The Federal Circuit's Licensing Law Jurisprudence: Its Nature and Influence
Gomulkiewicz, Robert W., Washington Law Review
Abstract: The Federal Circuit serves as the central appellate court for U.S. patent law appeals. Outside of patent law, scholars have noted the Federal Circuit's distinct lack of influence on the law. Thus, unnoticed, the Federal Circuit has become one of the most influential actors in the creation of intellectual property licensing law. Its influence reaches across all areas of intellectual property, industries, and all federal circuits and state courts. But the Federal Circuit's influence on licensing law is more than just a matter of academic interest: licensing is critical to innovation in the information economy. Licenses underlie the creation and distribution of ideas, information, inventions, and works. Products as diverse as open source software and soybean seed rely on licensing.
The Federal Circuit's influence emerged out of failed attempts to create uniform statutory licensing law, which has left licensing law to develop as common law. Since its creation in 1982, the Federal Circuit has decided more cases involving licensing law than any other state or federal court. Many courts have looked to and followed the Federal Circuit's decisions. The Federal Circuit's general approach has been to uphold modern licensing models, which fosters both technological and business model innovation. This approach is consistent with the approach taken by most other courts, including the Supreme Court. At the urging of the U.S. Solicitor General and others, the Supreme Court probed the Federal Circuit's licensing law jurisprudence in a recent case, Quanta Computer, Inc. v. LG Electronics, Inc. While the Supreme Court reversed the Federal Circuit in a unanimous decision, upon close inspection, the reversal actually amounts to an affirmation of the Federal Circuit's core licensing-law jurisprudence.
Congress created the Court of Appeals for the Federal Circuit in 1982 to decide patent-law appeals.1 Congress hoped that the Federal Circuit would improve the climate for innovation2 by giving inventors a uniform body of judicial interpretations of patent law decided by judges with patent expertise.3 Recently, scholars have debated whether the net effect of the Federal Circuit's jurisprudence has been positive or not.4 Adding fuel to that debate, lately the Supreme Court has decided an unusually large number of patent cases,5 reversing the Federal Circuit each time,6 and causing some observers to speculate that the Supreme Court is unhappy with the Federal Circuit's tendencies.7
The cases decided by the Federal Circuit typically involve familiar patent law issues such as patent validity8 or the scope of patent claims.9 Although other issues arise from time to time, the Federal Circuit's role is unremarkable except in one significant area of modem law - licensing law.10 Unnoticed, even in the recent hot spotlight focused on the Federal Circuit, is the fact that the Federal Circuit has become one of the most influential forces in the creation of licensing law.11 On one level, this is not surprising; one would expect the court to handle cases involving patent licenses.12 However, the Federal Circuit's influence now reaches beyond patent licensing, across all areas of intellectual property and industries, and across all federal circuits and state courts.
The Federal Circuit's influence emerged out of failed attempts to create uniform statutory licensing law. In the wake of these failed efforts, licensing law has developed as common law. Since its creation in 1982, the Federal Circuit has decided more cases involving licensing law than any other state or federal court. With licensing law evolving through the common law, other courts have looked to the Federal Circuit's case law for guidance in deciding licensing-related cases. More will undoubtedly do so in the future.
The Federal Circuit's licensing-law jurisprudence is more than just a matter of academic interest. Licensing is a critical transaction model in the information economy because it enables innovation.13 Products as diverse as open source software and soybean seed rely on licensing. Consequently, the nature of the Federal Circuit's licensing-law jurisprudence, like its patent-law jurisprudence,14 strongly influences the climate for innovation in the United States - for good or for ill. The Supreme Court undoubtedly understands this, as it recently reviewed a Federal Circuit case, Quanta Computer, Inc. v. LG Electronics, Inc.,15 which lies at the heart of the Federal Circuit's licensing-law jurisprudence.
This Article begins by describing in Part I the emergence of licensing as the dominant transaction model in the information economy. It then explores in Part II the development of licensing law in the United States and how, in the wake of failed attempts to create uniform statutory licensing law, the law has evolved largely as common law. This Article then explains in Part III and Part IV how the Federal Circuit has begun to shape this common law by deciding more and more cases involving licenses, and how other courts now look to the Federal Circuit for guidance in deciding licensing-related cases. In Part V, this Article explores the nature of the Federal Circuit's licensing-law jurisprudence, focusing on its "first sale" jurisprudence. This Part also examines how the Federal Circuit's case law meshes with the decisions of other circuits and the Supreme Court, including the Supreme Court's recent Quanta Computer decision.
This Article concludes in Part VI that the Federal Circuit has been a good but sometimes imperfect steward of modem licensing practices. This is well illustrated by the Quanta Computer case. In that case, the Supreme Court unanimously overturned the Federal Circuit's ruling, yet left the Federal Circuit's core licensing-law jurisprudence relatively intact despite numerous urgings through amicus briefs and academic literature to send a stern corrective message to the Federal Circuit as it had in several recent patent cases.16 This Article also highlights some areas that the Federal Circuit should give heightened attention to, given its highly influential role in the creation of licensing law.
I. THE EMERGENCE OF LICENSING AS A TRANSACTION MODEL AND ITS CRITICAL ROLE IN INNOVATION
The story of the Federal Circuit's role in licensing law must be understood in the context of the evolution of licensing as a business practice. Licensing - granting permission to use intellectual property - is as old as intellectual property itself. The oldest intellectual property statute, the 1474 Venetian Patent Act, mentions licensing in its text.17 Even though licensing is not new, its prominence as a transaction model is new, driven by a shift in the United States economy.
The economy has undergone a profound transformation in the past few decades, away from emphasizing the production of hard goods and toward the creation of ideas and information. Today, Americans live in an "information economy." The commercial transactions of the information economy emphasize the creation, distribution, and use of intellectual property, services, and intangibles. As a result, the dominant transaction model has changed from sales contracts to information licenses.18 Licensing has emerged as an important transaction model because it enables innovation, and innovation is critical to the United States economy.19 As explained below, there are two types of innovation in the information economy: technological innovation and businessmodel innovation. Licensing is at the heart of each.
A. Technological Innovation: Licenses to Build Products
Licensing is a tool used by producers to build innovative products. The basic personal computer system ("PC") provides a good illustration. A PC runs operating-system software, such as GNU/Linux or Microsoft Windows. Although many see the "open source" GNU/Linux software and the "binary use" Microsoft Windows software20 as polar opposites in many respects,21 they share one important feature: both are built on an array of licenses.22
If a PC is running Windows software, then the user is running software created by dozens of programmers who are not employed by Microsoft. Windows software includes many lines of code written by third parties, small and large. It also includes inventions that are covered by third-party patents and depends upon third-party information, including trade secrets. Licensing is the primary legal tool that Microsoft uses to include third-party technology in its Windows product. The operating system may be called Microsoft Windows, but it is a more innovative product than Microsoft could create alone because of the third-party technology included via licensing.23
If the PC is running the GNU/Linux operating system, then licensing has also played a key role in the operating system's creation.24 Linus Torvalds is known as the author of the Linux kernel, yet Torvalds did not write most of the code that comprises Linux today. Linux is the result of the collaboration of hundreds of different programmers25 who combine their work.26 From a legal point of view, Linux was created by hundreds of licenses exchanged between the contributors to the Linux project. Furthermore, Linux is only part of the operating system (the kernel). Licensing is also the basis for combining the Linux kernel with GNU software from the Free Software Foundation27 (hence GNU/Linux) and other third-party code to create a complete operating system.28
B. Technological Innovation: Licenses to Create Customer Solutions
After technology is built, the producer often wants to maximize the way that it interacts with other technologies so that the product is useful to end users. Again, the PC provides a good illustration. A PC may have a CPU produced by Dell, a pointing device developed by LogiTech, a microprocessor designed by AMD and fabricated by NEC, a keyboard manufactured by IBM, speakers by Bose, and software written by Microsoft, Mozilla, Apache, and Adobe. It may also connect to the Internet because of technology created using standards by IETF29 and W3C,30 and telephony provided by AT&T. In order for the PC to work as a useful customer system, all of these entities had to share technology, information, or intellectual property. Licensing allows this sharing to occur.
C. Business-Model Innovation: Licenses to Distribute Products
One feature of the information economy is the innovative ways that distributors of information products have invented to get products to market.31 Continuing with our PC example, we can see that PC software developers distribute their products through Value Added Resellers (VARs), Original Equipment Manufacturers (OEMs), distributors (e.g., Ingram), and retailers (e.g., Wal-Mart). Software is distributed electronically through email attachments, chat rooms, and via download from thousands of web sites, web pages, and bulletin boards.32 Software gets distributed in cereal boxes and with the morning newspaper. It's not hard to find software anymore; it's hard to avoid software finding you. What legal tool underlies these diverse distribution practices? The answer is licensing.
D. Business-Model Innovation: Licenses to Use Products
As I have explored in detail elsewhere,33 end-user licensing enables PC-software developers to provide users with a variety of information products at a variety of price points and for a variety of uses.34 Software publishers come in all shapes and sizes and with a multitude of objectives. Universities, non-profit organizations, individuals, collections of individuals, and small and large firms all develop and license software to end-users.35 Free and open source software again provides a powerful example. Because of open source licensing, software users have the freedom to add new features and fix bugs and the legal ability to hire others to do the same.36 End-user licensing also allows software developers to offer packages of software and services; flexible client-server computing-usage models; and the same code to business users at one price, home users for a lower price, academic users for yet a lower price, and charitable organizations for free. In sum, enduser licensing is a key component of business-model innovation in the information economy.
II. EVOLUTION OF LICENSING LAW
A. A Body of Law Takes Shape
In one sense there has always been "licensing law." License transactions existed, so therefore practicing lawyers and courts had to apply legal principles to these transactions.37 For instance, they had to determine whether the offer, acceptance, and consideration were adequate to create a contract. In a dispute over the meaning of contractual language, they had to determine what canons of construction should apply. In case of breach of contract, they had to fix appropriate remedies. And so on. In other words, licensing law existed before the label attached.
Only in recent times have scholars become aware of "licensing law" as a distinct body of law, although it is a looser and less formalized body of law (at least at this point in time) than many bodies of law such as real property law, tort law,38 or even traditional contract law for the sale of goods.39 There is a large and diverse collection of laws that bear on and shape licenses.40
Contract law is one of the most important ingredients in licensing law. Licenses are contracts, so licensing law fundamentally involves contract law.41 The principle is simple, but the reality is complex. Contract law related to licensing comes from a wide variety of different sources, including the common law, Article 2 of the Uniform Commercial Code ("UCC 2"), and the Restatement (Second) of Contracts.*2 Besides contract law, intellectual property law is an important aspect of licensing law. Intellectual property law influences licenses in a variety of ways. Intellectual property law provides contract mies in some instances, such as a statute of frauds for exclusive copyright licenses.43 In other cases, it provides the backdrop for licenses and influences their content and interpretation.44 In still other cases, the fact that intellectual property is the subject of the contract places boundaries around freedom of contract. These boundaries, expressed in terms of antitrust, misuse, and preemption, are an important aspect of licensing law.45
The contract law applicable to license transactions began as common law, and has never changed for pure intellectual-property licenses, such as patent and trademark licenses.46 However, with the rise of the software industry, many courts began to look on software transactions as akin to sales of goods (as they often seemed, as the software was embedded in computer hardware or distributed in boxes). Thus, many courts looked to UCC 2 as the primary source of contract law.47
In the 1990s, many people began to see the need for a cohesive body of contract law for licensing software and information.48 The organizations that created the Uniform Commercial Code - the National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) - initially decided to address it by adding it to the agenda of the re-write of UCC 2, which was already in progress.49 When this approach proved to be inadequate, they set out to create a separate article of the UCC to deal specifically with licenses.50 This statute was to be known as UCC Article 2B (UCC Article 2 for sales, 2A for leases, and 2B for licenses).51
B. The UCC Article 2B and Uniform Computer Information Transactions Act (UCITA) Experiment
The Article 2B project created intense debate, especially about the interplay between contract law and intellectual property law,52 enforceability of mass-market licenses,53 and use of electronic self-help.54 The ALI eventually withdrew its support. Nonetheless, NCCUSL decided to move forward and renamed the project the Uniform Computer Information Transactions Act (UCITA). NCCUSL approved UCITA in 1999, and Maryland and Virginia enacted it shortly thereafter.55 Since that time, however, no other state has enacted UCITA, and several states have passed legislation purporting to preclude any contractual choice of law choosing UCITA.56
C. The 2003 Amendments to UCC 2
NCCUSL and ALI set out in the early 1950s to create a modem code of contract law for sales of goods. This new code, UCC 2, was specifically tailored to fit gooife-related sales (i.e., as opposed to sales of things like services or leases of goods). Although UCC 2 is now considered mainstream, its adoption by the states, at the time, proved to take a relatively long period and was often controversial.57
As information-related transactions (including licenses) began to emerge with increasing frequency and disputes about them began to come before the courts, judges often looked to UCC 2 as a source of law, despite that fact that, traditionally, the common law applied to intellectual property licenses and services contracts.58 Sometimes courts applied UCC 2 because the transaction at issue resembled a sale of goods, but often the court applied UCC 2 simply because it provided a comprehensive and readily ascertainable set of contract principles with which the court was familiar.59 However, some commentators do not believe this is sound,60 and an increasing number of courts have also been circumspect.61
In 1991 when NCCUSL appointed a Drafting Committee to revise UCC 2, the issue of UCC 2's applicability to information transactions was placed squarely on the table.62 The UCC 2 process turned out to be long and difficult for a variety of reasons.63 ALI passed a draft in 1999, but NCCUSL did not.64 Eventually, the Drafting Committee was reconstituted, a new Reporter chosen, and the scope of the project narrowed from a complete rewrite to a series of amendments, which came to be known as the 2003 Amendments to Uniform Commercial Code Article 2- Sales.65
One of the issues that vexed the Drafting Committee was how to distinguish between transactions in goods and transactions in information. Ultimately, the Drafting Committee reiterated that UCC 2 was never intended to apply to information and revised UCC 2 to make the point clearer.66 According to Reporter Henry Gabriel and Drafting Committee Chairman William Henning: "[T]he definition of 'goods' was changed to make clear what has always been true - the term does not include information."67 As to transactions that include both goods and information, the Official Comments state that it is up to the courts to determine whether a transaction is entirely within UCC 2 or whether UCC 2 should apply to only part of the transaction.68
D. Retreat Back to the Common Law
Whether one views UCITA as dead,69 dormant,70 or still dangerous,71 the fact is that licensing law will not be codified any time soon.72 Article 2 of the UCC could have covered licenses but in the end NCCUSL chose not to jump in. Thus, licensing law continues to evolve as common law.73 The Federal Circuit has stepped into this void, setting precedents that are shaping the landscape of licensing law.
III. CREATION AND JURISDICTION OF THE FEDERAL CIRCUIT
Until the 1980s, any federal circuit court in the United States could hear a patent-law appeal. This led to divergent results in patent cases and frequent forum shopping.74 Congress established the Federal Circuit to unify appellate jurisdiction for patent appeals.75 In doing so, Congress hoped to improve the climate for innovation by giving inventors a uniform body of judicial interpretations of patent law decided by judges with patent expertise.76 Since that time, the Federal Circuit has been a strong "manager and developer" of patent law.77
Creation of the Federal Circuit did not change the appellate jurisdiction of regional federal appellate courts in federal copyright or trademark cases,78 or for state-law trade secret or contract issues arising out of diversity jurisdiction,79 at least not directly. Indirectly, however, things changed. The Federal Circuit has exclusive appellate jurisdiction in cases where the plaintiff pleads a patent-law issue.80 As specified in 28 U.S.C. § 1295, the Federal Circuit has exclusive jurisdiction of an appeal from a federal district court if the jurisdiction of that court was based, "in whole or in part," on civil actions arising under "any Act of Congress relating to patents."81
Consequently, the Federal Circuit's jurisdiction sweeps in many licensing-law cases. Naturally, the Federal Circuit decides cases that combine patent and contract-law issues. On top of that, its broad appellate jurisdiction often requires it to handle infringement and breach of contract issues that arise from copyright, trademark, and trade secret licenses.82 In other words, the Federal Circuit gets the opportunity to set precedents on a regular basis involving licenses of all types of intellectual property and involving all types of creative and innovative works.
IV. THE FEDERAL CIRCUIT'S INFLUENCE IN THE DEVELOPMENT OF LICENSING LAW
A. Defining "Influence"
Sometimes it is easy to see one court's influence over another; in fact, sometimes the influence is mandatory. A trial court is required to follow the precedents of the appellate courts in its jurisdiction. A panel of judges in. a federal circuit must follow the decisions of prior panels. All courts must follow the lead of the U.S. Supreme Court.
Outside of these contexts, however, it is harder to gauge influence. Cross-pollination of ideas is natural83 and encouraged across federal circuits,84 but how does one determine the influence that one peer appellate court has on another? Ultimately the matter comes down to two things: practicality and persuasiveness. As a practical matter, a court with a difficult issue to resolve and no binding precedents to apply will look to other courts for useful on-point or related cases. Then, for a court to adopt the decision of a non-binding jurisdiction, the court must find that the reasoning of the non-binding case is sound, sensible, and persuasive. With these principles of practicality and persuasiveness in mind, I have adopted two criteria to test the Federal Circuit's influence in licensing law: absolute number of licensing-law cases decided between October 1, 1982 and February 15, 2008 compared to other jurisdictions; and the number of times the Federal Circuit has been cited, followed, or quoted by other courts in licensing-law issues within that time frame.
B. Number of Licensing-Law Cases Decided
The number of Federal Circuit licensing-law cases is significant because the more cases decided, the greater the odds that another court will find a useful precedent to cite from the Federal Circuit's "catalog" of licensing-law cases. Since its inception in 1982, the Federal Circuit has decided more than one hundred licensing-law cases.85 This is far more than any other federal circuit court in the same period of time.
As shown in the table below, the number of Federal Circuit licensinglaw cases exceeds the totals, respectively, of the Ninth, Second, Fifth, and Seventh Circuits, all of which tend to handle a significant number of cases involving intellectual property. Indeed, the Federal Circuit has decided as many licensing-law cases as the combined total of the influential Ninth and Second Circuits. Not surprisingly, most of the Federal Circuit's cases involved patent licensing, and most of the Ninth and Second Circuit cases involved copyright licensing.86 Trademark licensing cases were spread evenly across the circuits.87 However, the Federal Circuit decided more cases involving software and trade secret licensing.
The number of software-licensing cases is particularly significant because software cases crop up in all circuits and tend to involve copyright and other non-patent issues.88 These Federal Circuit cases will be directly on point for courts looking for cases to apply. If a court takes an approach different than the Federal Circuit, it will create a circuit split.89
Beyond the total number of cases, the Federal Circuit's decisions address a wide range of issues. These issues run the gamut: implied licenses,90 federal-law preemption,91 enforceability of mass-market licenses,92 first sale,93 applicable law,94 canons of contract construction,95 transferability,96 misuse,97 and antitrust.98 The sheer volume of Federal Circuit cases combined with the wide variety of issues that they address means that, as these issues crop up in other jurisdictions, courts looking for precedent naturally will consider adopting (and in many cases have adopted, as described in the next Section) precedent from the Federal Circuit.
The range of issues enhances the possibility that even the Federal Circuit's patent-licensing cases will prove to be influential. In the absence of an on-point copyright case, for example, a patent-licensing case often makes good analogy.99 Sometimes the distinction between copyright as a "thin" intellectual property right and patent as a "thick" intellectual property right justifies a difference in treatment between copyright and patent licensing,100 but on many occasions these differences do not justify distinctions in licensing law. Moreover, in software licensing where the software may be protected by both patents and copyrights, it may not be practicable to apply different licensing principles to the same transaction.
C. Citations to Federal Circuit Cases
Many courts have cited to the Federal Circuit's licensing-law jurisprudence.101 These courts include other federal circuit courts, federal district courts, and state courts. The relatively large number of citations shows that other courts have acknowledged the Federal Circuit's leadership in this area. Looking more closely at the context of the citations reveals that on many occasions courts adopted the Federal Circuit's approach.102 In several cases, including a leading case from the Eighth Circuit on Federal Copyright Act preemption, the court quoted from Federal Circuit case law.103 The Federal Circuit's influence in licensing law is particularly noteworthy given its distinct lack of influence on areas outside of patent law, as several scholars have noted.104
D. Final Observations on the Federal Circuit's "Influence " in Licensing Law
Judging the Federal Circuit's influence on licensing law is more art than science, of course.105 It seems beyond question that the degree of influence is more than trivial but less than dominant. The Federal Circuit is not the only voice, but it is an important voice and arguably one of the most important voices.106 Is the Federal Circuit more influential than the Second Circuit or Ninth Circuit? There is not enough evidence at this time to reach that conclusion. Given the pace of licensing-law cases coming out of the Federal Circuit, however, it seems safe to predict its continued and increasing influence.107
It is also safe to predict that if the Supreme Court overturns the Federal Circuit's licensing-law decisions, it will have an unusually large ripple effect. Almost anytime the Supreme Court reverses the Federal Circuit it affects the parties, the lower courts, and the industries that have come to rely on what seemed to be the established rule.108 The difference will be a difference in the order of magnitude. An adjustment to the Federal Circuit's approach to licensing law will not just affect patentees and those who use patented inventions. Widespread adoption of Federal Circuit precedents means that an adjustment will also affect industries that base their activities on copyright, software, and information licensing. Furthermore, the reverberation will reach across all federal circuits and the decisions of state courts.109
V. THE NATURE OF THE FEDERAL CIRCUIT'S JURISPRUDENCE
This section will describe the nature of the Federal Circuit's licensing-law jurisprudence, primarily through the lens of its first sale cases, but also discussing cases that challenge licenses on preemption, misuse, and antitrust grounds. It will explore whether the Federal Circuit's jurisprudence is consistent with practices in other jurisdictions and Supreme Court precedent, including the outcome of the recent Supreme Court case Quanta Computer.110
A. First Sale Cases
We begin with a discussion of the Federal Circuit's jurisprudence on patent exhaustion (also know as "first sale") because, as mentioned previously, this jurisprudence recently has attracted the attention of the United States Supreme Court.111 This area is very significant because of parallels and overlaps with copyright's first sale doctrine. When software is involved, the code may be covered by both patents and copyrights, so the court must deal with patent and copyright first sale at the same time.
The Federal Circuit's first significant decision in this arena was Mallinckrodt, Inc. v. Medipart, Inc.112 In that case, a manufacturer of medical equipment, Mallinckrodt, sold equipment labeled as "Single Use Only" to hospitals.113 When hospitals contracted with a service company, Medipart, to refurbish the equipment for reuse, Mallinckrodt sued Medipart for patent infringement and inducement to infringe.114 The District Court ruled that the "Single Use Only" designation on the package did not prevent the refurbishment or the hospital's further (i.e., second and subsequent) use under patent law.115 The Federal Circuit reversed.116
The Federal Circuit held that patent exhaustion only occurs when the patentee makes an unconditional sale. By placing an express restriction on reuse, the patent holder could create a restricted license rather than an unconditional sale.117 According to the Federal Circuit, "Unless the condition violates some other law or policy (in the patent field, notably the misuse or antitrust law, e.g., United States v. Univis Lens Co.), private parties retain the freedom to contract concerning conditions of sale."118
The Federal Circuit elaborated upon Mallinckrodt five years later in B. Broun Medical, Inc. v. Abbott Laboratories.119 In that case, the Federal Circuit explained:
[A]n unconditional sale of a patented device exhausts the patentee's right to control the purchaser's use of the device thereafter. The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the "use" rights conferred by the patentee. As a result, express conditions accompanying the sale or license of a patented product are generally upheld.120
The court reiterated, however, that "conditions that violate some law or equitable consideration are unenforceable."121
The Federal Circuit clarified, in Hewlett-Packard Co. v. Repeat-O-Type Corp.,122 that not all manner of restrictions or conditions would turn transactions from first sales into conditional sales or licenses. At issue in Repeat-O-Type was a statement in the user instruction manual stating that users should "discard old print cartridge[s] immediately."123 The court ruled that to be enforceable the condition or restriction must be explicit: "A seller's intent, unless embodied in an enforceable contract, does not create a limitation on the right of a purchaser to use, sell, or modify a patented product as long as a reconstruction of the patented combination is avoided."124 The court stated that this "noncontractual intention is simply the seller's hope or wish, rather than an enforceable restriction."125
A decade after Mallinckrodt, the Federal Circuit revisited the issue of patent exhaustion, this time in a context very different from medical devices or computer equipment. Monsanto Co. v. McFarling126 and Monsanto Co. v. Scruggs121 dealt with the licensing model for genetically modified seeds.128 Monsanto licensed its biotechnology for "Round Up Ready" seeds to seed-distribution companies who then licensed the seeds to end-user growers.129 This technology allows growers to use the pesticide "Round Up" for weed control without killing the genetically modified plants.130 Monsanto's license allowed the seed distributors to incorporate Monsanto technology into the distributors' germ plasma, subject to certain conditions, including a condition that the seed distributors would not sell seed to growers unless the grower signed a Monsanto end-user license agreement.131 The enduser license with growers included the following restrictions: the seed could be used only for planting a single crop; no transfer of seed for replanting; prohibition on research or experimentation; and payment of a technology fee.132
Scruggs, a grower, argued that he was not bound by any of the license conditions under the doctrine of patent exhaustion.133 The Federal Circuit disagreed, reasoning that "[tjhere was no unrestricted sale because the use of the seeds by seed growers was conditioned on obtaining a license from Monsanto."134 Moreover, as to the second generation of seeds, there was no "sale" by Monsanto (or the seed distributor for that matter) at all, so there was no "first sale" under patent law.135
Shortly after the Scruggs decision, the Federal Circuit again took up the issue of patent exhaustion in LG Electronics, Inc. v. Bizcom Electronics, Inc.136 In mat case, LG Electronics licensed certain patents to Intel.137 LG Electronics' license with Intel contained a provision prohibiting use of LG Electronics' patents with non-Intel devices.138 Further, Intel was required to notify its customers of the prohibition in any agreements that Intel created with its customers.139 Intel then sold chipsets covered by the patents to PC manufacturers.140 Intel provided notice of its LG Electronics license limitation to the PC manufacturers.141
When some of Intel's customers failed to obtain the appropriate patent rights from LG Electronics, LG Electronics sued for patent infringement. The defendants argued that LG Electronics' patent rights were exhausted because they bought the chipsets from Intel in an unconditional sale.142 The Federal Circuit disagreed. It held that the sale was conditional because Intel was limited by its license with LG Electronics as to how Intel could pass on patent rights to Intel's chipsets, and because Intel provided notice to its consumers of the limitation.143 Because the sale was conditional, the patent rights of LG Electronics were not exhausted.144 Thus, LG Electronics had the right to assert its patents against unlicensed "downstream" uses.
B. Analysis of the Federal Circuit's First Sale Jurisprudence: Comparison to Supreme Court Precedent
The U.S. Supreme Court's recent decision in Quanta Computer, reviewing the Federal Circuit's ruling in LG Electronics, Inc. v. Bizcom Electonics, Inc., reveals what the Supreme Court thinks about the Federal Circuit's entire line of first sale cases. The Federal Circuit's Mallinckrodt line of cases was clearly in jeopardy in Quanta Computer. The Supreme Court presumably took the case because the U.S. Solicitor General's office argued that from Mallinckrodt to LG Electronics, the Federal Circuit had moved licensing law in a direction contrary to good public policy. As discussed below, the Supreme Court, in effect, largely accepted the Federal Circuit's core approach from the Mallinckrodt line of cases, even while unanimously overturning LG Electronics on other grounds. In other words, this particular reversal fundamentally amounts to an affirmation: the Federal Circuit lost the battle but won the war.
1. From Mallinckrodt to Monsanto
The comparison begins with the Federal Circuit's foundational case on first sales versus conditional sales, Mallinckrodt.155 The first question to ask is: Did the Federal Circuit ignore the Supreme Court's case law? It would be hard to argue that it did. Judge Newman's opinion146 cites more than twenty Supreme Court cases147 and discusses or quotes several of them, including two of the most important cases in this area, Motion Picture Patents Co. v. Universal Film Manufacturing Co.m and General Talking Pictures Corp. v. Western Electric Co. 149 Indeed, the opening paragraphs of Mallinckrodt address the district court's ruling in relation to General Talking Pictures:
[T]he district court held that no restriction whatsoever could be imposed under the patent law, whether or not the restriction was enforceable under some other law, and whether or not this was a first sale to the purchaser without notice. This ruling is incorrect, for if Mallinckrodt's restriction was a valid condition of the sale, then in accordance with General Talking Pictures Corp. v. Western Electric Co., it was not excluded from enforcement under the patent law.150
If the court in Mallinckrodt did not ignore Supreme Court precedent, then the next question is: Did the Federal Circuit misconstrue the precedent? In Mallinckrodt, the Federal Circuit was reviewing the district court's ruling on a motion for summary judgment.151 As such, the Federal Circuit had to make a key factual assumption: that the "single use only" condition was legally sufficient.152 According to the court, "The movant MediPart did not dispute actual notice of the restriction. Thus we do not decide whether the form of the restriction met the legal requirements of notice or sufficed as a 'label license.'"153 The court then stated, "On this motion for summary judgment, there was no issue of whether this form of license gave notice of the restriction. Notice was not disputed."154
Thus the narrow issue decided by the court in Mallinckrodt was whether a patent holder could create an enforceable (via patent law) restricted license or conditional sale. Not that the patent holder did, but that it could.155 The court reasoned that Mallinckrodt could create a restrictive license because a patent gives the patentee the right to exclude "use" of an invention,156 and this right can be waived in whole or in part (i.e., conditioned or restricted).157
For support, the court cited several Supreme Court cases that approved of conditional sales or restrictive licenses, including General Talking Pictures and American Cotton-Tie Co. v. Simmons,156 a case that involved a "[licensed to use once only" notice that had been stamped on metal ties for cotton bales.159 The Federal Circuit quoted liberally from General Talking Pictures, in which the Supreme Court said:
That a restrictive license is legal seems clear ....[T]he patentee may grant a license "upon any condition the performance of which is reasonably within the reward which the patentee by the grant of patent is entitled to secure." . . . The practice of granting licenses for a restricted use is an old one. So far as appears, its legality has never been questioned.160
Summing up the Supreme Court's case law in this area, the Federal Circuit observed: "Viewing the entire group of these early [Supreme Court] cases, it appears that the Court simply applied, to a variety of factual situations, the rule of contract law that sale may be conditioned."161 And if condition or restriction is within the scope of the patent grant, such as a patentee's right to exclude use of the patented invention, "then violation of the restriction may be remedied by action for patent infringement."162
But is this a fair assessment of Supreme Court precedent? One case that the Mallinckrodt opinion cites but does not discuss extensively is United States v. Univis Lens Co.,163 a case decided by the Supreme Court four years after General Talking Pictures and cited extensively by the Supreme Court in Quanta Computer. Some consider the Univis Lens case to be the Supreme Court's last and definitive word on patent exhaustion.164 Did the Federal Circuit give Univis Lens its due, or did it misperceive its importance?165 The best interpretation of the General Talking Pictures and Univis Lens cases, when read in context, supports the Federal Circuit's treatment of the latter case.
General Talking Pictures and the cases that it cites establish the following framework for a patentee's ability to control use of a patented product: The patentee may make an unconditional sale of a product under its patent. If the patentee does so, its rights under the patent are exhausted and the user is free to use the product without further interference by the patent holder. Alternatively, the patentee can make a sale or license that conditions or restricts usage. If the patentee does so, the person who received a product under the patent may use the product only as conditioned or limited by the patentee. If the recipient uses the product in another way, he or she infringes the patent.
However, a patentee's ability to enforce restrictions or conditions on use is not absolute. First, it must be done in an enforceable contract. Second, the restriction or condition must be within the scope of the patent's exclusive rights. Third, restrictions or conditions are subject to other laws, such as antitrust law and the doctrine of patent misuse. If a patentee's contractual condition or restriction is outside the enumerated exclusive rights granted by a patent or violates some other law,166 then use of the product contrary to the condition or restriction does not infringe the patent.
With this framework in mind, General Talking Pictures and Univis Lens fit neatly together. General Talking Pictures is fundamentally a patent-infringement case. In that case, both a manufacturer and user ignored the license restrictions imposed by the patentee.167 Consequently, the Supreme Court found that the manufacturer and user infringed the patent by doing so.168
Univis Lens, on the other hand, is fundamentally an antitrust case. In Univis Lens, the patentee was using a license condition to enforce resale price maintenance.169 In other words, the patentee was using license restrictions in violation of antitrust law. The Court in Univis Lens barely mentioned General Talking Pictures, presumably because there was little need to cite it in the context of antitrust. Justice Stone's opinion instead, and appropriately so, focused repeatedly on the "price-fixing features" of the licensing scheme, which the Court ruled were in violation of the Sherman Act.170 In other words, Univis Lens does not overrule or even refine the rule in General Talking Pictures - it simply applied it.
2. The Monsanto Cases
This brings us to the more recent Federal Circuit decisions in Monsanto Co. v. McFarling171 and Monsanto Co. v. Scruggs.172 What have these cases added, if anything, to the Mallinckrodt decision on the issue of patent exhaustion? The McFarling case adds little to Mallinckrodt. m The primary issue in McFarling was the enforceability of a condition in Monsanto's end-user (grower) Technology Agreement that restricted use of seeds incorporating Monsanto's Roundup Ready technology to "a single season" and prohibited the grower from saving for replanting any second-generation seed produced by the first.174 McFarling argued that this restriction constituted patent misuse because Monsanto had impermissibly tied an unpatented product to a patented one.175 The Federal Circuit acknowledged that "[tjying can constitute patent misuse" but stated that "McFarling does not raise a typical tying allegation, and the mere recitation of the word 'tying' is not sufficient to state a patent misuse defense."176
The court then went on to assess what it considered the unique feature of the case: "the Technology Agreement does not impose a restriction on the use of the product purchased under the license but rather imposes a restriction on the use of the goods made by the licensed product."177 In other words, the license restriction applied to the second-generation seed that resulted from the crops produced from the first-generation seed. The key question, according to the court, was whether this restriction reached "beyond the scope of the patent grant"?178 If it did, it could (at least potentially) constitute a misuse of Monsanto's patent. The answer to the question was: "Because the '435 patent would read on all generations of soybeans produced, we hold that the restrictions in the Technology Agreement prohibiting the replanting of the second generation of ROUNDUP READY® soybeans do not extend Monsanto's rights under the patent statute."179
The McFarling decision broke no new ground on the rules applicable to assessing a license restriction. If the court had found Monsanto's restriction to be an illegal tying arrangement or beyond the scope of the patent, then it would have refused to enforce the restriction. Like the Supreme Court in Univis Lens, the Federal Circuit in McFarling reached its conclusion simply by applying the framework articulated by the Supreme Court in General Talking Pictures.
The Scruggs case presents facts similar to McFarling. In Scruggs, the grower had not signed Monsanto's Technology Agreement,180 but it was undisputed that Monsanto required all seed companies to place a notice on all bags of seeds stating that the seeds were "covered by U.S. Patents, that their purchase of the seeds conveyfed] no license, and that a license from Monsanto must be obtained before using the seeds."181 However, unlike the McFarling case which focused on the grower's patent-misuse defense, the Scruggs case also focused on first sale and implied-license defenses.182
The Federal Circuit rejected Scruggs' first sale defense.183 According to the court, patent exhaustion did not apply for two reasons. First, there was "no unrestricted sale" because the use of the seeds "was conditioned on obtaining a license from Monsanto."184 Second, because:
[T]he new seeds grown from the original batch had never been sold. Without the actual sale of the second generation of seed to Scruggs, there can be no patent exhaustion. The fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology. Applying the first sale doctrine to subsequent generations of self-replicating technology would eviscerate the rights of the patent holder.185
Does the Scruggs decision break new ground on the law of patent exhaustion and first sale? Scruggs seems to line up well with the facts in General Talking Pictures. In General Talking Pictures, a patentee licensed an amplifier manufacturer to manufacture and sell amps for non-commercial uses.186 A commercial end user purchased the amps from the manufacturer "knowing that [the manufacturer] had not been licensed."187 Under these