CASRIP Newsletter - Fall/Winter 2009, Volume 16, Issue 1
Patent Exhaustion is a Defense, not a Cause of Action: ExcelStor Technology, Inc. v. Papst Licensing GMBH & Co. KG
By Carmen G. Wong1
In ExcelStor Technology, Inc. v. Papst Licensing GMBH & Co KG., the Federal Circuit confirmed that patent exhaustion can be used only as a defense to patent infringement and is itself not a valid cause of action. The Federal Circuit thus affirmed the District Court’s decision that ExcelStor Technology, Inc. lacked standing to sue in federal court since its complaint did not contain a patent law cause of action and did not require resolution of a substantial question of federal patent law.
A. Factual Background
In 2004 ExcelStor Technology, Inc. (“ExcelStor”) had a licensing agreement with Papst Licensing GMBH & Co. KG (“Papst”) that allowed ExcelStor to manufacture patented hard disk drives in exchange for a royalty payment.2 Under the same license, Papst was required to notify ExcelStor if it collected royalty payment from others for the same patented hard drives.3 For three years, Papst sent letters to ExcelStor telling the company that no other royalties were being paid.4
In 2006-2007, ExcelStor discovered that Papst also had a licensing agreement with Hitachi Corporation, but Papst allegedly continued to assure ExcelStor that no other royalty payments were being collected and that Papst had entered into a licensing agreement with Hitachi after the agreement with ExcelStor.5
ExcelStor alleged that the letters sent by Papst were fraudulent, that Papst had entered into the agreement with Hitachi before the agreement with ExcelStor, and that Papst was collecting royalty payments from Hitachi as well as ExcelStor.6
B. Procedural History
ExcelStor filed a complaint in the U.S. District Court for the Northern District of Illinois against Papst for fraud and breach of contract, and Papst filed a motion to dismiss for lack of subject-matter jurisdiction.7 ExcelStor filed an amended complaint that included issues regarding federal patent law including the following three claims: a request for declaratory judgment that Papst violated the patent exhaustion doctrine by collecting multiple royalties for the same patent, a fraud claim due to Papst’s failure to disclose its violation of the patent exhaustion doctrine, and a breach of contract claim due to Papst’s failure to disclose its violation of the patent exhaustion doctrine.8
The District Court dismissed ExcelStor’s complaint for lack of subject matter jurisdiction.9 The court held that patent exhaustion was only a defense to patent infringement and was not a valid separate cause of action, and since patent exhaustion was not a cause of action, the fraud and breach of contract claims did not involve a federal question. ExcelStor appealed to the Federal Circuit.10
In determining whether federal courts have subject-matter jurisdiction, there must exist either a diversity of citizenship or a federal question. Since no diversity of citizenship exists here, there must be a federal question.11 28 U.S.C. § 1338(a) states that “district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks.”12 In determining whether 28 U.S.C. § 1338(a) applies to a specific case, the court relied on the two-prong test set forth in Christianson v. Colt Industries Operating Corp.: whether federal patent law is a cause of action in the case, and whether claim requires resolution of a substantial question of federal patent law.13
Patent exhaustion is a doctrine that prohibits the licensor from controlling post-sale use of an article after it sold the patented article, but it does not prohibit licensors from collecting royalties twice on the same patented good.14 The Federal Circuit held that patent law did not create a cause of action in this case because the patent exhaustion doctrine is a defense to patent infringement and is not a cause of action by itself.15 Furthermore, the court held that the claims do not require resolution of a substantial question of federal patent law.16 Since ExcelStor’s claims fail to meet either prong of the set forth in Christianson, the court concluded that no federal question of patent law exists in this case.
The Federal Circuit acknowledged that Papst may have violated the terms of the license agreement by collecting two royalties on the same patent article and that the collection scheme may be fraudulent, but concluded that these allegations of breach of contract and fraud should be resolved in state courts.17 The Federal Circuit thus affirmed the district court’s decision by dismissing ExcelStor’s claims for lack of subject-matter jurisdiction.
This is the first time the Federal Circuit addressed the scope of the patent exhaustion doctrine since the United States Supreme Court’s decision in Quanta Computers v. LG Electronics.18 This case demonstrates the court’s opinion that patent exhaustion is only a defense not a cause of action, and that it alone does not itself constitute a federal question of patent law.
- Carmen G. Wong is a J.D. candidate at the University of Washington School of Law
- ExcelStor Technology, Inc. v. Papst Licensing GMBH & Co., 541 F.3d 1373 (Fed. Cir. 2008)
- Id. at 1374
- Id. at 1375
- 28 U.S.C. § 1338(a) (2007)
- Id. at 1375 (citing Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988))
- Id. at 1376 (citing Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. ––––, 128 S.Ct. 2109, 2122, 170 L.Ed.2d 996 (2008))
- Id. at 1376 (citing Monsanto Co. v. Scruggs, 459 F.3d 1328, 1332–36 (Fed.Cir.2006))
- Id. at 1376
- Id. at 1377
- Michael G. Sullivan, Patent Exhaustion/First Sale Doctrine: The Federal Circuit rules on the doctrine for the first time since Quanta v. LG (S.C.) http://www.iplawoutline.com/index.php?flag=true&month=Sep&year=2008, (last visited Feb 7, 2009)