How can a patent holder, contemplating a license agreement, retain control over downstream use of that patent? The answer to this question is unclear.
It is well-settled after Quanta Computer v. LG Electronics, 553 U.S. 617 (2008), that an authorized sale by a licensee “exhausts” the rights to that patent, meaning that the patentee cannot sue either the licensee or its customers for infringement. The principle of exhaustion or “first sale” which may apply alike to sales, licenses and covenants not to sue is meant to prevent a patentee from obtaining more than its fair royalty by terminating the patentee’s right to collect additional royalties once it has received compensation for that first sale. But under what circumstances, exactly, does downstream exhaustion apply, and how can it be avoided? In general, only an unconditional transfer triggers exhaustion. This is because, in such a transaction, the parties have presumably negotiated a price that reflects those rights conferred by the patentee. Conversely, exhaustion may not apply if the transfer is limited or conditional.
