With its holding in Quanta Computer, Inc. v. LG Electronics, Inc. on June 9, 2008, the US Supreme Court limited a patentee’s ability to collect multiple royalties from its patent.  With this decision, the Court clarified the scope of the patent exhaustion doctrine (also known as the first sale doctrine), which provides that the first authorized sale of a patented item terminates all patent rights to that item. 

I.          Background

South Korean company, LG Electronics Inc. (LGE), licensed some of its patents related to personal computers to Intel Corp. Some of the LGE patents cover components such as microprocessors and chipsets, while others cover the systems and methods that combine these components with other devices to produce operational computing systems. The license agreement permitted Intel to manufacture and sell microprocessors and chipsets covered by LGE’s patents to computer manufacturers, such as Quanta. In a separate agreement (i.e., Master Agreement), Intel agreed to notify its customers that the license granted by LGE did not extend to products made by combining Intel and non-Intel components. Despite receiving notice of this agreement, Quanta manufactured computers by combining the licensed Intel components with various non-Intel components, such as buses and memory.

LGE then sued Quanta and others for patent infringement in the United States District Court for the Northern District of California. LGE asserted that the combination of Intel and generic computer components infringed its system and method patents. The district court granted summary judgment to Quanta, holding, among other things, that Intel’s sale to Quanta exhausted LGE’s patent rights. The United States Court of Appeals for the Federal Circuit reversed the district court, ruling that patent exhaustion did not apply because the transaction between LGE and Intel was conditioned on the requirement that Intel customers be notified that the Intel products may not be used with non-Intel products. In September of 2007, the Supreme Court accepted Quanta’s petition for certiorari to consider whether the LGE-Intel agreement and Intel’s sale to Quanta exhausted LGE’s patent rights.

II.        The Supreme Court’s Ruling

The unanimous Court reversed the Federal Circuit, holding that because the exhaustion doctrine applied to method patents and because the license authorized the sale of components that substantially embodied the patents-in-suit, the sale exhausted the patents’ right to exclude.

Before the Supreme Court, LGE argued that the exhaustion doctrine is inapplicable because it does not apply to method patents. In turn, Quanta argued that there is no method claim exception to the application of the exhaustion doctrine. In fact, Quanta noted several examples of the Court’s patent exhaustion cases that involved method patents. 

The Court accepted Quanta’s argument.  Writing on behalf of the Court, Justice Clarence Thomas stated that the Court’s precedent does not “differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials.” According to the Court, eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine because patentees could easily avoid patent exhaustion by drafting patent claims to a method rather than an apparatus. 

The Court then concluded that Intel’s products embodied the patents-in-suit. Relying primarily on United States v. Univis Lens. Co., 316 U.S. 241 (1942), it noted that exhaustion was triggered in this case by the sale of the microprocessors and chipsets to Quanta because their only reasonable and intended use was to practice the patent and because they embodied essential features of the patented invention.

Next, the Court considered whether sale of the microprocessors and chipsets to Quanta exhausted LGE’s patent rights. Here, LGE argued that there was no authorized sale because the license agreement did not permit Intel to sell its products for use in combination with non-Intel products to practice the patents. The Court disagreed, noting that the provision requiring notice to Quanta appeared only in the Master Agreement—not the patent license. As such, Intel’s authority to sell its microprocessors and chipsets embodying the LGE patents was not conditioned on the notice provision.

III.       Conclusion

The Quanta decision provides discomfort to patentees seeking to maximize the value of their patents by licensing rights to companies at different stages of the manufacturing process. Essentially, a patentee’s authorized sale of an article that substantially embodies the claims of a patent exhausts the patentee’s rights. This decision is the latest installment in a series of cases in which the Supreme Court has reined in the Federal Circuit and effectively weakened a patentee’s rights. Last year, the Court made it easier to invalidate patents under 35 U.S.C. § 103.  Separately, the Court ruled that US patent law doesn’t apply to software sent to foreign countries. In 2005, the Court ruled that a lower court did not have to issue an injunction against an infringer.

If you have any questions about the Quanta decision and its potential impact, please contact Arent Fox’s Aziz Burgy.

Aziz Burgy
burgy.aziz@arentfox.com
202.857.6378