Chapter 5 Taiwan’s IT Industry Research and Licensing Strategies Management . 76
3. Licensing Strategies for IT Industry
3.2 Post-Quanta Strategic Licensing Agreement
3.2.2 Vertical Licenses
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patent designed for does violate the patent right. In the other word, the set forth restrictions to fix the article to continue the usage for the left life are lawful. However, the restriction to limit the purchasers to replace, reconstruct, or to remake the key elements to implement the equivalent functions patented would be enforceable under patent law.
G、 Restrictions to Transfer
As the acquisitions happened, the rights of patent may face the risk of being passed hand to the others or even competitors under the contract.
However, even the exclusive license which refers to the exclusive right given to the licensee, it does not mean the patent owners would be glad to grant the same right to the third party especially when the one is competing to patent owner. In the circumstances of acquisition and merger, the license granted to the legal entity may end up to be substantially fell into the control of the third party. Hence, the IP proprietors may like to also restrain the licensees to substantially transfer the right to any other without the consent of the licensor regardless under any circumstances.
3.2.2 Vertical Licenses
Based on Quanta, LGE assigned a vertical license to authorize Intel to unconditionally sell the microprocessor and chipsets. The Court granted its ruling supporting method patent is exhaustible and non-conditional sales have terminated the patentee’s control. With the similar licensing model, Qualcomm have designed a more comprehensive vertical license. Following the interpretation in Mitchell v.
Hawley to segment the right of patent right to make, use, marketing, and sale that
can be operated individually, Qualcomm therefore adopted a vertical license strategy as Univis to authorize the manufacturer to only sell to Qualcomm’s authorized purchasers. By dividing right to make patented chips from right to use on‧ 國
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final products, Qualcomm signed separate contract to manufacturer and the licensed purchasers.178
Through the case of Univis, the fix-price on downstream purchasers is prohibited under antitrust law. There has been such discussion about whether the transaction of Qualcomm to substantially control the manufacturer and purchasers via the two-tiered licensing strategy would have effected anti-competition. Though Broadcom filed suit against Qualcomm by claiming the licensing structure infringing patent misuse and patent exhaustion in 2008, Qualcomm and Broadcom had reached settlement in 2009 and revoked all litigations regarding patent infringement.179 Therefore, the Qualcomm style licensing strategy seems still effective up to day.
3.2.3 Direct Sales License
As Mallinckrodt had applied to sell directly to the hospital by imposing restriction on sales to limit the frequency of use, the conditional sales have been supported by the Federal Circuit. Quanta’s decision did not overruled Mallinckrodt but sub silento allow the conditional sales to avoid exhaustion. By simply post ing the restriction on the sales seem as one of the most convenient way to patentees.
However, the decision of Mallinckrodt is presently facing challenges about whether the conditional sales would also effect avoiding the international exhaustion.
3.2.4 Post-sale Restrictions through Licensees
The alternative licensing strategy adopted by General Talking Picture is to authorize the licensee to sell a limited right of use to the purchasers. General
178 Supra note 114, at 37-39.
179 May, Wireless Telecom Litigation-Qualcomm Reached Settlement with Broadcom for 891
Million, STPI (2009), URL = < http://cdnet.stpi.org.tw/techroom/pclass/2009/pclass_09_A026.htm >.
(無線通訊訴訟之爭：高通同意付 8.91 億美元，與博通大和解，科技產業資訊室)
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Talking Picture had restricted the function of their patented amplifiers for private use only while licensing to Transformer Company. The limited right of use was therefore tied with the transaction while the licensee passed the patented product to downstream user.
4. Conclusion
Following the case of Quanta, certain licensing strategies and rules have been indicated and practiced in market. Taiwan’s IT industry seems relative weak in light of level of the technology. As a result, we are now standing on an inactive position while making licensing strategies. Contrarily, the patent or technology holders in U.S. or Korea are now having more market power to decide the transaction.
However, with the strength of the OEM and ODM capacity that brings the industries in Taiwan a strong bargaining power as licensees.
What we have been taught by Quanta, the sales conditions regarding patent rights shall be placed to restrict the licensees instead of the downstream users. The future patentees intend to restrict the downstream purchasers or users with vertical license must consider the delicate balance between exhaustion and antitrust. On the other hand, the licensees may therefore win the power to bargain for the price discrimination based on their demands in categories.
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Chapter 6 Conclusion
This research has led us an in-depth study through the U.S. case laws of exhaustion doctrine and post-sale restriction. The dig-in study has indicated some effective instructions for IT industry in Taiwan. Along with the technology development and the complicated business association, licensing is therefore applied to extend the market of patented or patent embodied articles. Details and definitions may be emphasized in agreements, but the restrictions to bind the parties are wildly taken to withhold the power granted to licensees. The above studies have granted us the following understanding and conclusion.
1. Conclusion of the Research
In the beginning of Chapter 2, the theory of exhaustion has been explained and illustrated into three dimensions. In Bloomer v. McQuewan, the Court has first defined the status as the good passed to the hands of the purchaser would have effect to exhaustion which therefore forms the exhaustion doctrine. U.S. Patent Act has also explicitly included doctrine of exhaustion in part of the law. Through series of case laws, exhaustion doctrine has been interpreted by Courts and shaped in to a default rule.
Literally, the parties are free to license based on contract law. Patentees, therefore, have been after all means of contractual strategies to sustain their dominance on the patents. The rulings granted by the Courts have also indicati ng us an experiential guideline for Taiwan’s IT industry as stated in Chapter 5. In order to prevent the over-monopoly of patent proprietors through license, the Courts intend to draw a fine line to narrow down the scope of post-sale restriction. The Supreme Court currently made its decision in Quanta not only to again interpret exhaustion doctrine but also to emphasize that method patent is exhaustible. Moreover, the
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Court reemphasized on the primary definition of patent law to pull the favor-on-patent-holders phenomenal commonly found in Federal Circuits back to the ground of public interests that implys a strong exhaustion. By indicating Intel’s authorized unconditional sales result to exhaustion that LGE may seek contract law to solve the disputes, the Court also indirectly allows the post-sale restriction supported by Mallinckrodt.
On the other hand, the disputes occurred by distribution have raised the confliction between independent jurisdictions and global economy which results to an unsolvable dilemma on global trading market. This research has included the study about how exhaustion doctrine has been interpreted and practiced in EU, Japan, and China as comparison of U.S. patent law. Although the exhaustion doctrine may be applied differently in copyright or trademark law, most of countries around the world are still supporting national exhaustion in terms of patent law.
Significantly, the member stats of EU have developed regional exhaustion to allow the goods to flow free within the territory of EU. The member countries of WTO, moreover, have also keened on entering an international like exhaustion (though it is not exactly the same but almost there) agreement to allow parallel trade of patented products. Nonetheless, the developing countries that sustain less protection on patent law in order to develop their own technology. The unequal status of economy has result to discriminations and conflictions between countries that unable to form an agreement on practicing international exhaustion.
According to the current development of Taiwan’s IT industry and considering the extremely competitive business environment, Taiwan is standing at the cross road between establishing the own technology or persistently OEM/ODM for these patent owners under their labels. The massive cost is engaged as conducting into the innovation which has been far beyond what I can discuss in this research. However,
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an effective and enforceable licensing management strategy provided in this research may at least offer the companies an instruction while making their IP right decisions.
2. The Future Development of Exhaustion and Licenses
Although quite some precedents have been studied in this research, some more legislations and cases related to the violation of antitrust and fair use can still be further discussed. Besides, the arguments to weight between free to contract and post-sale restriction have been raised up currently. Following the rules of Quanta, conditional sale was brought back to the table as the principle for exhaustion avoidance. However, this point of view may raise the controversies while applying international exhaustion. Moreover, for those massive patent holders or cross-licensing alliance seeking to design sophisticated conditions and licensing transactions to bind the downstream users may result to a substantial monopoly over the market. Whether the interpretation of Federal Circuit to support the conditional sales have provided an over extended power to patentees. More than that, the over-sized alliance or complicated transaction may even avoid breaking the anti-competition law or patent misuse through drafting a complicated licensing agreement.
In Chapter 5, I have mentioned the modified vertical licensing as the type of Qualcomm. Though it creates price discrimination by separating the rights but causes more the cost on transaction, this may also result to “double dipping” that end up the downstream users may have to pay for the over charged bill. Though the Courts not yet give a clearly comments, the future research may like to further discuss through it into details.
The patentees that used to obtain the same strategies as LGE to split the
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components for seeking price discrimination may face the challenges after Quanta.
The Court in Quanta has explicitly affirmed that method patent is exhaustible. The components embedded with the patent function would have exhausted the patent right at the time they are sold. This decision may force the patentees to abandon the roundabout strategies but to only restrict within the scope of patent right.
Despite of defining the scope and giving clear distinctions for IP owners to understand about the limits of each term of resistances, the Quanta and the previous cases have also suggested certain principles to be considered while drafting the licensing agreement.
1. Any restrictions added on the licensing agreement must take the fundamental spirits of IP Law into account by considering the public interests. Only conditional license can possibly avoid exhaustion and make the post-sale restriction effective. Moreover, the post sale restrictions need to be set in forth with specific scope and not to beyond the patent right granted by law.
2. Though the post-sale restriction is allowed by law, the limitation can only be set within the scope of patent. The tip for patentee is to separating the right of sales from use of patented products. Price discrimination based on the segmented right is acceptable, but fixing-price on the downstream distribution is prohibited under anti-competition law.
3. In terms of international trade, the issues regarding parallel import/export would have to be considered. The explicitly limitations on territory or scope of use are essential for patentees who seek to
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prevent exhaustion. Accompanying with the terms that meet the domestic laws and rules can therefore practice the licensing strategies more precisely.
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Bibliographies & References
1. Journals, Law Reviews, and References
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12. Hope, Leonard J., The Licensed-Foundry Defense In Patent Infringement Cases:
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24. Stack, Alexander J., Trips, Patent Exhaustion and Parallel Imports, J. World Intell. Prop. 657.
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2. Cases
1. General Talking Pictures v. Western Electric, 305 U.S. 124 (1938) 2. Wilson v. Simpson, 50 U.S. 109, 123 (1850).
3. Bloomer v. McQuewan, 55 U.S. 539 (1852).
4. Mitchell v. Hawley, 83 U.S. 544 (1872) 5. Adams v. Burke., 84 U.S. 453 (1873)
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6. Boesch v. Graff, 133 U.S. 697, 10 S.Ct. 378 (1890) 7. Hobbie v. Jennison, 149 U.S. 355 (1893)
8. U.S. v. General Electric, 272 U.S. 476, 47 S.Ct. 192 (1926) 9. U.S. v. Univis, 316 U.S. 241, 62 S.Ct. 1088 (1942)
10. Mallinckrodt v. Medipart, 976 F.2d 700 (Fed Cir. 1992) 11. LG v. Asustek, 248 F. Supp. 2d 912.
12. LG v. Bizcom, 453 F. 3d 1364, 79 U.S.P.Q. 2d 1443 (Fed Cir. 2006).
13. Quanta v. LG, 128 S. Ct. 2109 (2008).
14. Omega v. Costco, 541 F.3d 982 (Fed Cir. 2008).
15. Fujifilm Corporation v. Jazz Products LLC, 605 F. 3d 1366 (2010)
3. Rules and Regulations
1. 35 U.S.C. 273 Defense to infringement based on earlier inventor.
2. 35 U.S.C. 154.
3. The Treaty on the Functioning of the European Union art.34, 35 (ex Article 28, 29 TEC)
4. The Treaty on the Functioning of the European Union art.36 (ex Article 30 TEC)
5. The Treaty on the Functioning of the European Union art.101 (ex Article 81 TEC)
6. Commission Regulation 2790/1999, 1999 O.J. (L336) 21 (EC).
7. Commission Regulation 772/2004, 2004 O.J. (L123) 11 (EC).
8. Commission Regulation 240/96, 1996 O.J. (L31) 2 (EC).
9. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
10. Anti-Monopoly Law (P.R.C.), art. 55.
11. Patent Law of the People’s Republic China art. 11.