There were two recent decisions – one in the USA and one in the UK – which dealt with the important but seldom-discussed concept of patent exhaustion. Patent exhaustion in essence means this: the initial authorised sale of a patented item terminates all patent rights to that item, for the reason that the owner of the patent (the patentee) has been rewarded for its ingenuity by that sale.
The UK decision was that of Nestec v Dualit, and it dealt with that absolute necessity of modern life, the Nespresso machine, and more particularly the capsules that are used to make a cup of coffee. Nestec has a patent relating to a capsule extraction device and it sued Dualit for making and selling a capsule that was compatible with the Nespresso (and cheaper than the official capsule).
The UK Patents Act has a section that makes it an act of indirect infringement for anyone to supply to a person 'other than a licensee or person entitled to work the invention' any of the means that relate to an essential element of the invention and that put it into effect. So the question in this case was this: was Dualit contravening this section of the Patents Act by supplying to owners of Nespresso machines with capsules that effectively put the patented extraction device into effect?
No said the court. There were various reasons for the court's decision, but the most important and interesting one was that the owner of the Nespresso machine was a licensee or a person entitled to work the invention. Why? Well, no contractual restrictions were imposed on buyers of the Nespresso, which meant that they were impliedly licensed to use the machine in any way they saw fit, and this included the use of compatible capsules. The court made the point that the implied licence is similar to the exhaustion principle, with the main difference being that the implied licence can be expressly excluded. The Court said this: 'By consenting to the manufacture and sale of Nespresso machines, Nestec have exhausted their rights under the patent to restrict purchaser's freedom to use such machines in accordance with their normal function.' So the patent exhaustion doctrine had the result that there was no infringement of the patent.
The US case was the Supreme Court decision of Bowman v Montsanto. What makes this decision interesting is that, although it recognises that the concept of patent exhaustion exists, it makes it clear that there are limitations. Exhaustion does not apply in respect of all goods, and certainly not some goods that are self-replicating, for example seeds.
The facts were that Montsanto had patents relating to soybean
seeds that had been genetically modified to survive certain
herbicides. The company sold these seeds to soybean growers,
subject to very strict terms: the growers could plant the
seeds in one season; the growers could consume or sell the crop to
certain 'grain elevators' (organizations offering
storage facilities or silos for grain); yet the growers could not
use the crop or second generation seeds for replanting. Bowman was
a grower who had bought seeds under a licence, but once he'd
used his seeds for one crop he decided to buy for his second crop
soybeans from one of the grain elevators and plant them –
Bowman had correctly assumed that the soybeans would be resistant
to the herbicide because they came from the patented seeds and
therefore contained the patented technology.
When Monsanto sued for patent infringement, Bowman's defence was one of patent exhaustion. Bowman's argument was that as Monsanto had allowed farmers to sell their crops (the soybeans) to the grain elevator and he had, in turn, bought the soybeans from the grain elevator, he was protected by the concept of patent exhaustion.
Not so said the court, the doctrine of patent exhaustion applies only to the particular item sold. The court quoted this line from an earlier decision: 'The initial authorised sale of a patented item terminates all patent rights to that item.' What the initial authorised sale doesn't do, said the court, is interfere with the patentee's exclusive right to make and use the invention in relation to other items. The patentee retains the right to make new copies of the patented item because 'the patent holder has "received his reward" only for the actual article sold, and not for subsequent recreations of it'. If purchasers were entitled to replicate an invention a patent would plummet in value after the first sale of the first item. This, said the court, would lead to a 'mismatch between invention and reward'.
Applying this thinking to the seeds, the court said that Montsanto had received its reward for the actual items sold, but not for further recreations of it. Under the patent exhaustion principle, Bowman had been entitled to resell or consume the patented beans he'd bought from the grain elevator, but he was not entitled to plant them and create more of them.
The court did, however, recognise that inventions relating to self-replicating products are becoming more common and that there may well be cases where the article's self-replication occurs outside of the purchaser's control – the court didn't say so, but it was presumably referring to the digital world. The court, however, felt that it didn't need to consider how exhaustion might apply in such cases.
So two very different cases, both confirming that the exhaustion principle does indeed apply to patent law. The nuances that have been introduced by these decisions in the United Kingdom and the United States are important to take into account in the development of any patenting strategy.
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