Background
LG Electronics (LGE) owns the rights to several patents on computer technology, which describe a computer operation or a method, not actual product. LGE licensed the patents to Intel Corporation a license agreement that authorizes Intel to manufacture and sell microprocessors and chipsets that use and incorporate the LGE patents. LGE and Intel had a separate agreement (“Agreement”) that required Intel to provide its customers in writing that the license does not extend to a product made by combining an Intel product with non-Intel product. The Framework Agreement provides that violation thereof does not affect the integrity and the terms of the license agreement.
Quanta purchased microprocessors and chipsets from Intel, then builds computers using Intel parts in combination with non-Intel parts, but without changing the Intel parts. LGE sued Quanta, asserting that combination has infringed LGE’s patents. Quanta argued that LGE’s patents were exhausted when Intel sold Quanta parties that embodied LGE’s patents and thus LGE has no rights.
The district court initially granted summary judgments in favor of Quanta, but on reconsideration, denied the summary trial on the grounds that the doctrine of exhaustion does not apply to method patents. The Federal Circuit held that patent exhaustion does not apply to method patents and, alternatively, found that LGE did not license Intel to sell Intel products to Quanta to combine with non- Intel.
The U.S. Supreme Court heard the case Jan. 16, 2008 and issued its opinion, reversing the Federal Circuit, and find in favor of Quanta, June 9, 2008.
The doctrine of exhaustion of patent and its history pre-Quanta
The basic concept of exhaustion of patent law means that the first authorized sale of a patented item terminates all patent rights to that item. Quanta, 128 S. Ct at 2115. The doctrine is based on the notion that a patent is entitled to a single charge – allowing the first sale, the patentee has probably negotiated and obtained the value of patent rights. The Supreme Court has explained that the touchstone of the doctrine of exhaustion of patent is “whether or not there has been such a provision of the article, it can rightly say that the holder received reward for the use of the article. ” United States v. Masonite Corp., 316 U.S. 265, 278 (1942).
In the early 1900s, some courts have allowed patentees to post-sale restrictions on their patents that have allowed them to control (and receive additional fees) in the channel downstream, long after the sale initial authorized. Quanta, 128 S. Ct at 2115-2116. But in 1917, the Supreme Court has clearly indicated that these restrictions after-sales would not be tolerated. In Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502, 516 (1917), the Court held that “the right to sell is exhausted by a single, unconditional sale, the item being sold and is performed outside of the monopoly law patent and rendered free of any restriction which the vendor may attempt to set it. “
Before Quanta, preceding the most recent and important Supreme Court on the exhaustion doctrine, including its application components and method patents, has been United States v. Univis Lens Co., 316 U.S. 241 (1942). In Univis, the patentee (Univis Corp.) held a patent claim on a spectacle lens and contact lens manufacturing process by producing grinding and polishing lens blanks. Univis Corp. licensed its related company, Univis Lens, manufacture lens blanks.
Univis Lens sold the license blanks to wholesalers and retailers who would finish grinding and polishing of blanks by the practice of the patented method Univis. Licenses for wholesalers and retailers contained strict limitations after purchase to which the lens blanks may be sold and at what price.
The court found that when selling licensed Univis “of the lens blanks, which had no use except to practice realistic Univis patents, patent rights lens on the lens blanks and finished products were exhausted. “[T] he authorized sale of an item that is able to use that in practice the patent is an abandonment of patent monopoly with respect to the item being sold.” Univis, 316 U.S. at 249.
The Court stated:
”Retailers of all first article manufactured under a patent puts the article beyond the scope of the monopoly conferred by patent. If the licensee sells the patented article in its full form or sells it before the end in order to enable the buyer to finish and sell it, he also departed from the article, and made the vehicle for the transfer to the buyer the ownership of an invention in respect of this article. To that extent, he has abandoned his patent monopoly in either case and has received the purchase price of all the advantages of this monopoly that the patent law provides him. S it was possible to control the price at which it could be sold by others, it would extend its monopoly in one case as much as in the other, and it would extend beyond the fair meaning of laws Patent and construction, which has hitherto been given. “316 U.S. at 252.
Despite holding Univis, however, the Federal Circuit again allowed the erosion of the exhaustion doctrine by allowing patent holders to impose restrictions after-sales service and the limits of their patents. The seminal (and often criticized) to power in Mallinckrodt, Inc. v. Medipart, Inc., 976 F. 2d 700 (Fed. Cir. 1992), helped limit patentees to their customers significantly in the repair, renovation, recycling and modifying equipment post-sales – a violation of the restriction was an infringement of patent unless the restriction violated another law such as antitrust laws. The justification for detention, a patent holder to the merchant and receives royalties based on a planned and their use, if the buyer makes use of other auxiliaries and the patent, the patentee must be able to claim additional charges for non-negotiated employment.
The decision of Mallinckrodt and its progeny have limited the right of the exhaustion of patents in various ways – a controversial result. Patent owners have relied on these cases by drafting license agreements that the Federal Circuit has interpreted as the preservation of their rights to file a complaint of infringement against downstream users who purchase and use the licensed product. Indeed, the Federal Circuit has applied this same line of thought when it upheld the District Court against Quanta. (1)
In addition, from Mallinckrodt, also in apparent contradiction with the holding Univis, the Federal Circuit held that method claims are not subject to the exhaustion of patents. (2) The Federal Circuit has seriously weakened the doctrine of exhaustion by limiting only to claims of devices.
Quanta Univis reaffirms and renews the doctrine of exhaustion
In its decision in Quanta, the Supreme Court relied heavily on the precedent of Univis and definitively held that the exhaustion doctrine applies to method claims and apparatus claims.
The Court said: “It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be” embodied “in a product, the sale of rights patent exhaustion. ” 128 S. Ct at 2117.
The Court warned that any other result “would seriously undermine the exhaustion doctrine. Patented seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an appliance.” 128 S. Ct 2117. This technique is exhausted avoidance, if it were effective, would wreak havoc on downstream buyers, who may be suddenly responsible for patent infringement, unaware that a method incorporated in the product they have has purchased a patent inexhaustible.
After verifying that exhaustion applies to method claims, the Court explained that “the extent to which a product must have a patent in order to trigger exhaustion.” Id at 2118. Again, the Court examined Univis guidance, concluding that when the licensed product that contains the patented method is really able to be used when we practice the patented method, exhaustion applies:
”As the lens blanks Univis, Intel products are an important part of the patented invention and all but completely practice the [LGE patent]. Here, as in Univis, the incomplete article substantially embodies the patent because the only necessary to practice the patent is the application of common processes or the addition of standard parts. Any inventive each patent is embodied in the Intel products. “128 S. Ct at 2120.
LGE argued that exhaustion does not apply because the sale of Intel to Quanta was not “authorized” first sale. LGE argued that the contractual restriction after purchase it imposes on its patents – that LGE did not license Intel to sell Intel products to Quanta to combine with non-Intel – have prevented the application doctrine. 128 S. Ct at 2121. The Federal Circuit had agreed with this argument, following the precedent it had established for itself (which the parties can contract around the exhaustion) during the last 15 years.
But the Supreme Court disagreed. LGE had two separate agreements with Intel a license agreement that granted Intel the right to manufacture and sell patents LGE, and a separate Master Agreement, which contained the restriction after purchase. But the specific framework agreement stated that its breach did not affect the validity of the license agreement. Consequently, the licensing agreement Intel has the authority to sell its products containing the patent LGE, and the first authorized sale exhausts LGE patents, regardless of the other agreement. Id at 2121-2122.
Quanta leaves one question answered imperfectly
There may be a question remains about the exhaustion when the component that embodies the patent has other uses non-infringement. For example, if the Intel products were thousands of non-infringing uses outside the LGE patented process, but someone has used the Intel patent practice LGE, an argument could be that exhaustion does s’ LGE should not apply and have the right to sue and infringement action against this user.
It certainly was not the case in Quanta, the Intel chips really have no use, even while embodying the LGE patents until they are put into a computer and practical use of the patent . But what if the chips have been many other uses, only one has been the practice of patent LGE? Could exhaustion still apply? The foregoing indicates that the overwhelming exhaustion does not apply in such circumstances.
But the opinion Quanta includes this curious comment:
”While each Intel microprocessor and chipset practices thousands of individual patents, including some LGE patents not at issue in this case, the analysis of exhaustion is not affected by the fact that more than one patent is practiced by the same product. The relevant consideration is whether the Intel Products that partially practice a patent – for example, embodying its essential features – exhaust that patent. “128 S. Ct. 2121.
Insofar as this passage might suggest that a patented process can be exhausted, even if it is contained in a product with many legitimate uses, we believe it is simply incorrect wording by the court. Future cases may clarify the issue, more precisely, but the precedent should be lit obstacle to the application of exhaustion in this circumstance.
(1) LG Electronics, Inc. v. BizCom Electronics Inc., 453 F. 3d 1364, 1369-1370 (Fed. Cir. 2006). (2) See, e. g. , Devel glass apparatus. Inc. v. Besten Inc., 174 F. 3d 1337, 1341, n. 1 (Fed. Cir. 1999).
