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Assume a patent is awarded with apparatus and method claims applying to some device with an intended process. For example, consider a potato peeler intended to be swiped across potatoes, in which both the peeler and process of swiping the peeler are patented. If someone wanted to then open a potato-peeling shop, and they bought the device from a patent owner or licensee, would they owe royalties on the revenue generated by peeling potatoes?

In my case, I am working out a license agreement with such a patent owner in order to manufacture and sell it. I am wondering if I can somehow buy the device from myself or sell the device to a family member (i.e. not at arm's length) at 'market price', and then open a shop providing royalty-free services using the device. Would exhaustion apply in this case? What if I instead sold the device to someone who was at arm's length?

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  • Are you suggesting you can sell a device for peeling potatoes, but then the purchaser would have to pay a royalty in order to use it? Who would by such a device?
    – Eric S ♦
    Jul 29, 2017 at 0:34
  • @EricShain I'm basically asking if as a licensee, can I minimize royalties by making most of the revenue from services performed with the device (which would hopefully not owe royalties) rather than device sales.
    – user132162
    Jul 30, 2017 at 3:36
  • This seems like a contracts question. The license terms are negotiated.
    – Eric S ♦
    Jul 30, 2017 at 15:19
  • @EricShain I think it's more a question of statutory or case law on patent exhaustion, and what the courts have stated on this matter in the past (if it has come up). Assume the license contract did not consider this possibility, and only stated that royalties were due on something like 'sales of the technology'.
    – user132162
    Jul 30, 2017 at 16:49
  • Well, I'm not a lawyer so I'll have to defer to those more qualified. I'd still guess since you need a license, the license language should be written to cover this.
    – Eric S ♦
    Jul 30, 2017 at 22:40

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This method exhaustion issue was the subject of a SCOTUS case Quanta v LG. It is covered by in Wikipedia. Patent claims covered both a cache control chip as an item and methods that the use of the chip caused to occur. The court ruled that having given a license to the thing, the rights were exhausted and they couldn't stop the method from being carried out by the licensed chip.

It was subtler and more complicated that I have explained here.

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