The opinion of the court was delivered by: Paul L. Friedman United States District Judge
This matter is before the Court on the parties' cross-motions for summary judgment on the issue of patent exhaustion.*fn1 Upon consideration of Minebea's motion, Papst's opposition, Minebea's reply, Papst's motion, Minebea's opposition and Papst's reply, the Court must conclude that there are genuine issues of material fact which prevent the granting of either motion. The Court will, however, clarify its legal conclusions with respect to both the law of patent exhaustion and the meaning of the 1995 Settlement Agreement to aid the parties in preparing for trial and in drafting preliminary and final jury instructions.
This is not the first time in this litigation that the issue of patent exhaustion has come before the Court on a motion for summary judgment. In October 2004, the Court denied a motion by Papst for partial summary judgment on the issue of patent exhaustion. At that time, the Court gave its preliminary views regarding the 1995 Settlement Agreement and patent exhaustion and invited Minebea to file a motion for summary judgment with respect to the patent exhaustion claim. Many of the views expressed by the Court in October are reflected in this Opinion.
At the heart of the controversy in this case is whether certain of Papst's disk drive patents have been exhausted by Minebea's sales of hard disk drive motors. Papst owns both motor and disk drive patents. "Every patent . . . contain[s] . . . a grant to the patentee . . . of the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States . . . ." 35 U.S.C. § 154. Patent owners also have the right to exclude others from performing acts that induce infringement of the patent or contributorily infringe the patent.
35 U.S.C. § 271(b) and (c). A patent right is exhausted, and thus no longer enforceable by the patentee, if "there has been such a disposition of the article that it may fairly be said that the patentee has received his reward for the use of the patent." United States v. Masonite Corp., 316 U.S. 265, 278 (1942). It thus follows that "[t]he unrestricted sale of a patented article, by or with the authority of the patentee, 'exhausts' the patentee's right to control further sale and use of that article by enforcing the patent under which it was first sold." Jazz Photo Corporation v. ITC, 264 F.3d 1094, 1105 (Fed. Cir. 2001). "This longstanding principle applies similarly to a sale of a patented product manufactured by a licensee acting within the scope of its license." Intel Corp. v. ULSI System Tech., Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993).
Thus, generally, the authorized, unconditional sale of a patented article exhausts the patent with respect to the future use or sale of that article. This is true so long as "the authorized first sale . . . occurred under the United States patent." Jazz Photo Corporation v. ITC, 264 F.3d at 1105. Minebea argues that it was authorized to sell its motors unconditionally and that it sold them "under" the United States patents. In this case, however, Minebea does not seek a finding merely that its sale of motors exhausts the patent on the motor itself, a conclusion no one seems to question. Rather, Minebea contends that its sale of motors exhausts other Papst patents, namely, those disk drive patents listed in Appendix III of the 1995 Settlement Agreement. As Judge Harris said at an earlier stage of this case: "[W]hen a patent holder sells an incomplete product that has no substantial use other than to be further manufactured into a complete patented and allegedly infringing article, the patent holder cannot claim that the final product infringes the patent." Minebea v. Papst, 13 F. Supp. 2d 34, 44 (D.D.C. 1998). Minebea, as the licensee, stands in the place of the patent holder, Papst. In order to establish that its motor sales exhausted the disk drive patents, Minebea therefore must establish that: (a) it had authority to sell the HDD motors; (b) there were no conditions on its sale of motors; (c) its motors are the "essential feature" of the Appendix III patents such that they have no substantial use which does not infringe the Appendix III patents; and (d) the sale of its motors occurred "under" the United States patents.
The first question is whether Minebea's sales of motors were "with the authority of the patentee." Jazz Photo Corporation v. ITC, 264 F.3d at 1105. Minebea maintains that it is authorized to sell its motors under the 1995 Settlement Agreement as well as under earlier agreements between the parties. As has been true throughout this case, the parties focus on the 1995 Settlement Agreement rather than on the prior agreements. Because Minebea claims it was authorized under all of these agreements, however, the Court will discuss each in turn.
1. 1995 Settlement Agreement*fn2
At various points, Minebea has attempted to argues that all of its rights under previous agreements with respect to the Papst Drive Patents ("Appendix III patents") were incorporated into the 1995 Settlement Agreement. This is contrary to the plain language of the Agreement, which provided:
This Agreement supersedes and extinguishes all obligations of Minebea under agreements previously entered into between the parties in regards to the license of any Papst Patent. . . (hereinafter referred to as "Prior Agreements"), and the parties acknowledge that from the Effective Date hereof this Agreement shall govern the relationship between them. Nothing herein shall be construed as limiting or abridging the rights of Minebea under such agreements, and any such rights are incorporated herein and preserved hereby. However, with regard to the rights and obligations of the parties to this Agreement concerning Papst Drive Patents . . . such rights and obligations shall be governed only by the provisions of this Agreement.
See Agreement ¶ 3.1 (emphasis added). Through a somewhat twisted construction of this section which the Court will not reiterate here, Minebea argues that this provision still preserves all of Minebea's rights under previous agreements with respect to the Papst Drive Patents. See Minebea Mot. at 29-30. This is contrary to the plain language of the 1995 Settlement Agreement. The rights and obligations of all parties to the 1995 Settlement Agreement, with respect to the Papst Drive Patents, are limited to those expressly enumerated in the Agreement.
The question, then, is what rights are granted to Minebea with respect to the Papst Drive Patents under the 1995 Settlement Agreement and whether Minebea's motor sales are "authorized" under the Papst Drive Patents. The Agreement expressly provides that:
Papst and each of them agree not to assert any claim or prosecute any action, suit or proceeding against Minebea or any of them for contributory infringement or inducement of infringement of any Papst Patent or Papst Drive Patent See Agreement ¶ 2.4. The Agreement also provides:
Minebea's manufacture, distribution, use or sale of motors by themselves do not directly infringe the claims in the Papst Drive Patents. Papst and each of them agree not to assert any claim or initiate any proceeding against Minebea or any of them for contributory infringement or inducement of infringement of any Papst Drive Patent.
See Agreement ¶ 5.2. It is clear from the language of the 1995 Settlement Agreement that Minebea's motors, by themselves, have been warranted not to directly infringe the Papst Drive Patents. All that Minebea requires, therefore, is a license such that it will not be liable for infringement should its customers combine its motors with other elements, resulting in infringement of the Papst Drive Patents.
The 1995 Settlement Agreement explicitly waives Papst's right to sue Minebea for contributory infringement or inducement of infringement of the Papst Drive Patents. If, therefore, a Minebea motor is sold to Company X, which uses it to make a product which infringes a Papst Drive Patent, Minebea will not be liable for patent infringement with respect to that product. At no point in the Agreement is Minebea granted an explicit "license" under the Papst Drive Patents, however. Rather, Minebea receives a promise that Papst will not sue Minebea should a Minebea motor be manufactured into a product which directly infringes a Papst Drive Patent.
The Federal Circuit has explained:
A patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. Even if couched in terms of '[l]icensee is given the right to make, use, or sell X,' the agreement cannot convey that absolute right because not even the patentee of X is given that right. His right is merely one to exclude others from making, using, or selling X.
Spindelfabrik Suessen-Schurr, Stahlecker & Grill GmbH v. Schubert & Salzer Maschinenfabrik Aktiengesellschaft, 829 F.2d 1075, 1081 (Fed. Cir. 1987). By waiving Papst's right to sue Minebea in the 1995 Settlement Agreement, Papst has authorized Minebea to manufacture and sell motors that would otherwise contribute to, or induce the infringement of, the Papst Drive Patents. Minebea is thus "authorized" to sell its motors to customers who will combine those motors into products which directly infringe the Papst Drive Patents.*fn3
2. Rights Under Previous Agreements
Minebea explains that Papst's previous motion for summary judgment on the issue of patent exhaustion involved only Minebea's sales after June 1995. Because Minebea's current motion involves Minebea's sales prior to June 1995 as well, the motion addresses Minebea's rights under earlier contracts and agreements. See Minebea Mot. at 23.
a. Agreement for the Sale of Intangible Assets
The Agreement for the Sale of Intangible Assets, which governed the patent rights of the joint venture formed in 1990 between Minebea and Papst Motoren, provided that:
Papst as the holder of patents (for the purposes of this agreement the term "patent" is defined as patents, and patent applications) grants to Minebea the right to use all of its patents; especially the predominant German patents and the corresponding international patents, enumerated in Exhibit B attached hereto, world-wide as far as they are required and necessary for research and development (R), manufacturing, engineering, use and ...