No exhaustion doctrine for “method-of-use” patents – Iwncomm v. Sony decision in China

Earlier this year, the Beijing IP Court issued a landmark decision in the Iwncomm v. Sony case, which clarified a number of interesting issues relating to standard essential patents (SEP). The court ruled that Sony had infringed an SEP held by the Chinese company Iwncomm and granted, besides damages for past infringement, the first injunction based on an SEP in China. In the same decision, the court addressed another important question concerning the applicability of the exhaustion doctrine. Under the doctrine, once an authorized sale of a patented product or a product obtained by using a patented manufacturing method occurs, the patent holder’s exclusive rights to control the use and sale of that product are said to be “exhausted,” and the purchaser is free to use or resell that product without further restraint from the relevant product patent or method-of-manufacture patent. It was nevertheless unclear from the existing case law, whether the exhaustion doctrine shall also be applied to a method patent that protects a method of using an existing product(s) (method-of-use patent), until the Sony decision now answered this question clearly in negative. This decision may thus provide an important guidance for future cases. However, when compared with more balanced approaches in other jurisdictions, which I will briefly discuss in this post, this guidance does not appear unquestionable.

Background

Iwncomm’s method patent at issue is essential to a mandatory national standard for the WLAN Authentication and Privacy Infrastructure (WAPI) technology. The patented method is provided for a secure access of a mobile terminal to WLAN and for secure data communication, and this method is performed with the participation of a mobile terminal (MT), an access point (AP) and an authentication server (AS). As required by the mandatory WAPI standard, Sony integrated a WAPI module in its handsets, thus enabling each handset to act as an MT in, jointly with an AP and AS, performing the patented method.

Iwncomm sued Sony for contributory infringement for supplying handsets equipped with a WAPI module, thereby assisting end users in practicing the patented method. In addition, Iwncomm also sued Sony for direct infringement when testing the WAPI functionality of its handset products during R&D, manufacture and delivery inspection. To rebut the latter claim, Sony claimed patent exhaustion as a defense. Sony stressed the origins of the relevant devices: the special-purpose testing devices were purchased form Iwncomm, and the chipsets installed in the handsets for implementing the WAPI module were purchased from a third party – the American company Qualcomm, which was nevertheless authorized by Iwncomm to manufacture and supply these chipsets. Sony argued that, since these testing devices and chipsets are destined to be used as AP, AS and MT in performing the patent method, Iwncomm’s patent right was thus already exhausted by the authorized sales of the testing devices and the chipsets. It turned out in the proceedings that Qualcomm actually only took from Iwncomm copyright and trade-secret licenses but not a license for the method patent at issue.

Court’s decision

The court dismissed Sony’s defense, holding that the exhaustion doctrine does not apply to the method-of-use patent because, while Art. 11 of the Chinese Patent Law clearly defines the exclusive rights conferred to a method patent as including the right to “use the patented method, or use, offer to sell, sell or import products directly obtained by using the patented method”, Art. 69(1), nevertheless, only explicitly provides exhaustion for “a product directly obtained by using the patented method”, but doesn’t contain any expression regarding the “use of the patented method”. Therefore, the court concluded that the legislators did not intend to regulate exhaustion of method-of-use patents.

The court’s rather simple reasoning and solely literal interpretation of relevant provisions has been widely criticized. A complete exclusion of method-of-use patents from exhaustion, as suggested by the Sony decision, would also deviate from the approaches adopted in other key patent jurisdictions.

Approaches in Germany and the U.S.

According to the German case law (Bodenwaschanlage/Handhabungsgerät), if a same patent contains both product and method claims, the method claims are exhausted along with the product claims by an authorized sale of the product. If, however, a patent contains merely method claims, there is no exhaustion of the method patent, even when special-purpose devices for performing the protected method is sold by the patentee. The underlying rational is that, in the former instance, the patentee already receives compensation for the use of his or her invention through sale of the patented product; but it’s not the case in the latter instance, since others can supply these special-purpose devices as well.

U.S. case law provides even wider applicability of the exhaustion doctrine to method-of-use patents. According to the U.S. Supreme Court’s holding in Quanta Computer, Inc. v. LG Electronics, Inc. case, a method patent may be exhausted, if a sold article’s only reasonable and intended use was to practice the patent and the article includes all inventive aspects of the patented method. The Supreme Court emphasized in its opinion, as it is easy to formulate patent claims for the same invention either in method or product terms, the exhaustion doctrine could easily be evaded if reliance on method claims was sufficient to avoid exhaustion: By “including a method claim for the machine’s patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion”.

These considerations underlying the case law development in Germany and in the U.S. were not even touched up in the Sony decision. Thus, the guidance that the Sony decision may provide for future cases does not appear water-tight.

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