How Far Does the Monopoly Conferred by a Patent Extend?

By: Tony Sanny, Ph.D

In the recent U.S. Supreme Court decision, Bowman v. Monsanto Co., U.S., No. 11-796, 5/13/2013, the Court held that the patent monopoly does extend to later generations of self-replicating seeds.  Yet, the Bowman decision left open important questions regarding how far the monopoly rights conferred by a patent extend.  The Court chose not to decide how far monopoly rights extend for other self-replicating technologies, e.g. genetically altered cell lines, genetically altered microorganisms, or self-replicating chemical structures.  The Court also chose not to clarify the doctrine of conditional sales which may allow a patent holder to maintain patent rights in products, even after sale of the product.  The following is a brief analysis of the extent to which Bowman and the U.S. Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), two leading cases regarding the doctrine of patent exhaustion, provide guidance regarding the extent of patent monopoly rights.

The doctrine of patent exhaustion limits a patentee’s right to control what others can do with a product which embodies an invention.  Under the doctrine, “the initial authorized sale of a patented item terminates all patent rights to that item.”  Quanta Computer, Inc., 553 U.S. 617, 625.  A limitation on the doctrine of patent exhaustion has been the doctrine of conditional sales in which the patent holder restricts the rights of the purchaser to use the patented product through an enforceable contract.  In theory, the doctrine of conditional sales may prevent patent exhaustion and preserve a patent holder’s right to sue for infringement if a restriction of the contract is violated.

An important case discussing the doctrine of conditional sales is the 1992 decision of the Court of Appeals for the Federal Circuit (CAFC), Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).  In Mallinckrodt, Inc., a patented medical device was sold to hospitals with a restriction “for single patient use only”.  Instead of disposing of the device after use, the hospitals sent the used devices to Medipart for “reconditioning” so that the devices could be reused.  The CAFC held in favor of Mallinckrodt, holding that if the single-use restriction was valid under state sales law and within the scope of the patent grant, then Mallinckrodt could bring a claim of patent infringement against parties that violated the restriction.  The CAFC held that the “right to exclude may be waived in whole or in part” Mallinckrodt, Inc., 976 F.2d 700, 703, and thus the doctrine of patent exhaustion was not applicable.

In Quanta, the U.S. Supreme Court cast doubt on the ability to avoid patent exhaustion through a conditional sale.  The Court examined the rights of a patent holder (LG Electronics) with respect to a third-party (Quanta) who purchased a patented product from the licensee (Intel).  An important aspect of Quanta is that the Court held that method claims are subject to exhaustion, when a product substantially embodies the patented invention.  A product substantially embodies the invention when the product’s only reasonable and intended use is to practice the patent and when the product includes the inventive aspects of the patent.

In Quanta, the Court held that exhaustion arises when there is an authorized sale.  In this case, the licensee was authorized to sell computers processors which embodied the patented methods but the licensee had contractually agreed with the patent holder that it would notify buyers that they were not to combine the licensee’s products with other products not sold by the licensee.  The third-party buyer combined the processors with components which were not purchased from the licensee.  The patent holder sued the third-party buyer (alleged infringer) and the patent holder lost.  The Court held that the third-party buyer did not infringe because while the processors embodied the patented claims, the processors had no reasonable noninfringing use and thus the patent rights to the processors had been exhausted.  Since in reaching its decision the Court did not specifically mention the doctrine of conditional sales or Mallinckrodt, the decision left unanswered questions about the ability of a patent holder to retain some patent rights after a conditional sale.

Bowman provided the U.S. Supreme Court an opportunity to clarify to what extent, if any, exhaustion of patent rights can be avoided by a conditional sale, since Monsanto makes a conditional sale of its Roundup Ready seeds to purchasing farmers. However, the Court did not decide the case based on the doctrine of conditional sales.

Among the relevant facts of the case, Bowman acquired the seeds at issue as “commodity seeds” from grain silos.  He planted the seeds and applied the glyphosate (Roundup) herbicide to each crop, eventually producing at least eight generations of seeds.

The unanimous Court, in a decision by Justice Kagan, decided in favor of Monsanto based on a theory that was created sua sponte by the Federal Circuit.  The Court stated:

‘[A] second creation’ of the patented item ‘call[s] the monopoly, conferred by the patent grant, into play for a second time.’  Aro Mfg. Co. v. Convertible Top Replace- ment Co., 365 U. S. 336, 346 (1961).  That is because the patent holder has ‘received his reward’ only for the actual article sold, and not for subsequent  recreations of it. Univis, 316 U. S., at 251.  If the purchaser of that article could  make and sell endless copies, the patent would effectively protect the invention for just a single sale. Bowman, U.S., No. 11-796, page 5.

Thus, the Court found Bowman’s use of Roundup Ready soybeans for growth of more Roundup Ready soybeans to be an act of direct infringement and concluded that “the exhaustion doctrine does not enable Bowman to make additional patented soybeans without Monsanto’s permission”. Id.

The Court attempted to limit its holding to the facts of the case:

Our holding today is limited—addressing the situation before us, rather than every one involving a self-replicating product.  We recognize that such inventions are becoming ever more prevalent, complex, and diverse. In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be a necessary but incidental step in using the item for another purpose. Id. at p. 10.

Thus, in the context of other self-replicating technologies, it remains to be seen how Bowman will be applied to the analysis of exhaustion of patent rights.

Taken together Quanta and Bowman, provide some limited, but useful, guidance regarding the extent of patent monopoly rights.  In Quanta, the Court found important the fact that the licensee was authorized to sell to third parties.  Under a different set of facts, if a licensee is not authorized to make sales, the conditions in the contract between the patent holder and the licensee may constitute only a partial waiver of patent rights such that the patent holder retains enforceable rights against third parties.  In Bowman, the Court found it important that Bowman treated the planted seeds with glyphosate to take advantage of the patented invention.  If a self-replicating technology is replicated but the alleged infringer does not purposefully avail themselves of the benefits of the patented invention, then infringement may not be found.  Also, in Bowman the Court considered it significant that the commodity seeds at issue had a use other than planting, e.g. human or animal consumption.  In Quanta by contrast, LG’s patented methods were directed to computer processors which had no reasonable alternative use.  The availability of an alternative use in combination with the alleged infringer’s purposeful practicing of the patented invention may help a patent holder to assert rights of exclusivity.