Patent Rights Exhausted as of Authorized Sale
Tessera v. ITC (decided 9/2/10)By: Eric L. Amundsen
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What This Means to You
- When out-licensing a patent, consider periodic upfront partial royalty payments for on-going sales
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Overview
In Tessera v. International Trade Commission et al, the US Court of Appeals for the Federal Circuit (Federal Circuit) confirmed that once an authorized sale of an item has been made, further patent rights have been exhausted as to the sold item.
Case Background
Tessera licensed a licensee to make and sell semiconductor chip assemblies which had been assembled according to a patented method. The licensee fell behind on paying royalty payments, and Tessera attempted to sue the customers of the licensee for patent infringement.
Tessera argued that the sales were not authorized until royalty payments had been made, and if they were unable to sue the licensee’s customers for infringement, then they would recover no payment on the patent rights.
Decision Analysis
The Federal Circuit held that Tessera’s patent rights to the specific chip assemblies sold by the licensee to the licensee’s customers were exhausted at the time of the initial sale. The court reasoned that because the initial sale was authorized, and because the license agreement permitted payments to be made months after the sales, the subsequent non-payment of royalties did not convert a once authorized sale into a non-authorized sale.
The Federal Circuit also pointed out that if an authorized sale could later become unauthorized due to non-payment of royalties, a cloud of uncertainty would be cast over every licensed sale of an item. Thus, the only recourse for Tessera is to enforce its contractual right to receive royalties from the licensee.
Takeaways
When preparing a license agreement which includes on-going royalty payments for sales of patented articles, consider including provisions for at least partial royalty payments ahead of projected sales so that, as a patentee, you are not left without any recovery if the licensee ultimately fails to meet its royalty obligations. After a sales period has passed, the royalty payments can be settled up based on the actual sales numbers.
