Setback for Patent Troll Under “Patent Exhaustion” Doctrine Liberates Mobile Technology

Helferich Patent Licensing’s (HPL) licensing program has been dealt a serious blow by an Illinois federal judge. On August 14, Judge John Darrah ruled that the New York Times and others could not infringe HPL’s patents because the patents are exhausted. Judge Darrah entered judgment in NYT’s favor in a patent infringement suit brought by HPL against NYT, thus ending a three-year dispute between the companies.

As many retailers, content providers, technology vendors, and device manufacturers know, HPL is a patent assertion entity—commonly referred to as a “patent troll” —that is in the business of monetizing the portfolio of patents on which Richard J. Helferich is the named inventor. HPL claimed that Helferich invented and patented the concept of embedding a URL or link to content in a text message. HPL contended that any person or entity who participated in any way in providing or retrieving content via a link embedded in a text message infringed its patents.

HPL aggressively asserted its portfolio—which includes dozens of patents—suing and sending demand letters to hundreds of entities. HPL’s targets included everyone from content providers such as the New York Times and retailers such as Walmart, to wireless carriers and mobile phone manufacturers. HPL offered a license to its patent portfolio for a payment of $750,000, and scores of businesses licensed HPL’s portfolio. HPL boasts that it has licensed over 200 companies, and its earnings are estimated to be in the hundreds of millions. Significantly, HPL licensed every U.S. wireless handset manufacturer. Those licenses proved to be HPL’s downfall in its case against the New York Times.

In July 2010, HPL sued the New York Times (NYT) in federal court in Illinois¹ alleging NYT infringed its patents by sending text messages containing links to NYT content. In particular, HPL asserted that NYT’s mobile alert services and social media campaigns infringed. The case was dormant for a time while HPL’s patents underwent reexamination in the patent office, but came back to life in 2012 when HPL’s patents emerged from reexamination.

Just as HPL received the green light to move forward with its patent infringement suit, however, Judge Darrah also granted NYT’s request to bring an early motion for summary judgment of non-infringement based on the doctrine of patent exhaustion. Patent exhaustion is a legal principle holding that an initial authorized sale of a patented item terminates all patent rights to that item.² For example, if a smartphone manufacturer licenses the Helferich patents and sells a licensed smartphone to a customer in the U.S., under the doctrine of patent exhaustion the customer cannot be liable for infringement if he/she uses the smartphone in a way that infringes the Helferich patents.

Patent exhaustion is designed to prevent double recovery by a patent holder. As Judge Darrah explained, “[t]he rationale underlying the doctrine rests upon the theory that an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of that item thereafter because the patentee has bargained for and received the full value of the goods.”³ In making its “patent exhaustion” argument, NYT highlighted HPL’s admission that it had licensed the entire U.S. wireless handset industry, and argued that this means that every wireless handset in the U.S. can be used to practice HPL’s patents free from liability for infringement. NYT noted that HPL’s infringement theory required that a wireless handset was used in the content delivery process. Since all wireless handsets are authorized to make use of HPL’s patents, NYT argued that under the doctrine of patent exhaustion content providers cannot be liable for patent infringement.

Judge Darrah agreed with NYT. Central to the court’s ruling was the proposition that “the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent—even if it does not completely practice the patent—such that its only and intended use is to be finished under the terms of the patent.”⁴ In the NYT case, HPL urged that patent exhaustion did not apply because it licensed only some of the patent claims to the handset manufacturers—the so-called “handset claims”—but did not license the claims it was asserting against NYT—the so-called “content claims.” Judge Darrah rejected HPL’s argument, agreeing with NYT that “a patentee cannot use a license agreement to carve up a patent, claim by claim, in order to receive multiple royalties.”⁵ Judge Darrah concluded that “[t]he doctrine of patent exhaustion governs the exhaustion of a patent, not the exhaustion of individual claims.”⁶ To find otherwise, he concluded, would lead to uncertainty on the part of the licensee as to which parts of the patent it was licensed to use, and allow a patent holder to “potentially claim a multitude of separately licensable rights from one invention and thereby, in effect, create hundreds of patents out of a single patent.”⁷ Such a result, Judge Darrah wrote would be contrary to the policy considerations underlying patent exhaustion—i.e., “to avoid double recovery by a patentee, promote the orderly administration of patent rights, provide an efficient method for determining the termination of the patent monopoly, and promote fair competition.”⁸

In the end, Judge Darrah found that “[t]he handset devices have the capability to receive content from content providers, and the patents all require devices capable of receiving content or messages,” and “[t]here would be little value to the handset manufacturers (or their end users) to have purchased license to HPL’s patents to receive content from a third-party content provider if the content provider, like Defendants, could not send the message to the licensed handset device without infringing the patents.”⁹ Thus, he found the handsets “sufficiently embody the patents,” and ruled “Once the handset manufacturers sell the handsets which embody HPL’s patents, HPL’s patents are exhausted as to all third parties, including Defendants.”¹⁰

This is likely not the last word on the subject. Judge Darrah’s pronouncement sounds the death-knell to HPL’s licensing program. HPL will almost certainly appeal to the Federal Circuit. Judge Darrah’s opinion can be obtained here.

FOOTNOTES