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1. We will first look back at the context in Quanta. Quanta is a company which assemblates computers with elements boughts in others societies. Quanta sells those computers. He had bought chips to Intel in order to use them on computers. LG had given the authorization to Intel to make those chips and to sell them.
Therefore, the license given to Intel needed this society to warn Quanta that Quanta didn’t have any licence from LG to sell those chips. LG sued Quanda for patent infringment as Quanta hadn’t grant a license to LG. In court, the tribunal went against LG’s reasoning.
This affair implied the exhaution doctrine which says that once the property of a patent item is transmitted to a buyer, the patent’s owner doesn’t haven anymore right related to this patent regarding to future consumers.
Regarding to what the court said in this case, we can try to anticipate what the tribunal might say for Bowman vs. Mosanto. Mosanto sells seed to agricultural and permits them to plant and sell their harvest as a basis product. Buyers cannot keep those or use it and sell those seeds in order to plant them. But the exhaution doctrine doesn’t apply for copies of product. Mosanto made it clear what the seed societies and farmers could or could not do with those seeds. Those patents on seeds benefit for everyone. Without the patent protection, private industries wouldn”t invest in resarch and in developping products that would benefit for a big number of farmers and consumers.
But seeds and chips are not similar so, I think that the exhaution doctrine wouldn’t apply for The Mansato vs. Bowman case.
2. Firstly concerning the UsedSoft case: Oracle is an industry that develops and distributes software (free or with payment) whereas UsedSoft resells those software after rebuying them from Oracle clients. Oracle accused UsedSoft to illegally resell software from which it doesn’t have any license/rights. The Court gave his judgement in favour of UsedSoft: when software is sold, the rights on this product are not belonging to the society anymore; so the buyer can use it the way he likes with one condition: he cannot make a copy of it and resell it (based on article 4 of the Directive).
In both cases we are talking about the exhaution of a right, and it occurs after a resell of a product which initially was protected with a copyright/patent. When a software is sold, there is an application of the exhaution doctrine and the initial owner cannot prohibit the sale. A broad application is given to the two cases and it shows that once the product is sold, the initial owner cannot prevent the buyer to resell it.
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1. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), is a decision of the United States Supreme Court in which the Court reaffirmed the validity of the patent exhaustion doctrine. In the course of restating the patent exhaustion doctrine, the Court held that the exhaustion doctrine is triggered by, among other things, an authorized sale of a component when the only reasonable and intended use of the component is to practice the patent and the component substantially embodies the patented invention by embodying its essential features. The exhaustion doctrine applies not only to product claims but also to method claims.
Now the SCOTUS has rule over something new. In Monsanto v. Bowman, the question is whether the exhaustion doctrine apply to second generation of seed. It is for sure that it will apply to the original seed. This is only the application of the doctrine of exhaustion. But what about the second generation of GM seeds ? It is important because those seeds will keep the protected traits, which means the patented modification of the seed genes.
In Monsanto v. Bowman case, the court of appeals of the Federal Circuit considered « that the result of the self-replicating technology (the modified soy seeds) is a “newly infringing article” ». Thus, even if the original seed is subject to patent exhaustion after its first sale, replanting the second generation is not.
But the SCOTUS is going to rule this judgment and may quash the décision. It will depend on the scope of the doctrine of exhaustion. It will have a huge impact on all the agricultural sector.
On the other hand, there is another doctrine, the doctrine of the “conditional sale exemption” which is used by the Federal circuit court applies. But what does that mean ? « Patent holders can enforce their rights even after making a sale of the covered product. The doctrine has given patent holders the power to enforce restrictions against downstream purchasers ». This is the opposite of the exhaustion doctrine.
We can’t be sure about the decision. Both doctrine have reasons to stand but we can be sure that it will affect the future of GM seeds and the future of many people, GMO’s industry and farmers !
2. What are the facts ? LGE and Intel made contracts. In the Master Agreement, LGE required Intel to give its customers notice that the patent license does not extend to any product made by combining a licensed Intel microprocessor product with any other product by combining a licensed Intel microprocessor (for example, a computer containing the Intel microprocessor products).
Quanta Computer purchased licensed Intel microprocessor products and proceeded to manufacture computers containing them. Then, LGE then sued Quanta for patent infringement, but Quanta win in front of the SCOTUS.
What are the facts ? Oracle’s business model is not to “sell” software but to provide an intangible copy of its software, which can be downloaded from its website, and to grant a perpetual license for this intangible copy. The license terms prohibit the customer from transferring the license to third parties. This system prevents a market for second-hand software licenses. Based on this licensing model, Oracle opposed the resale of “used” Oracle licenses by UsedSoft, a reseller of second-hand software. UsedSoft argued that under EU copyright law a software supplier who sells a copy of a software program cannot oppose the further sale of such copy based on his copyright (the “exhaustion doctrine”). Oracle argued that the exhaustion doctrine does not apply to intangible copies which are licensed rather than sold. The CJ now concluded that when a copyright holder makes available to his customer a copy – tangible or intangible – and at the same time concludes a perpetual licence agreement in lieu of payment of a fee this equals a “sale” of the software and the copyright holder exhausts its exclusive distribution rights.
On of the main difference is that one case is about copyright right and the other one is about patent right. Anyway, in both case, the doctrine of exhaustion was applied.
In the Oracle case, the ECJ decide that where the license contemplates an indefinite right of use, it equates to a “sale” and thus the doctrine can apply. However, they are two limitation. First, if the license acquired by the first acquirer relates to a greater number of users than it actually needs, the acquirer is not authorised to divide the license and resell only part of the user rights for the computer program concerned. This means that licensees cannot just simply resell a surplus of licenses they have available under a license agreement. Secondly, the first acquirer should make its own copy unusable at the time of the resale. Thus, such licensee should either erase such copy or make it unavailable for further use. We can see here that ECJ put some limitations, this is not the case in Quanta.
But in the Quanta case, the Court made a difference between contract law and patent law which is really interesting ! If patent law says that Quanta’s actions are non-infringing, then it’s completely irrelevant what a contract between LG and Intel might have said, because Quanta doesn’t need a license and wasn’t a party to Intel’s contract with LG. Freedom of contract means that parties are free to sign contracts with one another with the confidence that they will be faithfully enforced. It does not mean that contracts can bind third parties who never consented to them. And in this case, the only relevant contract was between LG and Intel. Whether Quanta infringed LG’s patents is a matter of patent law, not contract law.
At the end of the day, both cases apply the doctrine of exhaustion right but there are going further in different way. I mean there are taken into account different problems or limits and there are solving them. So, both judgment can be useful for the doctrine of exhaustion.
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1. The doctrine of patent exhaustion limits the rights of a patent holder after an authorized sale. In some cases though, the patent holder can limit the extent to which the exhaustion doctrine is triggered by putting different conditions on the sale or use of the patented invention. The question that arises from this practice is whether the patent holder’s can still assert his rights against a third party to whom the product has been sold.
In the Quanta case, the US Supreme Court’s approach can be summarized as follows. First, according to the Court’s well-established case law, method patents can also be subject to patent exhaustion when the method “sufficiently embodies the patent”. According to the Court, “eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Thus LGE’s first argument is not received by the Court. Second, the court examines the extent to which “ a product must embody a patent in order to trigger exhaustion”. The case Univis is brought up by Quanta as a precedent to rely on. LGE tries to argue that this case is inapplicable, but the Supreme Court agrees with Quanta for several reasons. Lastly, after having concluded that the Intel products embodied the patents, the Court asserts that “the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article”.
I believe that in the light of the Quanta case, we can expect the US Supreme Court to restrict Monsanto’s ability to rely on patent to prevent the replanting of second-generation seeds in Bowman v. Monsanto pending case. In Quanta, the Court held that the authorized sale of a patented product exhausts the patent holder’s rights on that product. This can be interpreted as precluding Monsanto from claiming patent rights on the progeny of seeds which have been subject to a first authorized sale.
2. A notable similarity between the two decisions is the fact that they both examine patent exhaustion doctrine. Both decisions involve a “third party” to which the patented or copyrighted product has been sold by the first acquirer.
Also, both decisions conclude to the existence of exhaustion after a first authorized sale although there is a license agreement between the parties. Thus, as both decisions extend the exhaustion rule, the rights of IP owners are less protected. In this perspective, the two decisions potentially have far-reaching consequences for IP owners.
There are nevertheless important differences between the two cases. First, the Usedsoft case concerns software copyright whereas Quanta concerns method patent.
Second, the facts of the two cases are quite different. Quanta is about a product which substantially embodies the patented right, while Usedsoft is about the resale of a used software. Because the facts of the matters differ, the two Courts apply different criteria: the “substantially embodies” criterion for the US Supreme Court and the transfer of property criterion for the ECJ.
Thirdly, with regard to the way the two courts proceed in examining the issues brought before them, there are notable differences. While the US Supreme court examines and relies on different precedents (especially Univis), the ECJ’s approach is more about interpreting European legislation.
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1° Bowman V. Monsanto case concern the exhaustion doctrine.
Exhaustion doctrine is, according to Wikipedia, “a common law patent doctrine that limits the extent to which patent holders can control a patented product after an authorized sale. Under the doctrine, once an unrestricted, authorized sale of a patented article occurs, the patent holder’s exclusive rights to control the use and sale of that article are exhausted, and the purchaser is free to use or resell that article without further restraint from patent law”. Wikipedia adds that “ procedurally, the patent exhaustion doctrine operates as an affirmative defense, shielding authorized purchasers from infringement claims concerning the use or sale of a patented good after the patent owner authorized its sale”.
To summarize, under the exhaustion doctrine, when we legally buy a product, the buyer can use, sell, and use the product without any control of the owner of the patent of that product.
In the Quanta case, the Supreme court reaffirmed the validity of this doctrine. Indeed,the Court declares that “the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale and use of the article”.
The Supreme Court consider that an authorized sale of a product that embodies a patent trigger the exhaustion doctrine, and the patent owner don’t have any control right over the product sold.
The question is that wether the Supreme Court will, in the Bowman V. Monsanto case, apply the exhaustion doctrine or not. If yes, the authorized sale of seeds to farmers would exhausts Monsanto patent rights and they won’t be able to control and prohibit the reuse and resale of the second generation of seeds produce but the first one anymore. That would have a huge impact in the Biotech industries and for Monsanto, but it would be quite nice for the agricultural sector.
Considering that the Quanta case was concerning patented computer parts, which is something totally different from seeds and other biotech innovations produced by Monsanto, I don’t really know if we can really know how the Supreme Court will rule in the Bowman V. Monsanto case. The effects in the present case will, indeed, be very different.
But I think that there are chances that the Court will apply the exhaustion doctrine as they did in the Quanta case.
2° In the Quanta v. LG Electronics case, three electronic programs and devices producer were concerned.
LG Electronics was a company that owned several patents on methods and systems for processing information that entered into contracts with Intel. Inc.
They authorized Intel to make and sell products using patented inventions after having negociate an agreement.
This agreement was stating that “no license was granted to any third party for combining licensed products with other products (for example, for combining Intel microprocessor products with other parts of a computer)” and that “notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion”.
Quanta, another companies, then purchased licensed Intel microprocessor products in order to manufacture computers containing them.
LGE finally sued Quanta for patent infringement.
Quanta defended itself before district court by arguing about the exhaustion doctrine. On appeal, the Federal Circuit held that the exhaustion doctrine did not apply in that case. That reasoning of the Federal Court of Appeal was reversed by the Supreme Court. This Court consider that in that case, the exhaustion doctrine applies and that LGE electronics lost the controls of the re-sale and use of its products after they were legally sold to Intel.
The other case, UsedSoft v. Oracle, that was given by the ECJ, concerns sale and resale of downloaded programs.
The case concern Oracle, a company that develops and sells computer software that are, for most of them, downloaded by the customers on the internet.
In exchange of a payment, every customer has a right to use the software for an unlimited period.
The second companies concerned by the case is UsedSoft, a second-hand software seller. They began to sell second-hand Oracle programs that were downloaded by someone that didn’t need them anymore. Because the right to use Oracle software were unlimited, it was possible to resale them.
Oracle sued UsedSoft and obtained an injunction from the Munich Regional Court restraining UsedSoft from carrying out these activities.
UsedSoft appealed to the German Federal Court which referred a number of questions on the interpretation of Directive 2009/24/EC on the legal protection of computer programs.
This directive says that “the first sale of a copy of a program by the rights holder or with their consent in the EU exhausts the distribution right of that copy within the EU” (article 4 (2)) and that “unless the contract specifies otherwise, the acts of reproduction and translation do not require authorization by the rights holder where they are necessary for the use of the computer program by a lawful acquirer” (article 5 (1)).
The German Federal Court asked the ECJ whether the right to distribute a copy of a computer program was exhausted under Article 4(2) where the acquirer had made a copy with the rights holder’s consent by downloading the program from the internet and if an acquirer of the user license was a “lawful acquirer” within the meaning of Article 5(1) such that it could rely on the exhaustion rule under Article 4(2) to run the program on its own systems.
The ECJ ruled that a somebody that buy Oracles products (so giving money in exchange of the program and the unlimited time of use of it) was concluding a sale in the meaning of art. 4 (2) and that in consequence, a transfer of right of ownership of that copy was made during the transaction.
The court make here a broad interpretation of Article 4(2), and says that such interpretation is necessary for the effectiveness of the rule of exhaustion.
The ECJ declares that the term ‘sale of a copy’ of Article 4(2) encompasses all situations in which there is a grant of a right to use a copy of a computer program for an unlimited period in return for payment of a fee, and any such ‘sale’ would trigger the exhaustion provisions of the Software Directive. Therefore, even if the licence agreement prohibits further transfer, the copyright holder can no longer oppose the resale of that copy.
So even if the patent owner prohibits resale, the exhaustion applies by the simple sale (that is interpreted broadly by the ECJ). If a software is sold under the meaning of the art. 4 (2) of the directive, the exhaustion applies and the patent owner can’t prohibit the resale.
Concerning art. 5 (2), because the copyright holder cannot object to the resale of a copy of software for which that rights holder’s distribution right was exhausted, a second acquirer of that copy and any subsequent acquirers are lawful acquirers.
However, the court precise that the right of reproduction of the software is not exhausted by the firs sale. It can be resold, but not copied. So, the original licensee must render his own copy unusable at the time of its resale.
Show lessThanks. I am not sure I understand what you mean by: “Because the right to use Oracle software were unlimited, it was possible to resale them.” Was the right to use Oracle’s software unlimited? Also, UsedSoft does not involve patent, but copyright.
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1) In the Mosanto v. Bowman case, the question of self-replicating technology is raised. Even though the context is completely different (the Quanta case concerns the method patent whereas the Bowman case deals with composition of matter, which are two different categories of things that can be patented), the Quanta v. LG Electronics dealt with the same issue, namely the issue of patent exhaustion.
The issue raised in the Quanta case is : does the doctrine of patent exhaustion applies to method patent?
The patent exhaustion doctrine provides that “the initial authorized sale of a patented item terminates all patent rights to that item”.
In its conclusion the Court said that “the License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel’s authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products”.
Having regards to the judgment of Quanta, we could say that the Supreme Court of the United States is attached to the patent exhaustion doctrine.
This doctrine has the opposite point of view than the one defended by the doctrine of the conditional sale exemption. The Bloomberg Businessweek gives the following definition of this doctrine. “Under the so-called conditional sale exemption, patent holders can enforce their rights even after making a sale of the covered product. The doctrine has given patent holders the power to enforce restrictions against downstream purchasers”.
The question is which one of these doctrine will be applied for the Mosanto v. Bowman case.
If the patent exhaustion doctrine is applied, Bowman will win his case. Once Mosanto sold its products he wouldn’t have its say on the reuse of the product.
If the conditional sale exemption doctrine is applied, Mosanto will win its case. The contractual prohibition of reuse, or resale will then be valid. And it would be prohibited to buy second generation beans from a grain elevator.
2) Both cases have the same subject; a licensed product which is purchased and then resold or redistributed.
But the issues are somehow different. In the Quanta v. LG Electronics case, the issue is “whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods”.
In the UsedSoft v. Oracle, the issue is “whether the downloading from the internet of a copy of a computer program, authorized by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of article 4(2) of Directive 2009/24”.
The facts of the issues are also different.
Intel’s authorized sale of chip components to Quanta exhausted LGE’s patent rights. Because LGE didn’t submit any post-sale restrictions, the patent is exhausted by the sale of the product.
In UsedSoft v. Oracle, it’s the opposite. Oracle inserted a term in its license which stated that the right was non-transferable.
On the one hand, the holdings aren’t entirely similar either.
In the UsedSoft case the contractual provision of Oracle about the reproduction right is void. And “the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorised, even free of charge, the downloading of that copy from the internet onto a data carrier has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor, a right to use that copy for an unlimited period”.
In the Quanta case, “the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post-sale use of the article” because “nothing in the License Agreement limited Intel’s ability to sell its products practicing the LGE Patents”. This would preclude that if there had been a contractual restriction on the sale, the ruling would have been different.
On the other hand, both holdings defend the patent exhaustion doctrine. Neither Oracle nor LGE can prevent anyone from further distributing their products.
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You have identified the similarities and differences, good. In particular, I Like your presentation of the facts as such: “Intel’s authorized sale of chip components to Quanta exhausted LGE’s patent rights. Because LGE didn’t submit any post-sale restrictions, the patent is exhausted by the sale of the product.
In UsedSoft v. Oracle, it’s the opposite. Oracle inserted a term in its license which stated that the right was non-transferable.” But, nevertheless, the CJEU decided that there was exhaustion.
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1. According to the patent exhaustion doctrine, the first unrestricted sale by a patent owner of a patented product exhausts the patents owner’s control over that particular item. The way the sale was initially authorized is thus going to terminate the paten owner’s right over his item.
In the Quanta case, the plaintiff is L.G. Electronics Inc. They owned patent covering computer systems. LGE licensed its patents to Intel in order to allow them to manufacture and sell microprocessors and chipsets covered by L.G.E patent. Quanta, whi is a computer manufacturer, bought those microprocessors and chipsets from Intel and combined those products with non-Intel products. L.G. sued Quanta for infringing its patents.
The Supreme Court granted certiorari. It held that methods could be patented as well as products. It also stated that the patent exhaustion applied because the only reasonable and the intended use of the Intel products sold to Quanta was to include them in computers they practice the LG patents. The Court also found that LG’s license did not prohibit Intel from selling the microprocessors and chipsets to customers who combined them with non-Intel components to make other products.
The fact that the authorized licensee, Intel, who manufactured a product within the scope of it’s license, to Quanta, gives to the latter an implied license of the rights to use and resell the product.
The Monsanto case is about biotech seeds and traits business, which is radically different from what we have been talking about in the Quanta case. In the latter ruling, the Supreme Court determined that the terms of the agreements between LG and Intel authorized Quanta to purchase those chipsets and microprocessor s and combine them with non-Intel products. But we can’t compare seeds to microprocessors.
In the Quanta ruling, it was held that the only reasonable and the intended use of the Intel products sold to Quanta was to include them in computers they practice the LG patents. But in Monsanto, we are talking about the offspring of the seeds, their copy.
Thus, the patent exhaustion doctrine does not apply.
2. In the Usedsoft ruling, it has been decided that one can resell its used software to other people.
UsedSoft is a German company that buys excess licenses from people or organizations that don’t need them, and resells them. UsedSoft’s primary business model is to market licenses acquired from Oracle customers. After acquiring rights to the license, UsedSoft’s customers who do not possess the software download the licenses directly from Oracle’s website. Oracle losses business to UsedSoft.
The Court of Justice of the European Union expanded the principle of “exhaustion”. First, according to the exhaustion rule, the developer’s have an exclusive right of distribution which expires at the time of sale. In summary, a developer can only make money on the initial sale and any attempt to restrict trade of used software through specific trade terms conflicts with the exhaustion rule. The Court held that this principle applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD), but also where he distributes them by means of downloads from his website.
Software publishers can no longer oppose the resale of the copy of software. The court clarified two points on resales of copies of software. The first, “Where the copyright holder makes available to his customer a copy and at the same time concludes, in return form payment of a fee, a license agreement granting the customer the right to use that copy for an unlimited period, that right holder sells the copy to the customer and thus exhausts his exclusive distribution right.” The second, “Such a transaction involves a transfer of the right of ownership of the copy. Therefore, even if the license agreement prohibits a further transfer, the right holder can no longer oppose the resale of that copy”.
I both case, a broad interpretation is given to the principle of exhaustion. Its scope is widened.
But the difference is upon the products that are subject to the principle of exhaustion. In the Quanta ruling, we are talking about methods, while here, we have intangible products that are softwares. While the Quanta case is enhancing transactions and competitions, the Usedsoft case is a very anti-competitive ruling which doesn’t enhance innovation.
Thanks, good thoughts on the first question.
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1) In the case Monsanto v. Bowman, the facts are important and need to be pointed out: Mr. Bowman bought seeds from Monsanto and was therefore submitted for those seeds to the Monsanto Technology Agreement.
For his second-crop of the year, he did not buy seeds from Monsanto but commodity seeds from a local grain elevator. In the seven years following this operation, Mr. Bowman was using the harvested seeds of the second-crop for replanting.
It’s important to point out that Mr. Bowman was not using the harvested seeds of the first-crop coming from Monsanto, but the harvested seeds of the second-crop coming from the local grain elevator.
It is also important to underline that the Monsanto Technology Agreement allow growers to sell second-generation seed to local grain elevators as a commodity.
In its Quanta decision, the U.S. Supreme Court, stated that « the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article ». In other words, according to the theory of exhaustion, if the patent holder has authorized the sale of a good that substantially embodies his patent, he cannot control the use that is made of that good by downstream purchasers.
In Bowman’s case, first, the Monsanto Technology Agreement, as said above, authorizes the sale of the second-generation seed to local grain elevator. Secondly, this second-generation seed embodies the patent of Monsanto, since these commodity seeds show the same glyphosate resistance than the seeds directly sold by Monsanto. Therefore, when the second-generation seed is sold to the local grain elevator, the theory of exhaustion applies and Monsanto cannot invoke patent law to control the postsale use of the seed.
Bowman had therefore the right to replant harvested seeds of the second-crop, having bought the seeds of the second-crop from a local grain elevator and not from Monsanto.
In conclusion, the requirement of the Technology Agreement « to not save any crop produced from this seed for replanting, or supply saved seeds to anyone for replanting » only applies to the seeds sold by Monsanto.
Concerning the seeds sold by a local grain elevator, even if they are Roundup Ready seeds, Monsanto cannot control the postsale use of those seeds because Monsanto’s patent has been exhausted by the authorized sale to the local grain elevator.
Following what is said above, I think the U.S. Supreme Court, bound by the rule of precedent, will follow the principles enlightened in its Quanta decision and will therefore reversed the judgment of the Court of Appeal of the Federal Circuit (=will hold in favor of Mr. Bowman).
2) The Quanta decision of the U.S. Supreme Court and the UsedSoft judgment of the European Court of Justice concern both the exhaustion rule.
The first decision is about patent and the second is about copyright but both decisions rule on the extent of the two intellectual property rights.
In both cases we are facing a situation where the article patented or copyrighted is resold to a third party after having being bought by a first acquirer to the patent or copyright’s holder.
However, the situations are different:
In Quanta’s decision, the resale of products practicing the patent is authorized by the patent holder in a License agreement. But the question raised is whether the patent holder can control the use made by the downstream purchasers of the product.
In UsedSoft judgment, the question is whether the resale of a user license entailing the resale of a copy of a computer program downloaded from the copyright holder’s website is authorized (after a first sale has been authorized by the copyright’s holder).
In both cases, the theory of exhaustion applies and limits the power of the patent or copyright’s holder to control the article patented or copyrighted after he authorized a sale.
In Quanta decision, the theory of exhaustion is a doctrine while in UsedSoft judgment, the exhaustion rule is based on article 4 (2) of Directive 2009/4.
In both decisions, the sale authorized by the intellectual property right’s holder exhausts the patent or the copyright. But that exhaustion leads to different effects in the two cases:
In Quanta decision, the authorized sale of Intel products practicing LGE patents to downstream purchasers prevents LGE (patent holder) to control the postsale use of Intel products.
In UsedSoft judgment, the first sale of the computer program by Oracle (copyright holder) authorizes UsedSoft to resell user license entailing a copy of the computer program downloaded from Oracle’s website. Nevertheless, the European Court of Justice insists that the computer program of the first acquirer must be unusable for this latter when it’s sold to a third party.
In other words, the exhaustion of the copyright, after a first authorized sale, prevents Oracle (copyright holder) to prohibit downstream sales if the program has been rendered unusable for the previous users.
In conclusion, those two cases give us direct applications of the exhaustion rule, one concerning patent exhaustion and the other concerning copyright exhaustion, and proof us that the exhaustion rule has significant effects for patent holders as for copyright holders, since they cannot control what is made of the patented or copyrighted article after they have authorized a first sale.
Show lessGood comparison between the various decisions (please note that you need to add a “the” when you write “In THE Quanta/UsedSoft decision…”, but you could write: “In Quanta/UsedSoft, the Court…”).
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1.
It is my opinion that Monsanto patent rights have been exhausted when the second-generation seeds, stemming from the first-generation crop which was sold by Monsanto (or a licensee of theirs), were sold to a grain elevator. It is true that the Monsanto Technology Agreement forbids the grower to save the seeds from the first-generation crop in order to plant or sell them; however, the agreement allows growers to sell second-generation seed to local grain elevators as a commodity, without requiring growers to place restrictions on grain elevators’ subsequent sales of that seed. It is admitted by the Supreme Court that the licensee’s sale to a purchaser exhausts the patentee’s rights to restrict use and resale when the restrictions have not been violated. Since Monsanto Technology Agreement does not require growers to place restrictions on grain elevator’s subsequent sales of that seed, the commodity that Bowman contained GM seed on which Monsanto’s patent rights were exhausted.
In relation with the Quanta case, it must be noted that the Federal court disagrees with Bowman “that a seed “substantially embodies” all later generation seeds, at least with respect to the commodity seeds, because nothing in the record indicates that the “only reasonable and intended use” of commodity seeds is for replanting them to create new seeds”. I believe the Federal court is mistaken. Indeed, what drives the court’s reasoning is the use of commodity seeds. The only other use for seeds that I can think of besides replanting is for consumption. Seeds used for consumption could, in my opinion, be compared to soy meal which was the subject-matter of Monsanto v. Cefetra. In this case, the CJEU was asked whether there is patent infringement in case where “the product (the DNA sequence) forms part of a material imported into the European Union (soy meal) and does not perform its function at the time of the alleged infringement, but has indeed performed its function (in the soy plant) or would possibly again be able to perform its function after it has been isolated from that material and inserted into the cell of an organism?”. The Court had answered negatively. Now, the seed sold for consumption could be seen as not performing its function since its function is to be glyphosate-tolerant. From the creation of the seed inside the plant to its consumption by the end user, it is irrelevant whether it is glyphosate-tolerant or not since it is not replanted. For this reason, I agree with Bowman that a seed substantially embodies all later generation seeds.
On a non-legal note, it is however likely that the Supreme Court be “advised” or at least influenced by the U.S. government to rule in favor of Monsanto, given the company’s weight in the policies taken in the U.S.A…
2.
The cases differ from the perspective of the IP right at stake. Quanta concerns patent while UsedSoft concerns software copyright. However, both cases rejoin in the sense that the Courts concluded there was exhaustion of the right in discussion. Besides, in both cases, there was a license agreement giving right to, in the first instance, “make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of Intel products practicing LGE patents” and in the second instance, “store a copy of the program permanently on a server and to allow a certain number of users to access it by downloading it to the main memory of their work-station computers”.
Due to the difference of IP right at stake, the matters were treated differently. In Quanta, exhaustion is granted because the products Intel sold substantially embodied the patent and because their only reasonable and intended use was to practice the patent. Indeed, Intel processors and chips, which almost completely practice LGE patented technology, have no use per se. They must be linked to computer devices in order to practice the patents. As the court said, the only step necessary to practice the patent is the application of common processes or the addition of standard parts. Therefore, the patent right was exhausted when Intel sold the processors to Quanta.
In UsedSoft, exhaustion is acknowledged due to the “first sale” rule. The Court had to ascertain whether the making available of the copy of a computer program could be considered as a “sale”, in which case the right of distribution would be exhausted. The judges considered that the making available of a copy of the software and the license agreement should be treated as a whole. In this case, the Court considers the transaction to be a sale: there was a transfer of ownership to UsedSoft and remuneration to Oracle in return. The CJEU’s interpretation of Article 4 of Directive 2001/29, ‘Distribution right’, which provides that “the distribution right shall not be exhausted within the Community in respect of the original or copies of the work, except where the first sale or other transfer of ownership in the Community of that object is made by the rightholder or with his consent”, leads to believe that Oracle’s right of distribution was indeed exhausted.
Show lessThanks (I do not think the US Supreme Court could be directly influenced by the “weight” of Monsanto in shaping US policies, although this company has had a strong influence on certain US agencies).
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1. The Quanta case puts the emphasis on the exhaustion of a method patent. The Court first concludes that exhaustion applies to method patents, and that the License agreement between Intel and LG Electronics authorizes the sale of products that embody the method patents on which LG Electronics has a control. The Court also concludes that the mechanism of exhaustion is triggered when Intel sells the said products.
Quanta did not combine these products with other Intel products, but it did not modify the product and followed Intel’s instructions to incorporate the parts. The Court relies on Univis and states that “the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent […] such that its only and intended use is to be finished under the terms of the patent”, no matter if the product already fully practices the patent or not.
Using Univis, the courts asserts that whilst it is not possible to sell a patented method the same way as a physical article or device, it may nonetheless be embodied in such a way that the patent is exhausted once the product is sold. LGE’s reasoning could be a danger to any downstream buyer and the method patent would be extremely invasive.
Since the patent was exhausted by the sale to Quanta, Quanta could not be bound by the license agreement, since there was an exhaustion.
Does the Quanta case apply to Bowman v. Monsanto ? Bowman, before the Court of Appeal, argues that it does, and that the patented seed is the embodiment of all the later generation it could generate. Monsanto answers that au contraire, each generation of seeds replanted is a newly infringible article.
Bowman is a grower who bought a melange of seeds, including Roundup Ready seeds. Quoting Quanta was a good idea, but the two cases are different ; the seed is a self-replicating technology, and this phenomenon of self-replication was forbidden.
Also, the “only and intended use […] to be finished under the terms of the patent” that could be put forward by Bowman is not precise enough, because in this case the seed can find several uses : being planted, feeding…
A more precise use would be the consumption of the seed without self-replication, and that would lead the Supreme Court to hold in favour of Monsanto…
2.
The CJEU restricted the possibility of control over the resale of a software.
A first big difference is that the protection of the rights over the products are not the same. In Quanta, there is a method patent, while the software in Usedsoft is protected by copyright. Copyright provides the right for the author to control the distribution of his/her work, until the copy is sold by or under the consent of the right owner.
Also, if we have a look to the facts ; in Quanta the discussion went about the exhaustion of the patent when the product made following this patent is sold. We saw that if the product embodied enough the patent, there is an exhaustion of the patent.
The ruling of the CJEU discusses whether there is a possible control over the distribution of used licenses. Oracle sells licenses that are sold again by Usedsoft. The question here is whether there is a reproduction or a transmission, in other words we must determine the nature of the contractual link between Oracle and the first downloader. The CJEU determines that it is a sale.
The court concludes that as for the tangible rights, the copyright exhausts at the first distribution, at the condition that the copy is not copied again (the new seller ought to make his own copy unavailable once he sold his license). That the seller has made his/her copy unusable, may be quite hard to prove, but there are means to ensure that one license is used by one person only (by product keys, for example)
Both cases hold for the exhaustion of the right, but at different conditions : in Quanta, the seller must ensure that the only use of the product embodies the method patent and is proper to practice the patent, and in Usedsoft, the seller (Usedsoft -not owner of the copyright) must only ensure that there is no replication of the right that is sold.
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Regarding this matter, 2 questions were asked to be discussed. First of all, we will aim at providing an appraisal on the future Browman case under the light of Quanta case of 2008; we will underline the potential far-reaching consequences of such case.
Then, secondly, we will highlight differences between the Quanta judgment delivered by the U.S. Supreme Court in 2008 and the UsedSoft judgment delivered by ECJ.
Before going any further, we will recall the judgment delivered by the court of appeals of the Federal Circuit. A soybean farmer, Bowman, had purchased seed from a local grain elevator in order to plant it as a “second crop”. By doing this, he was pursuing financial objectives: he won’t have to pay the higher cost required by a licensed seed grower. However, all sales to growers of Mosanto seeds are subject to the “Monsanto Technology Agreement” which prohibits the farmer to save “any crop produced from this seed for replanting or supply saved seeds to anyone for replanting”. This is based on the doctrine of the “conditional sale exemption”.
The Court of Appeal of the Federal Circuit considered that even if the first seed is “subject to patent exhaustion after its first sale”, this doesn’t apply to replanting the second generation of seed.
U.S. Supreme Court decided to grant certiorari and to rule on this matter. In order to analyze this forthcoming judgment and foresee what might be the reasoning of the Court, we need to rely on the Quanta judgment, related to this same doctrine of conditional sale exemption.
In Quanta, the U.S. Supreme Court proceeded in 3 steps.
First of all, the Court considered that a patented method may not be sold in the same way as an article but methods are nonetheless embodied in a product. The sale of it exhaust the patent rights.
Secondly, the Court relied on a precedent: Univis. This case stated that “the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold ». As a consequence, they considered that the incomplete article embodies substantially the patent « because the only step necessary to practice the patent is the application of common processes ». Everything inventive about each patent is embodied in the Intel Products. Intel Products controlled the access to main and cache memory, to the priority of bus access. Subsequently, Quanta had to respect the specified requirement by Intel in incorporating the Intel Products into its computers. Exhaustion does not apply across patents. In a clear way, the Court wrote that « The sale of a device that practices patent A does not, by vir- tue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B ». In other words, the Court concluded that the Intel Products embodied the patents.
Thirdly, the Court had to analyze whether Exhaustion is initiated only by a sale authorized by the patent holder. In casu, LGE’s argued there was no authorized sell since the License agreement prohibited. This agreement disclaimed any license to third parties to practice the patents by combining licensed products with other components but the Court rejected these arguments on the basis that there was no conditions limiting Intel’s authority to sell products substantially embodying the patents
At the end of the day, the Court ruled that the « the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article » and nothing in the License agreement could preclude such postsale.
Coming back on our matter (Bowman v.Mosanto), we can observe clear similarities’ with Quanta. As the case above, we had a so-called Technology Agreement, which requires the grower to not save any crop produced from the seed for replanting, or supply any saved seeds to anyone for replanting (This is our concern of “conditional sale exemption”). Here, we had clearly a product (seed) embodying the patents. There is no limitations to reselling that could apply. The Court will probably rule that the first seed exhausted its patents and that the patent, once the first seed is sold, does not apply to the second. Furthermore, this agreement can’t preclude farmers the reselling of their crops to anyone for replanting. It is obvious it will have far reaching consequences for Biotechnological Company as Chuck Benbrook underlined, but we can’t accept such monopolistic situation whereas farmer, and more specifically, GM seeds, are key core of agriculture today.
Now, let’s compare with European Court of Justice reasoning on the same matter (in Usedsoft case). We had a preliminary ruling asked by Bundesgerichtshof. The main question was to determine whether a person could rely on exhaustion of the right to distribute a copy of a computer program a “lawful acquirer” within the meaning of Article 5(1) of Directive 2009/24 (plus 2 alternative questions).
A first difference that needs to be underlined is that the ECJ relied on a directive (2009/24) whereas The U.S. Supreme Court relied on their precedents (such Univis). This might look as procedural and technical anecdote but this makes a lot of sense knowing that both way of reasoning are different. This directive provides that in the absence of specifi
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1) How do you, relying on Quanta, expect the U.S. Supreme Court will rule in the pending case Bowman v. Monsanto?
In the Monsanto v. Bowman case the Court of Appeal of the Federal Circuit had to rule on the question of how far patent protection can go. Following Monsanto’s view, the Court of Appeal considered that the result of the self-replicating technology (the modified soy seeds) doesn’t exclude an infringement action. In other words, even if the patent rights of the original (commodity) seeds are exhausted, Bowman still creates a “newly infringing article” by replanting the second generation. Thus the second generation of seeds isn’t subject to exhaustion. Furthermore, the Court underlines that no farmer can replicate Monsanto’s patented technology by saving and replanting crop, as this was also a clause in their agreement. So even if there’s exhaustion after the sale of the first seeds, we cannot say there’s automatically exhaustion when they’re replanted in a second generation.
In the Quanta v. LGE case, the Court first of all underlines the principle that exhaustion applies to method patents and that the sale of an item that embodies the method exhausts the patent rights. The same question as in the Monsanto v. Bowman case is asked: how far can patent protection go? : “In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods.” (QUANTA COMPUTER, INC., et al., Petitioners v. LG ELECTRON- ICS, INC.). The important argument to notice here is that the additional products are an essential part of the invention under patent and therefore all practice the patent. Therefore the Court concluded in this case that the authorized sale of a product that substantially embodies a patent right falls under the exhaustion of patent protection, so that LGE cannot assert its patent right against Quanta.
Even though the future generations of seeds in the Monsanto v. Bowman case embody the same patent right that was exhausted by the sale of the first seeds, the situation is different than in the Quanta case, because not only does the agreement prohibit the saving and planting of the crop, but the seeds also embody a self-replicating technology protected by a patent that doesn’t need additional products to practice the patented method. In the Quanta case the use of those products was to be combined with other components to make the whole product work, whereas the seeds in the Monsanto case are not only used for replanting but also for feeding purposes. Furthermore in the Quanta case the agreement allowed the sale of products practicing the LGE patents: Intel was authorized to sell its products embodying the patents to Quanta so exhaustion applied to those products.
Therefore I don’t think the Quanta case is applicable to the Bowman case. I think the Supreme Court will allow Monsanto to assert its patent right against Bowman, as there is not automatically an exhaustion of the patent right for the second generation.
2) More complicated, but directly interesting for us in Europe: in a July 3, 2012 judgment (C-128/11, UsedSoft v. Oracle), the Court of Justice of the EU has radically limited the possibility to control the resale of (used) software by extending the exhaustion rule to the situations where software is licensed to the end user. Can you compare the approach in Quanta (U.S.) and UsedSoft (EU) by hightlighting the similarities and differences between the two cases and the two decisions?
In the UsedSoft case the national jurisdiction makes a reference to the Court for a preliminary ruling for three questions. “By its first and third questions the referring court seeks essentially to know whether, and under what conditions, an acquirer of used licences for computer programs, such as those sold by UsedSoft, may, as a result of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24, be regarded as a ‘lawful acquirer’ within the meaning of Article 5(1) of Directive 2009/24 who, in accordance with that provision, enjoys the right of reproduction of the program concerned in order to enable him to use the program in accordance with its intended purpose.” However, the question that will interest us the most is the second question where the Court “seeks to know whether and under what conditions the downloading from the internet of a copy of a computer program, authorized by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Directive 2009/24.”
In this case Oracle is a firm that develops and markets computer software. Being the proprietor of the exclusive user rights under copyright law in those programs, Oracle distributes its software by downloading from the Internet. The distribution of the software is free, but the user right for such a program is granted by a license agreement. Oracle now asserts its right against UsedSoft (firm) that resells their (Oracle’s) used software. The Court decided as following: “The answer to Question 2 is that Article 4(2) of Directive 2009/24 must be interpreted as meaning that the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorized, even free of charge, the downloading of that copy from the internet onto a data carrier has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor, a right to use that copy for an unlimited period.”
The main similarity with the Quanta case is of course the examination of the exhaustion rule and in particular the question of the extension of the protection. However, both Courts have a different reasoning. There were the European Court of Justice is more interested in the transfer of property through the sale as a criterion, the Supreme Courts takes the substantial embodiment as the main criterion in the Quanta case.
In both cases the Courts also said that there was an exhaustion of the protection, so the right could not be asserted anymore. The control of the resale of the products is thus limited in both cases by exhaustion.
The comparison between the decisions is well-done, thanks
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1. As is said in the Quanta case the “Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method”. In that case as well as in Univis case, the incomplete article substantially embodied the patent “because the only step necessary to practice the patent is the application of common processes or the addition of standard parts”. Furthermore, “The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article”.
In the Bowman v. Monsanto case it is likely that the Court will disagree with Mr. Bowman who claims that a seed “substantially embodies” all later generation seeds (at least concerning the commodity seeds). This is because nothing indicates for sure that the “only reasonable and intended use” of commodity seeds is to replant them. There are indeed various uses for commodity seeds, including use as feed. This is why i believe that the U.S. Supreme Court will decide that the patent exhaustion does not apply in this case.
2. In UsedSoft v. Oracle the Court of Justice of the EU has decided that « The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or a copy thereof ». One of the main questions in the UsedSoft case was to know whether the contractual relationship between the rightholder and its customer can be regarded as a « first sale … of a copy of a program ». To answer this question, it is necessary to look at the uniform meaning of the word « sale » throughout the EU. According to a commonly accepted definition, « a ‘sale’ is an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him. » It follows that the commercial transactions between Oracle and its customers that exhaust the distribution right of a copy of a computer program must involve a transfer of the right of ownership in that copy.
As we can see, the exhaustion rule is applicable in both cases but for different reasons. In the Quanta case the exhaustion results from the fact that method patents were exhausted by the sale of an item that embodied the method. Indeed, the only step to exercising the patent is the addition of standard parts.
In the Usedsoft case the exhaustion arises from the fact that the relation between Oracle and its customers can be referred to as a sale. And “the first sale in the Community of the original of a work or copies thereof by the rightholder or with his consent exhausts the right to control resale of that object in the Community”.
You could have developed this a bit more…
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1) On the one hand, it is explained in the Bloomberg BusinessWeek article that the Federal Circuit has adopted the conditional sale exemption under which there is a possibility to extend the rights of patent holders. In other words, according to this magazine, “patent holders can enforce their rights even after making a sale of the covered product. The doctrine has given patent holders the power to enforce restrictions against downstream purchasers”.
On the other hand however, the Supreme Court questioned this doctrine in a 2008 ruling. In Quanta v. LG Electronics, the Justices decided that the holder’s rights were exhausted after an authorized sale. As the Court affirms: “Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights”. This is confirmed in the Bloomberg BusinessWeek article.
Coming to the Bowman v. Monsanto case, the context needs to be analyzed. Monsanto won the case before the Appeals Court. The company stated: “The Federal Circuit decision reaffirmed important intellectual property rights of significance to the entire agricultural biotechnology industry”. The Supreme Court has to balance two interests: Bowman’s and Monsanto’s. Chuck Benbrook, a research professor at Washington State University’s Center for Sustaining Agriculture and Natural Resources in Enterprise, Oregon, sustains that an overturning of the Court of Appeal’s decision would have huge repercussions for the business model in the seed biotech industry. He said: “it would basically end the agricultural biotech industry as we know it, certainly for soybeans”. Nonetheless, this is not a unanimous opinion. Others argued that “a ruling against Monsanto may ultimately have little financial impact if growers continue buying fresh seed to benefit from the newest varieties”.
Monsanto is a multi-billion dollar company. Ruling in its favor, the Supreme Court would give little option for farmers but to buy new Monsanto seeds. From the point of view of Justice, the Court should rule in favor of Bowman, confirming its Quanta ruling in order to protect farmers. By doing so, farmers will be protected; and, it is not like Monsanto is going to collapse after such a decision.
2) First of all, the way the judgment is written is different. Whereas the EU Court separates its ruling in various sections (facts, legal basis, ruling…), the US Supreme Court’s decision is structured as a continued text. In America, the Court grants certiorari which is an unknown notion on the European continent. In the EU case, it concerns copyright and in the US case, it is about patent.
The EU Court starts by defining the word “sale”. It is an autonomous concept and the Court defines it as an “agreement by which a person, in return for payment, transfer to another person his rights of ownership in an item of tangible or intangible property belonging to him”. During the first sale, there is a transfer of the right of ownership of the copy of the computer program. The US Court starts by stating its ruling: “the sale exhausts the patents because the exhaustion doctrine applies to method patents and in this case, the license authorizes the sale of components that embody the patents in suit”.
Then the EU Court affirms that there is exhaustion since the first sale of a copy of the program exhausts the right of distribution. It considers also that exhaustion applies to both tangible and intangible property. And, article 4 (2) of Directive 2009/244 allows an extension of the exhaustion of distribution to the copy of the computer program sold by the copyright holder. On the other side, the Supreme Court explains the history of the doctrine of exhaustion. The Court disagrees with LGE when LGE argues that “the exhaustion doctrine is inapplicable here because it does not apply to method claims, which are contained in each of the LGE Patents”. After this, the Court considers the extension “to which a product must embody a patent in order to trigger exhaustion”. LGE defends that the Univis case cannot be applied here. The Court disagrees. Eventually, the Supreme Court has to rule on the question whether the sale to Quanta exhausted LGE’s patents rights. The decision is that “because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products”.
I like your response under 2)
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1. How do you, relying on Quanta, expect the U.S. Supreme Court will rule in the pending case Bowman v. Monsanto (11-796)?
In my opinion, the U.S. Supreme Court will reverse the judgement of the Federal appeals court establishing that the farmer Bowman infringed Monsanto’s patents when he planted soybeans coming from seed covered by Monsanto’s patents. The court held that the rights of the company extend to the second-generation beans, relying on the “conditional sale exemption” doctrine, which permits patent holders to enforce their rights even after making a sale of the covered product.
The Court of Appeal rejected Bowman’s contention that Monsanto had “exhausted” its patent rights by the time he bought the seed. The appeals court said Bowman “created a newly infringing article” by growing a new generation of soybeans with the seed.
According to me, the Supreme Court will follow the Quanta’s case. The Supreme Court will not depart from its precedent. Because Bowman acquired soy beans from an authorized sale, the doctrine of exhaustion applies, as in Quanta, “because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products ».
The problem in the Bowman’s case is that farmers such as Bowman who bought seeds, had to consent to a Technology Agreement, which oblige “to not save any crop produced from this seed for replanting, or supply saved seeds to anyone for replanting”. In Quanta, there is the same issue: Intel had to consent to a Master Agreement requiring that « the license does not extend, expressly or by implication, to any product that you make by combining an Intel product with any non-Intel product ». However the Court established in Quanta, following the Univis’s case, that because the patent right is exhausted, « then LGE has no postsale right to require that the patents be practiced using only Intel parts », and this way, put an end to the « Conditional sale exemption » doctrine.
Consequently, I think the Supreme Court will revolution the field of biotechnical industry and hold that following the authorized sale of soy beans seeds, patent’s exhaustion precludes the patent holder to call on the patent law to “control post-sale use of the article”.
2) Can you compare the approach in Quanta (U.S.) and UsedSoft (EU) by hightlighting the similarities and differences between the two cases and the two decisions?
– In Quantal, there is a license agreement on patented methods between LGE and Intel. Quanta manufactured computers using Intel parts in combination with non-Intel memory and buses in ways that practice the LGE Patents. LGE sued Quanta, arguing that it infringes the LGE Patent.
The Oracle’s case also concerns a license agreement, between the copyright holder and a consumer this time, on the copy of a software program intended to make the copy usable by the customer, permanently, in return for payment of a fee designed to enable the copyright holder to obtain a remuneration corresponding to the economic value of the copy of the work of which it is the proprietor.
– It concerns a patented method in the Quanta’s case, not a patented product, it’s not the same but methods nonetheless may be “embodied” in a product, the sale of which exhausts patent rights. In Oracle, it concerns the sale of a patented article.
– Oracle, emphasizes on the fact that the contractual relationship between the rightholder and its customer, within which the downloading of a copy of the program in question has taken place, has to be a real sale of the copy, a transaction that implies a transfer of the right of ownership. We don’t have this precision in Quanta.
– Another similarity is that a condition for the exhaustion is the sale authorized by the patent holder (Quanta) or the copyright holder (Oracle). In Oracle, the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Directive 2009/24. UsedSoft relies on exhaustion to market used licenses from Oracle customers. It’s the same in Quanta; Quanta relies on exhaustion.
– Event if the facts and developments of the cases are quite different, both explore the question of post-sale restrictions. As I said in the question above, because of the exhaustion LGE can’t enforce its patent rights against Quanta anymore, and consequently, the application of the Master Agreement, LGE can’t control post-sale use of the article.
A maintenance agreement, in Oracle, concluded by the first acquirer, permits the updating of the copy of the software. The question is if it does prevent the exhaustion of the right “since the copy of the computer program which the first acquirer may transfer to a second acquirer no longer corresponds to the copy he downloaded but to a new copy of the program”. Neverless in this case: “ An original acquirer who resells a tangible or intangible copy of a computer program for which the copyright holder’s right of distribution is exhausted in accordance with Article 4(2) of Directive 2009/24 must, in order to avoid infringing the exclusive right of reproduction of a computer program which belongs to its author, laid down in Article 4(1)(a) of Directive 2009/24, make his own copy unusable at the time of its resale. In a situation such as that mentioned in the preceding paragraph, the customer of the copyright holder will continue to use the copy of the program installed on his server and will not thus make it unusable »…
Good, in particular under 2)
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Answer to the first question:
To answer to this question, I’ll proceed as the Court does in the Quanta case.
First point to be solved: is the patented object a method or a tangible article? Second point: in order to trigger exhaustion, to which extent must a product embody a patent? At the end of the day: was the Monsanto Technology agreement violated?
First of all, we must clarify that patent exhaustion is applied no matter that the object subjected to patent protection is a method or a tangible article. Knowing this, in the Monsato v. Bowman case, the article is tangible, so patent exhaustion can easily take place. In the latter seeds is the tangible thing.
Second, we are going to analyse the extent to which a product must embody a patent in order to trigger exhaustion.
In the Quanta case, it was obvious that what was protected by patent (microprocessors and chipsets) couldn’t be used unless some extra equipment was provided (memory and buses). Furthermore, this extra equipment had anything that could be considered as ”unique”, thus the LGE’s patent exhausted when Intel sold the products to Quanta.
Now, let’s apply this view to the Monsanto v. Bowman case. What is Bowman adding to or taking out from the seeds that would create a new product?
I personally think, that the US supreme court could reverse the district court’s and the Court of appeals for the Federal Circuit holding that patent exhaustion does not apply to Bowman’s accused second-crop plantings.
Bowman used “commodity seeds” from a local grain elevator for the second-crop plantings. But because he thought these would grow with difficulties he added glyphosate-based herbicide to the fields to see if these plants were actually resistant. After some observation he saw that the plants were tougher, so from this time on, he kept seeds from this second-crop to replant them in the following second-crops.
Monsanto sued Bowman because these commodity seeds had actually the RR component over which Monsanto has some kind of monopoly thanks to a patent. Therefore Bowman, by keeping seeds from these second-crops, is infringing point 3 of Monsanto Technology Agreement, which requires the grower “to not save any crop produced from this seed for replanting, or supply saved seeds to anyone for replanting”.
Bowman, to defend himself will put forward patent exhaustion. Based on precedents as Univis or Quanta case, the Court will analyse if the patented seed could become a “new seed” thanks to the Bowman’s extras.
If the seed is what is patented, and the main element of the plantation, the field does have an important role to play too. So, if Bowman uses the seeds by adding something extra to the ground (glyphosate-based herbicide), I think that the seed changes properties because the seed grows in a different environment with other kinds of characteristics. The seed by itself can’t grow without a field, as in Univis the lens blanks had no use before they were finished lenses or as in Quanta a microprocessor and chipsets had no function without buses and memory.
For these reasons, the seeds used by Bowman aren’t protected by patent anymore.
Finally, because these seeds can’t be the ones patented by Monsanto, there’s no infringement of the Monsanto Technology agreement.
Answer to the second question:
The judgement of the 3rd of July of 2012 and the Quanta one are very different. First, let’s try to define their similarities and then we ‘ll highlight their differences.
Which similarities can be found? In both decisions there is an exhaustion of a right. In Quanta case the patent was exhausted because the sale by Intel of microprocessors and chipsets, in the European case, Oracle’s copyright exhausted with the sale of the computer program. Both cases talk about computer material.
So, it’s clear, that in both cases the sale of the protected product, by the right-holder exhausts the right.
But, these two decisions are very different.
First of all, Quanta case concerns patent exhaustion where the European case concerns copyright exhaustion. Here, we only intend to emphasize that the scope of protection of the goods are different.
Second, even if both cases talk about computers, the European approach on the matter is much more stringent. For instance, both cases face an “abstract situation”: Quanta case wonders if patent exhaustion can be applied to a method and the ECJ decision has to rule on a non tangible object which is a computer program.
If it seems that in the Quanta case the patent is allowed for methods in a very general way, the ECJ works by exceptions. Indeed, the ECJ reads the law in a very less pragmatic way than the Americans. In the ruling, we see how normally the protection can only be given to material products; this is the view of the directive 2001/29. And it’s is only by exception and because we have to apply the “lex specialis” of directive 2009/ 24, in the field of non material objects as computer programs that copyright exhaustion can take place.
Then we see that the European approach is very different than the American one. It seems like in Europe, there is a two-step process: the first process consists in the analysis of a “distribution right” and second, the possibility for a lawful acquirer to get a “reproduction right”, these conditions being much more severe than in the Quanta case where, the focus on the patent exhaustion lied on the function of the patented product.
Finally, even if this was not part of the issue, the ECJ case could’ve been able to interpret that the right was not exhausted if the good had been sold outside the European Union, this is a particularity that doesn’t occur in the USA.
This two decisions show how there still is no harmonisation on intellectual property law, and how the approaches change in the different continents.
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First, let’s compare the Quanta case from the US Supreme Court with the pending case Bowman v. Monsanto.
In this case, the company LG Electronics patented different products and then licensed Intel to use a portfolio of patents. This license is ruled by a License Agreement between LG and Intel. In this License Agreement, LG says that its patents would preclude third parties to combine their products with Intel products using LG’s license. This is an application of the doctrine of “conditional sale exemption”. In this case, Intel used those patents to produce microprocessors and chipsets. It then sold them to Quanta (and others) which is a computer manufacturer using Intel products (with LG licensed patent) to assemble its computers.
In Quanta, the Supreme Court held that in the event of an authorized sale of a product that embodied a patent, the patent holder cannot make post-sale restrictions on the use of those products. This ruling is contrary to the doctrine of the “conditional sale exemption” that authorizes such practices. By doing so, the Supreme Court reversed the Court of Appeal judgement.
We can make a comparison between this case and the Bowman v. Monsanto case pending in front of the SCOTUS. In Bowman, Monsanto patented GM seeds and then licensed Pioneer to sell them to farmers. Mr. Bowman didn’t buy seeds from Monsanto or Pioneer but from a local grain elevator. Those seeds were “second generation” GM seeds, i.e. harvested from the the original GM seed harvest. The thing is that Monsanto forbids farmers such as Bowman to replant those “second generation” seeds. That is understandable because if it was allowed, Monsanto would probably loose a non negligible part of its revenues.
Anyway, Bowman did it. And it worked: the second generation seeds had the same properties as the first generation ones, i.e. they were Roundup Ready. The whole issue in therefore whether patent exhaustion applies to those second generation GM seeds. According to the Court of Appeal of the Federal Circuit, patent exhaustion done’t apply to replanted seeds. The Supreme Court has recently granted certiorari to decide whether the judgement of the Court of Appeal was right or not.
With Quanta in mind, it seems that the SCOTUS abandons the “conditional sale exemption” doctrine. According to the Bloomberg article, this doctrine “has given patent holders the power to enforce restrictions against downstream purchasers”. This seems to be forbidden by Quanta. Therefore, we might expect the Supreme Court to rule the same thing in Bowman. Indeed, even if there was a Technology Agreement that forbid famers “to not save any crop produced from this seed for replanting, or supply saved seeds to anyone for replanting”, this agreement doesn’t entitle Monsanto to extend the scope of its patent to the second generation seeds. But we have to make a precision here. On the one hand, patent is exhausted after the sale of the original seeds, but also for next generation seeds (as the SCOTUS could rule). But on the other hand, there was a Technology Agreement, so regarding contract law (and not IP law), Bowman could be held liable of contract breach as he didn’t respect the agreement. But that is another issue.
Now, let’s consider the case UsedSoft v. Oracle in which the European Court of Justice decided that the copyright holder of a licensed software cannot forbid the resale of a used software license. In other words, the rule of exhaustion applies not only to the first sale of the software, but also to the subsequent sales. This has a big impact for consumers as they can now not only resell their hardware, but also their software on the secondary market (cf. this very interesting article from Forbes: http://www.forbes.com/sites/raywang/2012/07/04/news-analysis-usedsoft-vs-oracle-ruling-opens-up-monopolistic-practices-by-software-vendors/).
This case is different from the Quanta case for several reasons. First, this case concerns EU law, while Quanta was a US case. Second, it concerns copyright, while the Quanta case was about patents. Third, in Quanta, it was not about selling used products but about selling products that embodied a patented part.
However, we find the same concepts in both cases. Indeed, the question of exhaustion is present in both, as well as the question of conditional sale exemption. In UsedSoft, the ECJ rules that Oracle’s copyright is exhausted at the time of the first sale of its softwares. Therefore, UsedSoft, which is a German company that sells used computer programs to consumers, can lawfully do so. And this is similar to the Quanta case in that LG’s patent was exhausted at the time of the first sale to Intel. So Intel could lawfully sell its components to Quanta for manufacturing computers. In both cases, the fact that there was a license agreement between the IP right holder and the buyer doesn’t matter: they cannot impose post-sale conditions to their buyers because their IP rights are exhausted.
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How do you, relying on Quanta, expect the U.S. Supreme Court will rule in the pending case Bowman v. Monsanto (11-796)?
In the Quanta case, a very important criterion is substantial embodiment of the patent. As explained, « making a product that substantially embodies a patent is, for exhaustion purposes, no different from making the patented article itself. » It is also said that « the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article. »
According to the opinion, the « present seed does not substantially embody all later generation seeds because with regard to the commodity seeds “nothing in the record indicates that the ‘only reasonable and intended use’ of commodity seeds is for replanting them to create new seeds” (Quanta, cited in http://www.patentdocs.org/2012/10/supreme-court-grant-certiorari-in-monsanto-v-bowman.html). The opinion also states that “While farmers, like Bowman, may have the right to use commodity seeds as feed, or for any other conceivable use, they cannot ‘replicate’ Monsanto’s patented technology by planting it in the ground to create newly infringing genetic material, seeds, and plants.”
To conclude, it seems more likely that the Supreme Court will rule according to the Quanta case, by condemning Farmer Bowman.
2) More complicated, but directly interesting for us in Europe: in a July 3, 2012 judgment (C-128/11, UsedSoft v. Oracle), the Court of Justice of the EU has radically limited the possibility to control the resale of (used) software by extending the exhaustion rule to the situations where software is licensed to the end user. Can you compare the approach in Quanta (U.S.) and UsedSoft (EU) by hightlighting the similarities and differences between the two cases and the two decisions?
The facts in the UsedSoft case are the following: Oracle, a firm that develops and markets computer software, and is the owner of exclusive user rights under copyright law in those programs, brought proceedings against UsedSoft, a firm that resells their used software, while Oracle gives it for free. The only thing they do is conclude a licence agreement with their clients.
The national jurisdiction therefore decided to refer to the Court for a preliminary ruling, by asking three questions. One of them is “whether and under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union within the meaning of Article 4(2) of Directive 2009/24.”
The Court decided that « the right of distribution of a copy of a computer program is exhausted if the copyright holder who has authorised, even free of charge, the downloading of that copy from the internet onto a data carrier has also conferred, in return for payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy of the work of which he is the proprietor, a right to use that copy for an unlimited period. »
In the Quanta case, LG had licensed some of its patents related to memory management to Intel. But, according to its terms, the « license did not extend to third parties that combined Intel’s licensed products with third-party components. The practical effect of this licensing scheme was that Intel was off the hook, but LG could still go after downstream users of Intel products for patent infringement. » It happened that Quanta purchased licensed microprocessors and chipsets from Intel and used those parts with non-Intel memory and buses. Therefore, LG sued Quanta for infringement of their patents. Quanta responded that « those patents were exhausted as to the Intel products Quanta was using ».
The Supreme Court decided that « The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post sale use of the article. » Here the point was that LG had licensed Intel to sell products practicing their patents. They use the « substantial embodiment criterion » because Intel’s microprocessors and chipsets were substantially embodied the LGE Patents. « Nothing in the License Agreement limited Intel’s ability to sell its products practicing the LGE Patents. » And because Intel’s authorized sale to Quanta, it took its products outside the scope of the patent monopoly. As a result, LGE could no longer assert its patent rights against Quanta.
We can see that both Courts extend the exhaustion rule. The Supreme Courts bases it’s verdict on the substantial embodiment criterion, while the ECJ looks to the contractual relation and more specifically whether there is a sale (transfer of property) or not. In the UsedSoft, the Court says that “the resale of the user licence entails the resale of ‘that copy’ within the meaning of Article 4(2) of Directive 2009/24, and thus benefits from the exhaustion of the distribution right under that provision, notwithstanding the term in the licence agreement ».
Sources: http://www.supremecourt.gov/opinions/07pdf/06-937.pdf, http://www.patentdocs.org/2012/10/supreme-court-grant-certiorari-in-monsanto-v-bowman.html,
Show lessThanks for this summary and comparison between the decisions.
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Is the saving of genetically modified seeds allowed? A patent issue to be considered by the U.S. Supreme Court
1. Monsanto invented and patented a species of soy plant that resists the glyphosate herbicide. It imposes to everyone of its buyers to agree to a “Technical agreement” that “requires the grower to not save any crop produced from this seed (the patented seed he has bought) for replanting, or supply saved seeds to anyone for replanting”. However, it does not prohibit farmers to sell the second-generation seed as a “commodity”.
In Quanta v. LG Electronics, the facts are very resembling, but don’t actually coincide. LG Electronics concluded a license with Intel, authorizing Intel to sell the patented chips, but requiring, in a “Master agreement”, to notice to everyone of its buyers that the license “does not extend to any product that you make by combining an Intel product with any non-Intel product”. This agreement looks a lot like the Technical Agreement of the Monsanto v. Bowman-case. It is also known as a conditional sale by which the patent owner tries to control the use of its product after its introduction on the market. Quanta, who bought the LGE chips from Intel, did nevertheless use these chips in combination with non-Intel products, claiming that there is exhaustion of the patent.
The Supreme Court followed this argument, observing that the Agreement did not in any case require Intel to only sell the chips to undertakings that were planning on using them with Intel products only. The agreement merely imposes an obligation of notice and the breach of that agreement does not constitute a breach of the Licence Agreement.
LGE also claimed that method patents could not be exhausted. The Court rejected this opinion, assuring that this would be contrary to the very aim of the rule of exhaustion.
Therefore, by authorizing the selling of its products, LGE exhausted its patent and could not control the market of the products after this first sale.
The situation in Monsanto v. Bowman is different because while Bowman did sign the Technical Agreement, he did not violate its content. Indeed, Bowman bought the patented seeds for his first-crop, but for his second-crop, he bought “commodity seeds” from a local grain elevator, who mixes up the seeds that contain the protected DNA and seeds that do not. Bowman only saves the seed harvested from his second-crop, and not the seed harvested from his purchase from Monsanto. The right of Monsanto towards Bowman is exhausted at this stage because Bowman buys the seed from the local grain elevator, who exhausts the patent after selling the beans as “commodity seeds”, as Monsanto authorized him to do in the Technical Agreement. The case should therefore also rule that there is exhaustion.
2. Both Quanta v. LG Electronics and UsedSoft–cases concern the applicability of the exhaustion rule, as did the Monsanto v. Bowman-case. Both LG Electronics and Oracle do not contest the fact that they have given their consent to the first sale. The issue is rather related to the limitations of their IP right when the second sale occurs. In both cases, the exhaustion rule constitutes a limit to the second sale, because the sale falls out of their control.
In Quanta v. LG Electronics, LG Electronics imposed conditions on the use of its products after the resale by Intel, its licensee. However, due to the exhaustion of its patent protection after the first sale to Intel itself, these conditions could not be opposed to Quanta.
In UsedSoft, Oracle could not protest against the resale of its computer program by the initial buyer, as long as the first copy of the program was made unusable for the initial buyer.
Then, even though this is of minor importance for the issue at stake, we should pay attention to the fact that in the Quanta v. LG Electronics-case, a patent right is at stake, while in the Usedsoft-case, the question raises the exhaustion of a copyright.
In Quanta v. LG Electronics, the issue concerned a sale of physical components, namely the components of the chips that needed to be used in combination with other mechanisms in order to fulfill its useful goal. In UsedSoft, one particular defence opposed by Oracle is that the sale concerned a non-physical/material asset, namely the download an copy of a computer program. According to Oracle and the Commission, the exhaustion rule cannot be applied when confronted to non-physical products. The Court however decided that the exhaustion rule does also apply in cases of intangible products because the directive does not make any difference between the copying on a material medium (such as a CD-rom), or on an intangible medium (downloading from the internet and stocking).
Moreover, it is the nature of the process itself that is being question by Oracle. Oracle bases its argument, among others, on the fact that the transfer of the computer program to the final consumer does not constitute a sale, but merely a “making available to the public”, which excludes the application of the rule of exhaustion. The Court rejects this argument though, explaining that a transfer of propriety occurs when downloading the program at stake, and thereby it should considered to be a sale as well. In Quanta v. LG Electronics, the nature of the transfer of the product is not questioned: LGE authorized Intel to sell the chips to other undertakings.
In the end, the three cases illustrate the need to balance both the rights of the intellectual property owner and the traditional freedom of movement of goods, that allows consumers to benefit from inventions they might be interested in.
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