Court Opinion

ID: 9484377
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:51:06.439339+00
Date Added: 2024-06-11T17:50:12.344091
License: Public Domain

PLAGER, Circuit Judge,
dissenting.
I respectfully dissent. ULSI has managed to take a shield the law provides to purchasers of products containing patented inventions and turn it into a sword to cut off the legitimate rights of the patent owner. While a wrong result in a particular case is always unfortunate, a wrong precedent in this particular context is a cause for concern, since it can only lead to even further confusion regarding an important issue of law. In hopes that this case will not establish itself as such, I write to explain what went wrong.
In its simplest terms, the case is this. Company A and Company B are major competitors in a highly volatile industry. The industry experiences constant innovation in its products and processes, and is under great pressure from other domestic and foreign competitors. A and B both maintain large R & D operations, and obtain patents on their various innovations. Since both companies are engaged in continuing programs of research and development, they agree that it is in their mutual interest to avoid spending resources litigating with each other over patent rights rather than inventing.
In order to increase their freedom of design they cross-license each other in such a way that each is free to innovate and market their own similar products without fear of infringing upon the patent rights of the other. There is no intent to authorize third parties to make, have made, use, or sell the inventions covered by these patents beyond the rights the law accords to purchasers in the ordinary course in the marketplace.
Company C, a small company seeking to break in to the same market, approaches Company B with a proposition. C will provide B with details of its (C’s) invention (a design similar to that patented by A). C will provide complete design and manufacturing specifications, and warrants to B in writing that C rightfully obtained the design involved and that it does not infringe the patent rights of others. Using its manufacturing facilities, B is to manufacture the item to C’s specifications. B will provide the raw materials, and will be paid on a per completed unit basis. B, having excess manufacturing capacity, agrees, and produces the contracted-for item. B then delivers the item to C, and C provides the finishing touches.
Later, C markets its product, describing it in terms that suggest it is the same as a product manufactured by A A examines C’s product, concludes that it is so much like A’s product that it infringes one of A’s patents, and sues C. C then defends on the grounds that, since B manufactured the item that infringes A’s patent, and since B is immune from liability for infringement of A’s patents under the A-B cross-license, C also is immune under the doctrine of ‘first sale,’ sometimes known as ‘patent exhaustion.’
Of course C is wrong.
The principle of ‘first sale,’ simply stated, is that when a patent owner (or the owner’s authorized licensee) sells to another a product which incorporates the patented invention, the other may convey the product to third parties free of any claim of patent infringement.1 That is, third parties may use or sell the product without a license as such from the patent holder. This is but another variant on the common law rule that an owner of property may be estopped from claiming an interest in property which, through voluntary act of the owner, has found its way from the owner’s transferee into the hands of a third party.2
*1572This rule has no application to the case of C for two reasons. First, the ‘first sale’ of the allegedly infringing product was by C to third parties, not by B to C. Second, the claimed activity of B must be within the scope of authority granted by the license from A in order for B’s activity to immunize C; here it is not.
As for the first point, B did not make a sale to C of a product incorporating A’s patented invention. It sold C the raw materials that went into the product. It manufactured C’s product to C’s specifications. It sold its manufacturing expertise, but the product was always C’s, never B’s (and assuredly not A’s).
If B were to have manufactured a thousand extra embodiments of C’s design, per-, formed the finishing touches itself, and then sold them to third parties, would B’s cross license with A protect it from a claim of conversion by C? The answer of course is “no.” The issue of infringement under the cross-license — i.e., the rights of A and B visa-vis each other — is distinct from the question of C’s legal rights against B or A, and vice versa.
If the issue is whether the chips made by B infringe A’s patent, the fact that C rather than B designed them, or that C owns the manufactured item rather than B, would be irrelevant. If the accused product delivered to C infringes A’s patent, then A has a cause of action for infringement of its patent right against both B and C.
B’s defense is, I am not liable for infringement because I have a license from the patent owner.
C’s defense is not the license; his defense is, I am not liable for infringement because I am a purchaser of the patented device in ordinary course in the marketplace. In which case the question is, did B sell the accused device to C, or did B sell C something else, like manufacturing services. The question of whose design and whose property was involved is not only relevant, but determinative.
As for the second point, the scope of B’s authorization, neither A nor B intended by their cross-license to immunize third-party infringers of the patents of either. It is fundamental contract law that the A-B cross-license cannot afford rights and immunities to third parties that are not within the contemplation of the contracting parties. The duty that A and B owe to each other with regard to their own inventions and products is determined by the terms of the A-B cross-license; the duty that B and C owe to each other is determined by the B-C manufacturing agreement; the duty that C owes to A is determined by neither of these agreements, but by the law of patent infringement.3
In the case before us, A is Intel, B is Hewlett-Packard (HP), and C is ULSI. By law Intel has been granted the “right to exclude others from making, using, or selling” the invention claimed in the Palmer patent. 35 U.S.C. § 154 (1988). Intel alleges that ULSI “without authority ... sells” a chip which is within the scope of the Palmer patent, and therefore is an infringer. 35 U.S.C. § 271(a) (1988). ULSI is correct that, if the C87 chip had previously entered the stream of commerce with Intel’s permission via an authorized sale of the C87 chip by HP to ULSI, then ULSI’s sales to others need not be authorized by Intel. Bloomer v. Millinger, 68 U.S. (1 Wall.) 340, 350-51,17 L.Ed. 581 (1864). But if ULSI’s sale to others is the first sale of that chip (i.e. it is ULSI and not HP or Intel who launches the C87 chip into the stream of commerce), or if Intel never authorized HP to manufacture infringing embodiments of the Palmer patent at the behest of others, so that there could be no authorized sale by HP under the license, then ULSI’s defense must fail. In my view, the defense fails on both counts.
1.
As an initial matter, if we assume for the sake of argument that HP sold an embodi*1573ment of the Intel patented invention to ULSI, we must determine whether that sale was authorized by the patent owner; absent authorization the transferee obtains no protection. General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175,182, 58 S.Ct. 849, 853, 82 L.Ed. 1273 (1938); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 703 (Fed.Cir.1992). The answer to this question is found in the HP-Intel agreement.
The terms of the cross-license between Intel and HP are broadly stated. The cross-license notes that both parties are “engaged in continuing programs of research and development,” and that both parties “want to increase their freedom of design by obtaining a license.” In light of this expressed intent, HP and Intel then entered into a reciprocal grant — an “irrevocable, retroactive, nonexclusive, world-wide, royalty-free license under all patents and patent applications” filed before January 1, 2000, effective until the expiration of the designated patents.
It is correct that an appellate court approaches contract interpretation as a question of law. We thus owe no special deference to the trial court’s view of that law; that is the meaning of review de novo. But that is not the same as saying we are free to ignore the trial court’s factual determinations regarding the intent of the parties, based on testimony at trial. Especially is this the case when the matter before us is not a final judgment but a preliminary injunction, a matter expressly within the broad discretion of a trial court.
Both parties to the agreement — Intel and HP — agree that the cross-license was intended only to provide each party with the freedom to conduct research and development work free of wasteful litigation, and that there was no intent to immunize third party infringers. For example, the Associate General Counsel and Director of Intellectual Property for HP testified that “[njeither Intel nor HP intended to grant the other the right to sublicense any patents licensed to the other under the patent cross-license agreement.” Further, he testified that “HP did not intend to grant a sublicense under any Intel patents licensed to HP....” Jt. App. at 408.
The trial court, after considering the evidence presented by the parties and following a hearing on the motion, agreed with Intel’s interpretation of the contract. The trial court stated:
In examining the breadth of the Intel/Hewlett-Packard agreement, it is clear that neither Intel nor Hewlett-Packard intended their agreement to be so broad as to grant the other party the power to sublicense any patent granted under the Intel/Hewlett-Packard agreement.
782 F.Supp. at 1474, 21 USPQ2d at 1928 (emphasis added).4
The use of the term “sublieense” by counsel and court must be understood to mean that the cross-license did not give HP power to authorize third parties to separately design and manufacture (or have manufactured) products incorporating the patented invention. Thus HP could itself manufacture and sell products with the patented invention incorporated in them (and the purchasers of those products from HP would be protected in their use under the ‘first sale’ principle), but HP was not licensed to authorize others to do so.
In another context this court described as “without merit and specious” a patentee’s argument to the effect that the activity involved was a prohibited sublicense. Lisle Corp. v. Edwards, 777 F.2d 693, 227 USPQ 894 (Fed.Cir.1985). And on those facts, the argument was specious. In Lisle, the paten-tee had granted the manufacturer (Lisle) a nonexclusive license to make, have made, use, and sell the patented tool. Lisle produced the tool in accordance with the paten-tee’s design and paid the patentee a royalty on all sales. One of Lisle’s customers, Snap-On Tools, purchased the patented tools but also arranged for Lisle to affix the tool with the Snap-On trademark. The patentee argued that the arrangement between Lisle and Snap-On was a “de facto sublicense,” which made Snap-On a “de facto manufacturer.” This court noted that “[t]he sales by *1574Lisle were authorized by the nonexclusive license agreement. Resale did not create a sublicense.” Id. at 695, 227 USPQ at 895.
Lisle does not stand for a general rule that an argument that sublicensing is prohibited under a particular license is necessarily “specious.” The substance of the transaction at issue should control whether it is ‘sublicens-ing,’ and the terms of the license as intended by the parties should determine whether such ‘sublicensing’ is permitted. In Lisle, the substance of the transaction was the licensee (Lisle) manufacturing a product containing the patented invention, with a subsequent authorized sale of the product to a third party (Snap-On) interested in buying it. Here, in contrast to Lisle, the third party, ULSI, purported to have no interest in buying the patentee’s invention — the substance of the transaction was the licensee making the third party’s invention for the third party’s account. And record testimony indicates unequivocally that neither party to the cross-license understood or intended their cross-license to bring this activity within the scope of the cross-license.
This is not the first time that the Federal Circuit has been called upon to determine the scope of a broad Intel license. In Intel Corp. v. United States Int’l Trade Comm’n, 946 F.2d 821, 20 USPQ2d 1161 (Fed.Cir.1991) (Atmel), Intel had similarly entered into broad cross-licenses with two foreign manufacturers (both with names including the word Sanyo). The two Sanyo companies entered into an agreement with a third company, Atmel, under which the Sanyo companies manufactured Atmel-designed chips which allegedly infringed Intel patents when offered for sale by Atmel in this country. This court held that the importation of such goods was in violation of the patent rights of Intel, since the Intel license to Sanyo did not permit the licensees to manufacture the designs of third parties and thus immunize the fruits of those designs from charges of infringement.
The court quoted with approval the ITC’s description of the incongruity of the result argued for by Atmel:
The interpretation of the licensing agreement as proposed by Atmel would mean that any company that was unable to obtain a license from Intel but still wanted to make its own parts practicing Intel patents could employ Sanyo as a foundry and circumvent Intel’s patents. Without something to explain why the parties would have intended such a result, the agreement will not be given this strained construction.
Id. at 827, 20 USPQ2d at 1166-67 (emphasis in original).
2.
The second element to a successful ‘first sale’ defense is the existence of a sale of the accused product to the defendant — here ULSI — by the owner or someone authorized to sell the product — here HP — prior to ULSI’s own alleged infringing use or sale. The question is whether HP sold the accused product to ULSI. The preamble to the HP-ULSI agreement states: “[t]his Agreement details prototype and production fabrication of an integrated circuit designed bg ULSI ...” (emphasis added). Jt.App. at 38. The contract specifies that “the ownership rights to the chip designs, mask works, and physical layout computer data and processes shall be in the party who develops and designs the same.” Jt.App. at 43 (emphasis added); those items were provided by ULSI. “[ULSI] will provide [HP] with the GDS-II data files containing the artwork database for the Part.” ULSI “warrants that it owns all the rights to the information and processes including specifications, designs, instructions and Confidential Information provided to HP ... [and] warrants that it has the full power and authority to supply and to disclose such information to HP.” Jt.App. at 41 (emphasis added). ULSI further “warrants that it has not improperly or unlawfully acquired the information and processes submitted to HP for the purpose of this agreement.” Jt.App. at 42. The contract then proceeds to indemnify HP against any liability for, inter alia, patent infringement.
The affidavit of Richard R. Duncombe, Sales Manager for the contracting HP fabrication facility, provides the background for these contractual provisions:
I asked [the ULSI representative] whether he had any concerns about intellectual property rights. By this question, I wanted to make sure that ULSI’s product could be fabricated without exposing HP to liability for patent, copyright, or trade secret infringement. [The ULSI representative] replied that ULSI had no concern about intellectual property implications. None*1575theless, in keeping with HP’s custom and practice, ULSI agreed to indemnify HP against any claims of patent infringement, or other legal problems, which might arise from ULSI’s design of the product.
Jt.App. at 411. Had HP intended to sell to ULSI a chip containing the Palmer invention pursuant to the authority granted by the HP-Intel cross-license, and had ULSI intended to use HP in such a capacity, none of the warranties and indemnifications would have been required.
Mr. Duncombe’s affidavit further states: “HP has no ownership rights to ULSI’s products, and no rights to sell or use ULSI’s products. HP is required to return or destroy the magnetic design tape and reticles after HP completes the foundry services.... ”
Jt.App. at 413. Because ULSI had provided its own integrated circuit design, HP never had ownership rights in the invention to sell to ULSI; if there was a ‘sale,’ it must have been of something else. Under the HP-ULSI contract, HP provided the blank silicon wafers upon which the ULSI design was etched. Jt.App. at 60. HP further provided the fabrication services for embedding the ULSI design on the blank HP wafer. Jt. App. at 57. ULSI paid HP for certain nonrecurring expenses, Jt.App. at 58, and paid a scheduled amount for each fabricated chip containing the ULSI design. Jt.App. at 60. Despite language which might imply that HP sold “chips,” Jt.App. at 60, the overall context of the contract demonstrates that the sale was of services, measured per chip, rather than sale of any technology (be it Intel’s or ULSI’s), as embodied in each chip.
Thus HP basically sold its fabrication services and not the C87 chip with the allegedly infringing invention. The first sale of the C87 chip — the accused device in this infringement action, allegedly with the Palmer invention in it — was by ULSI and not by HP. That sale by ULSI was therefore within the scope of § 271, and is not a protected action of a purchaser in the marketplace.
Again, ULSI’s argument confuses the question of whether HP manufactured a product that infringes Intel’s patent rights— allegedly it did, although that issue has yet to be definitively determined — with the question of whether that product was owned and sold by HP to ULSI, thus creating the ‘first sale’ defense.
3.
The district court understood that the parties to this suit and their arrangements fit the pattern described earlier. This is not a situation in which there is a dispute between the parties to a contract regarding their understanding of their respective contract rights. Rather, the district court recognized that the so-called ‘patent exhaustion’ or ‘first sale’ defense was simply lawyer argument by ULSI trying to capitalize on the existence of an agreement between other parties (Intel and HP) in which ULSI had no part. The district court rejected the defense, granted a temporary injunction against ULSI (a matter within her discretion), and prepared for trial on the merits.
The majority overrules this action by the district court, and effectively ends the case by granting judgment in ULSI’s favor on this so-called defense. Thus a sensible and socially desirable agreement between Intel and HP is turned into an unintended gift to all manner of infringers. The result creates a disincentive among competitors to invent rather than litigate, potentially disadvantaging companies in a volatile industry such as this in competing world-wide. ULSI’s position is both bad law and bad policy, and does not merit approval by this court.
Because the District Court did not abuse its discretion, commit an error of law, or seriously misjudge the evidence in holding that Intel was entitled to a preliminary injunction, I would vacate the stay and affirm the trial court’s judgment.5 Even if I had reservations about the propriety of a preliminary injunction at this stage, which I do not, I believe the majority’s conclusion that “ULSI is immune from infringement,” Op. at 1570, is premature, since, if taken literally, it not only overturns the injunction but terminates the litigation.
*1576ORDER
Aug. 26, 1993.
A combined petition for rehearing and suggestion for rehearing in banc having been filed by the APPELLEE, and a response thereto having been invited by the court and filed by the APPELLANT, and the petition for rehearing having been referred to the panel that heard the appeal, and thereafter the suggestion for rehearing in banc and response having been referred to the circuit judges who are in regular active service,
UPON CONSIDERATION THEREOF, it is
ORDERED that the petition for rehearing be, and the same hereby is, DENIED, and it is further
ORDERED that the suggestion for rehearing in banc be, and the same hereby is, DECLINED.
The mandate of the court will issue on September 2, 1993.
Circuit Judges PLAGER, NEWMAN and RADER would rehear the appeal in banc.

. See John W. Schlicher, Patent Law: Legal and Economic Principles § 8.05[1] (1992). We are not here concerned with the question of whether and to what extent a patent owner may impose conditions on the sale which bind future transferees. See id.

. In order to invoke the common law estoppel doctrine some courts required that the third party be a bona fide purchaser for value without notice. See, e.g., Porter v. Wertz, 68 A.D.2d 141, 416 N.Y.S.2d 254 (1st Dept. 1979), affd 53 N.Y.2d 696, 439 N.Y.S.2d 105, 421 N.E.2d 500 (1981) (suit for possession of a Maurice Utrillo painting entitled 'Chateau de Lion-sur-Mer). U.C.C. § 2-403 extends the rule so that "any entrusting of possession of goods to a merchant *1572who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.” See generally, Sheldon F. Kurtz and Herbert Hovenkamp, American Property Law 152 (1987).

. There is a possible exception — C might be considered a third party beneficiary of the A-B agreement (the cross-license). That would seem far fetched, given the nature of the business the parties are in, but it is possible. To arrive at that conclusion, however, would require finding the requisite conditions for third party beneficiary status for C. That is not achieved by a misin-vocation of the patent exhaustion doctrine.

. Contrary to the majority's view, Op. at 1569, Intel did indeed dispute the authorization issue in its brief, under the subheading "The License Agreement Cannot Be Interpreted to Grant ULSI, an Unlicensed Infringer, a Sublicense to Launder its Product by Purchasing Foundry Services From HP.” Intel argued that "the licensees never intended to provide third parties blanket immunity for their infringing activities, particularly where those third parties provided no consideration in return for such immunity.” Ap-pellee brief at 26.

. ULSI raises several issues of claim interpretation regarding which they believe the trial judge erred on her way to concluding that Intel showed the necessary likelihood of success on the merits. I have examined each of ULSI's arguments and find them unpersuasive. Since the majority disposes of the case on other grounds, these issues are not addressed in the majority opinion. See op. at n. 6.