The Importance of Label Licenses to Life Sciences Companies After Lexmark

June 12, 2017

On May 30, 2017, in Impression Products, Inc. v. Lexmark International, Inc., the U.S. Supreme Court held that a domestic or foreign sale of a patented product exhausts all U.S. patent rights in that product.1 The case was summarized in our previous WSGR Alert issued on May 31, 2017.

Life sciences companies have routinely and customarily placed limitations on the post-sale use of patented items. These restrictions are often outlined in label licenses, which are commonly used in the life sciences industry to, for example: a) limit use of a product to research and not diagnostic purposes; b) restrict resale; or c) ensure that no implied license extends from, e.g., an instrument to reagents.

Lexmark, however, clearly indicated that post-sale restrictions of patented items could continue to be controlled and enforced through label licenses (e.g., through contract law). Here, we discuss label licensing by life sciences companies that may have previously relied on, at least in part, patent infringement lawsuits to enforce post-sale restrictions on patented items.

For example, a company selling a research tool (e.g., a polymerase chain reaction (PCR) kit) would condition the sale upon a purchaser agreeing to a label license stating that the research tool was for research use only (RUO). The label license would also state that if the purchaser wanted to use the research tool for other purposes, a separate license would need to be negotiated.2 Through use of the label license, the seller granted the purchaser a limited right under its patents—the limitations were customarily specified in the label license.

In Lexmark, the Supreme Court held that a domestic or foreign sale of a patented product by a company exhausts all U.S. rights in patents covering the sold product (i.e., patent exhaustion).3 Nevertheless, such companies can still effectively employ label licenses to limit, by contract, the post-sale use of patented products.

At the outset, we note that patent exhaustion is limited to those U.S. patents covering the sold product. Thus, for example, the sale of a PCR kit would likely not exhaust a company's U.S. patent rights in a PCR machine that conducts amplification and detection. Similarly, the sale of a PCR machine would not exhaust a company's U.S. patent rights in PCR kits.

Label licenses, post Lexmark, remain enforceable under contract law. Creative and effective solutions involving the use of label licenses therefore take on increased importance. For example, a label license could specify that violation of its limitations, as determined by the seller in its sole discretion, will result in the buyer agreeing—as a contract remedy—to immediately stop using the seller's product. Additionally, a label license could stipulate that a purchaser's violation of the label license, as determined by the seller in its sole discretion, will result in the seller having the right to automatically cut off, e.g., a reagent or kit supply chain.

Research tools and other products may be sold in and outside of the U.S., and foreign jurisdiction laws relating to contracts may have significant differences from U.S. contract laws. Thus, companies that sell products outside of the U.S. may consider having separate label licenses (distinct from label licenses for U.S. sales) that account for and effectively address these differences. Regardless, issues including venue,4 personal jurisdiction, governing law, conflict of laws, restrictions on the transfer of the product from the purchaser to third parties, and remedies for breach should all be carefully considered and specifically enumerated.

Finally, as an alternative strategy to control patented product use, companies may consider leasing rather than selling selected patented products (e.g., PCR machines). A leasing strategy may not be a practical solution for all products, particularly disposables (e.g., reagents and kits). Nevertheless, for certain products, leasing (as opposed to selling) would preserve a company's right to sue for patent infringement should a lease be violated, in addition to claims for breach of contract.

In the wake of Lexmark, the creative crafting of enforceable label licenses and the strategic use of leases take on increased importance for companies that wish to limit the use of patented products.

For questions regarding Lexmark, label licensing, leasing, or generally limiting the use of patented products, please contact Vern Norviel, Ian Edvalson, Rick Torczon, or any member of the patents and innovation strategies or technology transactions practices at Wilson Sonsini Goodrich & Rosati.

Charles Andres contributed to the preparation of this WSGR Alert.

1 Slip Op at 5, 9, and 18.
2 Before Lexmark, the enforcement of label licenses against companies was relatively straight forward. Enforcement against universities was trickier. In general, life sciences companies that sell research tools do not bring enforcement actions against universities or university researchers because doing so is bad for future business. However, universities often file patents that are based on research done in university labs, and university labs may use research tools under an RUO label license. Thus, before Lexmark, at least some university patents would likely have been subject to label license enforcement under a patent infringement suit. As such, Lexmark removes a patent lawsuit enforcement diligence consideration where university patents are involved. Nevertheless, it is possible that for particularly valuable patents, companies may deviate from the general practice of not suing universities, but rather sue the university, e.g., under contract law for breach of the label license.
3 Slip Op at 5, 9, and 18.
4 Venue considerations may be different for contract enforcement suits and patent lawsuits. See, e.g., "U.S. Supreme Court Limits Venue in Patent Infringement Cases," WSGR Alert, May 22, 2017.