Unconditional Sale

As discussed above, the conclusion drawn in Section 4.2.1.2. (Sale of FOSS) is that FOSS licensing may constitute sale of (free and/or open source) software for the purpose of copyright exhaustion. However, the concept of sale as such may not be sufficient to trigger exhaustion of patent rights in software. When it comes to the US patent exhaustion doctrine, the sale must also be unconditional, i.e. not impose restrictions on resale of the patented article, in order to trigger exhaustion.⁵⁸⁸ The requirement of unconditional sale under the US patent exhaustion doctrine is similar to the requirement of absence of restrictions on alienation of the copy in order to constitute sale of software under the US copyright exhaustion doctrine. Whether FOSS licensing entails restrictions on transfer of a copy of a FOSS program or may be considered as an unconditional sale, is already shortly discussed above in copyright context. However, further analysis is required for the purpose of evaluating exhaustion of patent rights in a copy of a FOSS program. As affirmed by the US District Court for the Northern District of California, the GPL permits distribution of software only if the distributor satisfies several specific conditions, such as including a copy of the GPL along with the distributed program.⁵⁸⁹ Also the permissive BSD license states that "redistribution and use in source and binary forms, with or without modification, are permitted provided that the following conditions are met." Further, the MIT license provides that

"permission is hereby granted… subject to the following conditions". Despite that the FOSS licenses subject to this study include conditions on copying, modification and/or distribution of software, each of the licenses permit sale, including other redistribution and/or licensing, of software provided that the license conditions are met. As discussed in Section 4.1.2 (Patent Exhaustion in the US), conditional sale is understood to mean sale imposing restrictions on resale of the patented product.⁵⁹⁰ Despite the conditions on modification and distribution of GPL-licensed software included in the GPLv2§§1-2, it is expressly mentioned in the GPLv2 that the said license is designed to make sure

588 Quanta v. LGE at 2116 and 2122.

589 XimpleWare v. Versata Order Granting-In-Part Defendants' Motions to Dismiss. No. 5:13-cv-05161-SI-PSG (N.D. Cal. Nov 25, 2014) at 11.

590 Quanta v. LGE at 2116 and 2122.

that the licensee has the freedom to distribute copies of free software, and to charge for such distribution.⁵⁹¹ Further, additional restrictions, including any attempt to restrict transfer of software, are expressly prohibited under the GPLv2§4. Accordingly, the GPL license does not restrict the right to transfer software. Therefore, it may be argued that FOSS licensor contributing and/or redistributing software under the terms of the GPLv2 provides the software with licensees based on an unconditional sale from patent perspective. Former FSF Counsel has noted, in connection with an analysis on implied patent license under the GPLv2, that the elements of implied license found in Hewlett-Packard v. Repeat-O-Type⁵⁹², i.e. "seller" "sells" "without restriction" are also present in licensing of software under the GPLv2, thus arguably allowing an unconditional sale of a copy of the GPLv2 licensed program, triggering exhaustion of patent rights in the said copy.⁵⁹³

Further, CAFC has held that the requirements regarding attribution and transparency of modifications create conditions for protecting the economic rights in the FOSS license, and are thus enforceable conditions under the US Copyright Act. The court also reminded that under Californian law, the words "provided that" usually denote a condition. The court distinguished independent contractual covenants from conditions of a copyright license, holding that mere covenants do not limit the scope of the license, whereas breach of conditions may result in copyright infringement.⁵⁹⁴ Further, while FOSS licensing may not be deemed unconditional copyright license under the above analysis, it must be borne in mind that, in essence, those restrictions are conditions on grant of the express copyright license. However, if emphasis is put on the fact that the reward of the patent holder rests on the consideration received by the FOSS licensor based on FOSS licensee's compliance with the license terms (i.e. copyright conditions), such as attribution and code contributions, then the relation between exhaustion of patents and the license conditions is closer, and may compel the conclusion that FOSS

591 Preamble of the GPLv2.

592 Hewlett-Packard Co. v. Repeat-O-Type Stencil Manufacturing Corp., 123 F.3d 1445 (Fed. Cir. 1997), cert. denied, 523 U.S. 1022 (1988). (Hewlett-Packard v. Repeat-O-Type)

593 Ravicher 2005.

594 Jacobsen v. Katzer at 1381-1383.

license conditions are conditions for not only the copyright grant, but specific reward, and bargained for consideration for the consummation of rights in the respective patents embodied by the FOSS program in general. However, if the license conditions of the FOSS licenses subject to this study are met, there are no (additional) conditions imposing restrictions on resale of the copy of the FOSS program from patent perspective. Namely, the instrument governing first sale of the patented article may include general obligations such as the obligation to pay the sales price of the patented article as a condition for transfer of ownership in the sold article as well as restrictions on resale of the patented article. If such general obligations are met, they do not render the sale conditional, i.e. restrict resale of the patented article and preclude exhaustion of patent rights in sold articles. As discussed in Section 3.1.2 (Acceptance of License vs.

Conclusion of Contract), consideration is one element of a valid contract under the US laws. Without such element, an (ordinary) contract concerning (first) sale of a patented article would not be valid in the US, while consideration alone does not render the sale conditional. Perhaps the same analogy could be drawn also in context of FOSS:

compliance with copyright conditions of the FOSS license forms the bargained for consideration between the FOSS licensor and the FOSS licensee(s): If the copyright conditions are met, release of a copy of a FOSS program under a FOSS license may amount to an unconditional sale from the perspective of patent exhaustion, and may thus trigger exhaustion of patent rights embodied by the sold copy of the FOSS program.

This could apply irrespective of whether the patent holder is a contributor or a mere distributor of FOSS: in both cases it benefits from the downstream licensees' compliance with the license terms of the respective FOSS license.

Finally, it is worth reminding that SCOTUS held in Quanta v. LGE that since the respective license agreement concerning sale of patented products did not impose restrictions on resale, the sale was unconditional despite that a separate master agreement did require the buyer to give notice to its customers that the seller's license does not extend to customer's own combinations. However, the Master Agreement expressly provided that breach of the Master Agreement would not amount to breach of

the License Agreement.⁵⁹⁵ Therefore, the contractual structure governing the sale may have an essential impact on whether or not the patent exhaustion doctrine actually applies to sale of FOSS in each given case.⁵⁹⁶ This should, however, not change the above analysis of patent exhaustion in FOSS context, because if the copyright conditions are met, the FOSS licensee is free to resell the copy of the FOSS program.

4.2.1.4 Reward

After discussing in Section 4.2.1.2 (Sale of FOSS) on whether FOSS licensing may constitute sale of software triggering exhaustion of distribution right in the copy of a FOSS program, it is worth noting that while it was considered that FOSS licensing may amount to sale of FOSS triggering copyright exhaustion, SCOTUS has held that, by the end of the day, the form of transaction is not decisive for finding patent exhaustion.

Instead, the decisive test for patent exhaustion is, according to SCOTUS, whether there has been such a disposition of the article that the patent holder has received reward for using the invention. SCOTUS ruled that in order for the disposition, whether a sale or a license, of the patented article to trigger exhaustion, the patent holder must have received reward for use of the patented article.⁵⁹⁷ However, the reward does not always have to be equal to the contemplated full value for use of the patent.⁵⁹⁸ For comparison, CJEU has held that for exhaustion of distribution right in a copy of a computer program based on sale of software, the relevant question is whether the copyright holder who authorized, even free of charge, the downloading of that copy from the Internet, received a fee intended to enable him to obtain a remuneration corresponding to the economic value of the copy.⁵⁹⁹ Further, while CJEU referred effectively to a payment in form or a remuneration corresponding to the value of the copy, academic scholars have argued that transfer of ownership in a copy also free of charge may result in exhaustion of the distribution right when the transfer of ownership is effected, for example, by

595 Quanta v. LGE at 2110.

596 Merges & Duffy 2013 at 1209.

597 US v. Masonite at 278.

598 Static Control Components v. Lexmark Intern at 586.

599 UsedSoft v. Oracle at Paragraph 72.

operation of a gift or a donation.⁶⁰⁰ Further, also CJEU expressly stated that even authorizing the download free of charge may result in exhaustion, if the right holder otherwise received a remuneration corresponding to the economic value of the copy.

Therefore, as shortly discussed already earlier, the key appears to be whether the transfer of ownership is free of charge or in consideration for a lump sum fee, but not subject to recurring royalties.

The rulings of SCOTUS and CJEU mandate discussion on reward in the context of FOSS licensing. Although FOSS is often distributed free of charge, there is no restrictions on selling it for monetary consideration. Free software refers to freedom, not price: software can be free even if it is not delivered for gratis.⁶⁰¹ Further, even if FOSS would be distributed for free, FOSS licensor may still gain sufficient consideration from the mere FOSS licensing model. CAFC has held that even the lack of money changing hands in FOSS licensing does not mean that there were no economic consideration involved in FOSS licensing model. According to CAFC, FOSS licensing involves substantial economic benefits reaching even far beyond traditional royalties involved in sale of software. By way of example, FOSS licensing model may help in generating market share for products, increase worldwide reputation and attract free of charge code contributions.⁶⁰² Therefore, sale, licensing and/or distribution of a copy of a FOSS program against lump sum fee permitting permanent use of the program may indeed constitute sale for the purpose of not only copyright, but also patent exhaustion.

Namely, when the question is of a permanent transfer of ownership of a copy of a FOSS program made available on fixed medium (in the US) and/or for download on the Internet (in Europe) under the authorization of the patent holder, both copyrights and patents may be exhausted in the sold copy irrespective of whether the transaction is called a sale, licensing and/or distribution of FOSS and provided, of course, that the transaction is unconditional, i.e. does not impose restrictions on resale of the copy.

Considering that the FOSS licenses subject to this study do not impose restrictions on

600 Guibault & van Daalen at 115. Haarmann at 99. Harenko, Niiranen, et. al. at 157.

601 2 Raymond Nimmer §11:7 at 11-16 – 11-17.

602 Jacobsen v. Katzer at 1379.

resale of the copy of a FOSS program, the said FOSS transaction may constitute sale, triggering exhaustion of patents (and copyrights) in the copy.

4.2.1.3 Authorization of the Patent Holder

Patent exhaustion requires that the first sale of the patented product, including also release of a copy of a patented FOSS program, is authorized. Specifically, under the European patent exhaustion doctrine, patent exhaustion is triggered when the patented product has been lawfully put on the market by the patent holder or with its consent.⁶⁰³ Under the US patent exhaustion doctrine, patent exhaustion is triggered by a sale authorized by the patent holder.⁶⁰⁴ (Note the difference to the US copyright exhaustion doctrine, under which copyright holder's authorization for first sale is not required, but the sold article must be a lawful copy of the protected work.) Accordingly, under both the European and the US patent exhaustion doctrines, first sale of a patented article (1) by the patent holder; or (2) its authorized licensee results in exhaustion of the patent rights embodied by the sold article.

In the context of sale, licensing and/or distribution of FOSS, this means that exhaustion of patent rights in a copy of a FOSS program occurs, by way of example, in the following circumstances: patent holder releases a copy of a FOSS program under and in compliance with a FOSS license subject to this study either free of charge or against a lump sum payment, such transaction, by definition, meeting also the elements of sale of software. The copy subject to exhaustion of patent rights may be either (A) a copy of the patent holder's own, original, FOSS program (owned and copyrighted by the patent holder, i.e., the patent holder is a FOSS contributor) contributed by the patent holder or its authorized licensee on behalf of the patent holder; or (B) a copy of a FOSS program received by the patent holder from other FOSS licensor(s), and redistributed by the patent holder or its authorized licensee on behalf of the patent holder in verbatim form (i.e., the patent holder is a FOSS distributor); or (C) a copy of a FOSS program received by the patent holder from other FOSS licensor(s), and licensed by the patent holder or

603 Centrafarm v. Sterling Drug at 503-504 and 507.

604 Quanta v. LGE at 2112.

its authorized licensee on behalf of the patent holder in modified form (i.e., the patent holder is also a FOSS contributor of a copyrighted joint work covered also by its patent rights).

When it comes to authorization of sale of a copy of a FOSS program, a German court held in a case regarding exhaustion of copyrights in a copy of a FOSS program licensed under the GPLv2, that exhaustion did not apply to copies of the FOSS program sold on tangible media. The defendant had violated the license conditions of the GPLv2§2, due to which it had lost its license rights under the GPLv2§4 and therefore, copies made by the defendant were put into circulation without the consent of the authors. Absent consent, the sale was unauthorized, and accordingly, did not trigger exhaustion of copyrights in the infringing copies.⁶⁰⁵ However, even if a patent holder would sell a patented article in breach of the respective (downstream) FOSS license governing copying, modification and distribution of the copyrights in the copy of the FOSS program, the said breach does not exclude exhaustion of patent rights in the sold copy as long as the elements of patent exhaustion doctrines in Europe and/or the US, are met. Of course, the patent holder could be liable towards the copyright holder(s) of the FOSS program for alleged copyright infringement due to breach of the said FOSS license.

Such infringing activity, however, does not necessarily affect the license rights of other downstream FOSS licensees, which received the infringing copies from the patent holder: if the FOSS licensees comply with the terms of the respective FOSS license, the upstream party's, including patent holder's) infringement does not automatically terminate the downstream users' rights. Namely, the GPLv2 license expressly states that even if a distributor infringes the license terms, the parties who have received copies from the infringing distributor will not have their licenses terminated as long as such recipients themselves remain in full compliance with the license.⁶⁰⁶ This outcome was noted also by the German court in the copyright exhaustion case.⁶⁰⁷

605 Welte v. D-Link.

606 GPLv2§4.

607 Welte v. D-Link.