written by The Law Offices of James David Busch LLC. 

James is Licensed to Practice before the USPTO, in Illinois and Arizona.

Preventing Patent Exhaustion When Licensing Multiple Levels of a Market

A patent owner with over a dozen patents relating  to mobile phone devices wanted to assert claims against a number of phone manufacturers as well as companies that utilized mobile messaging technologies to advertise to consumers via SMS.

In order to license both levels of the industry, the patent owner needed to be careful to prevent "patent exhaustion" from applying to the claims of the patents.

Mr. Busch researched the issues and wrote a paper "Licensing Multiple Levels of a Vertical  Market" based on the most current "patent exhaustion" cases at that time.  Some of the key takeaways found by Mr. Busch involved coordination between the patent prosecution and licensing phases of an enforcement program:

 The main objective of a patent licensor, when licensing multiple levels of a vertical market, is to efficiently license their technologies in such a way that they can preserve their downstream patent rights to maximize their licensing revenue. These objectives can be furthered in both the patent prosecution and licensing phases of a licensing program.

 Patent Prosecution

The ability to draft a clear licensing agreement is, to a large extent, dependant on having clearly defined patent rights. To the extent possible, patentees should contemplate their licensing strategy early on in the inventive process and during patent prosecution. While the patent prosecution phase is largely beyond the scope of this research paper, there are at least a couple of licensing issues that can be mitigated in light of the current patent exhaustion and implied license case law. Furthermore, even if the patent prosecution phases is complete, these considerations are also applicable when selecting the claims to include and exclude from a license agreement.

 Draft Each Claim so that it is Infringed by Only One Level of the Market. During the patent drafting process the claims should be drafted with one single level of the market in mind. For example, if a patentee is seeking patent protection for a new computer processor and system, the patent drafter may want to draft each claim so that they are infringed by one of: computer component manufacturers, or computer system manufacturers. Similarly, if it is a biotechnology patent for a protein and a related therapeutic device, each claim might be drafted so that they will only be infringed by either: the protein manufacturers, or the device manufacturers. In some instances, a portfolio may already have at least one claim spanning several levels of the market. In other instances, it may be beneficial to have a claim spanning several levels of the market. In these instances, a licensor may want to explicitly exclude these claims in the license agreement. By explicitly avoiding such claims, any subsequent license agreement can more easily be divided between the different levels of the market while reducing the likelihood that there will be arguments that an implied license was created. Like Jacobs v. Nintendo where a license was implied due to the intent of the parties, these arguments may be put forward because it is plausible that the party would have contemplated that these claims would have been included in the license agreement. The argument is less plausible where the claim does not encompass any activity in which the licensee engages.

 Ensure Distinct Inventions are Restricted or Divided into Distinct Patents. In Cyrix v. Intel, the court clarified the patent exhaustion doctrine by stating that does not apply to claims that are patentably distinct. Therefore, a patent applicant should take any opportunity possible to establish patentable distinctness between the claims aimed at different levels of the market during the patent prosecution phase. The patent applicant may want to consider separating claims targeted at different levels of the market into separate patents. This can be accomplished through the use of divisional applications. Divisional applications may be filed voluntarily or pursuant to a restriction requirement; however, those filed pursuant to a restriction requirement will be more beneficial when establishing the file wrapper. According to the Manual of Patent Examining Procedure (“MPEP”), “the claims of an application may properly be required to be restricted to one of two or more claimed inventions only if they are able to support separate pat­ents and they are either independent or distinct.” The MPEP defines the term independent as “unrelated” and continues by explaining that it means “that there is no disclosed relationship between the two or more inventions claimed, that is, they are unconnected in design, operation, and effect.” The MPEP explains that related inventions are distinct “if the inventions as claimed are not connected in at least one of design, operation, or effect (e.g., can be made by, or used in, a materially different process) and wherein at least one invention is PATENTABLE (novel and nonobvious) OVER THE OTHER (though they may each be unpatentable over the prior art).” A patent applicant may want to try to induce a restriction requirement from the patent office, requiring an election between claims targeted at different levels of the applicable market. This will help establish the patentable distinctiveness in the file wrapper of the patent application thereby precluding the argument that the doctrine of patent exhaustion is applicable.

 Patent Licensing

In drafting a license agreement or covenant-not-to-sue, the licensor will likely want to design the contract so that any sales that would exhaust patent rights fall outside of the definition of an authorized sale. Thus, the patent exhaustion doctrine is not triggered. Furthermore, the licensor will want to expressly provide what is and is not covered by the license agreement to mitigate arguments that an implied license was granted. There are a number of strategies that a licensor may want to consider.

Enumerate the Patents and Claims Included in and Excluded from the License. The licensor should be clear in what is covered by the license—those patents and claims that were drafted to be infringed by the level of the market in which the licensee participated. Furthermore, the licensor should be clear in what is not covered by the license by explicitly excluding downstream claims. Therefore, a licensee may avoid all future liability for claims that they would otherwise directly infringe. The licensee will not be able to exhaust claims applicable to downstream companies, because any transfer under the other patents would be unauthorized with respect the patent exhaustion doctrine. A licensee may still worry about liability for indirect infringement of the patents aimed at downstream levels of the market; however, these fears can be eliminated with a covenant-not-to-sue.

Mr. Busch, along with co-counsel implemented these techniques for the client and were able to license a great number of mobile phone manufacturing companies on one hand, and other companies that utilized mobile messaging techniques on the other hand.

In a patent infringement lawsuit relating to these patents at the district court level, the Judge disregarded the established case law and found against our client.  The Federal Circuit reversed the district court in a 40-page decision finding in favor of our client.

In that decision, the Federal Circuit specifically pointed to many of the actions that our client took based on Mr. Busch’s earlier research. For example, the Federal Circuit pointed to the client’s painstaking efforts to delineate what was and what was not covered by the license:

The licenses themselves generally reflect painstaking efforts to distinguish the conduct of handset makers and possessors from the conduct of others, such as content providers, and to distinguish claims practiced by the former from claims practiced by the latter. (The parties have not clearly identified and explained any differences among the licenses that would alter the analysis here.) The licenses generally indicate that the Helferich portfolio contains many claims that would not be infringed by a handset manufacturer because those claims “expressly recite material additional operations that are carried out (or material additional structure that is added) by Third Parties, including . . . Content Provider[s] . . . and/or are not substantially embodied in the products, services, or methods within the scope of the Licensed Fields,” J.A. 2102 (emphasis removed)—such Licensed Fields being defined as “Mobile Wireless Communications Devices” made, used, etc., by the manufacturer licensee, J.A. 2100. The licenses generally disclaim any grant of rights to such content providers and reserve Helferich’s enforcement rights against them. J.A. 2102–03. In light of those provisions, the content providers in these cases rely for protection only on the legal doctrine of patent exhaustion, not on a claim of a factually “implied license” to be found in the licenses Helferich granted to manufacturers. See Helferich, 965 F. Supp. 2d at 979 (“The right of Defendants and other third parties here to practice [Helferich’s] patents is based [on] exhaustion, not on an implied license . . . .”). Between July 2010 and March 2012, Helferich filed complaints against the defendants individually for directly infringing a number of Helferich’s content claims. Helferich alleged that all defendants infringe content claims of the ’838, ’716, ’757, ’601, ’741, and ’450 patents and that Bravo and CBS also infringe the ’241 patent.2 Although Helferich alleged indirect infringement in the alternative, it is undisputed—as Helferich asserted in this court without contradiction by defendants, see Helferich Opening Br. at 23, 33—that the cases before us involve no allegation by Helferich of indirect infringement based on handset acquirers’ direct infringement. The allegations of infringement focus on defendants’ conduct in storing content and delivering it to customers via mobile-device applications, text-messaging subscription services, and third-party networking programs like Facebook and Twitter. For example, Helferich contends that Bravo infringes when it (a) sends a multimedia message service (MMS) text message to a handset user that includes a brief description of video content and a plain-text uniform resource locator (URL) for the video stored on a remote server and (b) delivers that content to the user upon request, as when the user’s handset has

The Federal Circuit also focused on the fact that the client’s claims were patentably distinct and separately directly infringed by the content producers (and not the handset makers):

Finding exhaustion in the present cases would run counter to the pronouncement of the Supreme Court— dictum in Morgan, 152 U.S. 425—that is most on point for the issue presented here. The Court in Morgan, addressing exhaustion, indicated the doctrine would not apply in circumstances where the alleged infringement involved distinct, though related, validly patented inventions. Id. at 435. This court, among others, has noted Morgan’s significance for such circumstances.


Here, the PTO imposed a number of restriction requirements. That fact tends to confirm the independence or distinctiveness of the separated claims, see MPEP §§ 802.01, 803 (either suffices for restriction), as does the absence of double-patenting impediments to issuance of the final claims.


In short, we have scrutinized defendants’ argument that the content and handset claims at issue are distinguished only by “semantics,” Defendants’ Br. at 34, or “artful drafting,” id. at 39, by which they must mean that different words are used for what amount to the same substance. We have examined all suggested statutorily and doctrinally grounded approaches to defining legal identity of substance. We do not find that the two groups of claims here can be collapsed into one. We see no sound basis for expanding exhaustion doctrine to hold that authorized sales to persons practicing the handset claims exhaust the patentee’s rights to enforce the asserted content claims against different persons. C The only issue before us is patent exhaustion. We have decided the issue as it has been framed by the record and arguments in these cases. We reject the defense for the combination of reasons set forth.

Faced with the original question of whether or not it was possible to license multiple levels of the market, Mr. Busch researched the issue and came up with concrete suggestions for how to build a patent licensing program to achieve the client’s goals. These suggestions were then implemented over nearly a decade throughout the patent prosecution and licensing strategy for the client.

Ultimately, when challenged at the Federal Circuit, the client prevailed based on the recommendations provided early in the program by Mr. Busch.

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