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Patent Exhaustion and the Foundry Problem
Patent Exhaustion and the Foundry Problem
Section 154 of the Patent Code sets forth the rights of the patentee. However, these rights are limited by the doctrine of “patent exhaustion.” This doctrine limits a patentee's right to exclude others from using or selling patented inventions by allowing purchasers of patented goods to use and resell them without the patent owner’s consent. Basically, once a product embodying a patent is sold, the buyer is free to use and resell the product without paying royalties to the patent holder. However, patent exhaustion is the general rule that may be modified by contract between the patent holder and the buyer.
The patent exhaustion doctrine created legal issues in the foundry business. Here’s why.
As discussed in the earlier blog post, advances in semiconductor technology has caused specialization, with many tech companies focusing solely on designing chips, then submitting their design to foundries for fabrication.
Additionally, in order to justify burdensome research and development costs, numerous technology companies executed broad cross-licensing agreements, typically granting each other blanket licenses to use each other’s patents.
The foundry problem arises when these broad cross-licensing agreements, combined with contract manufacturing, enable third-party competitors to leverage licensing agreements without negotiating their own licenses. The scenario typically involves a patentee granting a license to a manufacturer, and a third party contracting with the manufacturer for fabrication of a design that embodies the patent. If the manufacturer sells the finished product to the third party, through the patent exhaustion doctrine, the third party acquires a product with patented technology, without having paid royalties to the original patentee.
A series of lawsuits addressed this problem, and defined critical issues that must be addressed when drafting technology licensing agreements. Failure to carefully assess these issues may well result in lengthy litigation and substantial damage awards.
Some of the more important cases dealing with the foundry problem will be discussed next.
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Saman Taherian
Lapin & Taherian
Attorneys At Law
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