BGH Decision CQI Report II: Patent exhaustion

In principle, patent rights are exhausted with the first sale or the first authorised (licensed) sale. To avoid this, you could think of not taking out a licence but merely entering into a non-aggression pact, i.e. an agreement not to be sued for patent infringement (covenant not to sue).

This approach is particularly interesting for the mobile communications and telecommunications industry with its numerous standard-essential patents (SEP) according to FRAND specifications. In this context belongs the current BGH decision CQI Report II presented here (BGH, X ZR 123/20 of 24.01.23).

The facts

The BGH decision concerns the European patent EP2294737, which describes a method for receiving a control channel signal from a base station and a mobile terminal for carrying out this method. This patent gained publicity in Germany last year, as IP Bridge was able to use it to obtain a German patent injunction against Ford (IP Bridge v. Ford, 7 O 9572/21). The plaintiff and appellant before the Federal Court of Justice is the company IP Bridge (Japan), the defendant is HTC (Taiwan). The action for revocation brought against the patent-in-suit by the defendant, among others, was unsuccessful (Federal Court of Justice, judgement of 18 January 2022 - X ZR 14/20, CQI report).

The defendant distributes mobile telephones in Germany which it describes as compatible with the "Long Term Evolution" (LTE) standard. The plaintiff claims that the distribution of these devices infringes the patent in suit. Recall and destruction were demanded and the Court of Appeal had granted the claims in full (OLG Karlsruhe, 6 U 104/18). The admissible appeal of the defendant before the BGH turned against this.

Was the defendant allowed to rely on patent exhaustion because of the contracts the plaintiff had concluded with various manufacturers of chipsets?

Patent exhaustion because of the plaintiff's contracts with third parties?

In the contracts with the two manufacturers of the chipsets used in the challenged mobile devices, the plaintiff undertook not to sue the chipset manufacturers until after all third parties who could be sued for infringing acts (so-called 'covenant to be sued last').

The Court of Appeal (the OLG Karlsruhe) had granted the claims in their entirety and held that a covenant not to sue was sufficient to prevent exhaustion of the patent, and that an agreement to postpone an infringement action (covenant to be sued last) therefore did not trigger exhaustion of the patent rights.

This central finding of the OLG Karlsruhe was contradicted by the BGH. According to the BGH, it is typical for a covenant not to sue that the waiver is sufficiently recognisable in relation to an infringement action, in which case consent leading to exhaustion is to be affirmed. A reservation of rights vis-à-vis third parties was merely an ineffectual attempt to limit the scope of exhaustion, the BGH stated. The conclusion drawn by the Court of Appeal that a covenant to be sued last could a fortiori not trigger exhaustion was therefore overturned by the BGH.

The BGH added that the exhaustion effect could not be denied because the chip manufacturers with whom the plaintiff had concluded the contracts did not sell mobile telephones, but only components for them.
The exhaustion effect is in principle limited to the product that has been put on the market with the authorisation of the IP right holder. However, the defendant had argued undisputedly at the appeal instance that the only commercially sensible use of the chipsets in question was to install them in mobile terminals. The BGH explained that this circumstance could lead to the fact that the plaintiff's consent to the distribution of the chipsets must be interpreted as implied consent to the distribution of mobile devices equipped with them.

Case referred back to the Court of Appeal

The case was referred back to the Court of Appeal, the OLG Karlsruhe. Above all, the Court of Appeal must make findings on the concrete content of the agreements between the plaintiff and the chip manufacturers. This is not to be based solely on theoretically conceivable courses of events, but rather on realistic assumptions for a "normally expected course of events" in relation to an infringement action. Specifically, the OLG Karlsruhe will have to examine whether, in normal expectation, the chip manufacturers must fear being sued for infringement of the patent-in-suit.

Accordingly, the fact that the direct beneficiary of the cause of action is sued last is not sufficient to avoid exhaustion - unless there are special circumstances suggesting otherwise.

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