.

As noted above, numerous amici submitted briefs to the U.S. Supreme Court. Overall, the number of briefs supporting the position of Lexmark and those supporting Impression Products were roughly in balance. Those on the Lexmark side of the ledger include Qualcomm, Medtronic, Nokia, Dolby Labs, InterDigital, and various professors and industry coalitions, among others. On the Impression Products side are Intel, Dell, LG, Huawei, Costco, along with a dueling assortment of professors, industry coalitions, and groups purporting to represent the public interest.

The most significant takeaway we distilled from this large pile of briefs is the risk that a win by Impression Products could be destabilizing to many business models, as it: 1) might give patent licensees, which in many cases are only reluctantly paying patent royalties, additional leverage against patent licensors that seek to impose complex terms and conditions; 2) could enable new legal challenges by licensees, i.e., unhappy "customers" currently under contract, who might leverage the decision to justify non-compliance or even non-payment; 3) might require re-negotiation of existing licenses to deal with the issue of international patent rights; and 4)could pressure business models characterized by country-to-country price discrimination, through the arbitrage of large price differentials on patented products.

Our view is that the U.S. Supreme Court is likely to breathe renewed life into the doctrine of patent exhaustion, siding against patent holder Lexmark and amici such as Qualcomm.

There's a fairly good chance the issue of patent exhaustion will soon enter the lexicon of investors.

While our view could change based on what we observe from oral arguments on March 21, we're inclined to think patent holders are poised to take yet another hit, with the question likely only being just how bad.

This article is excerpted from CFRA Legal Edge.

Nicholas Rodelli, J.D., and Michael Gordon, J.D. CFRA


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