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Supreme Court Expands the Patent Exhaustion Doctrine

June 10, 2008

Supreme Court Expands the Patent Exhaustion Doctrine

June 10, 2008

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Quanta Computer, Inc., et al. v. LG Electronics, Inc., No. 06-937, 553 U.S. __ (2008)

In a unanimous decision rendered on June 9, 2008, the U.S. Supreme Court confirmed the continued vitality of the patent exhaustion doctrine — the principle that limits the patent rights that survive an initial authorized sale of a patented item — and expanded the doctrine in two key respects. First, the Supreme Court reversed the Federal Circuit and held that the doctrine of patent exhaustion applies not only to patented products, but also patented methods. Second, the Supreme Court addressed the issue of the extent to which the components sold must embody a patent in order to trigger exhaustion and held that provided the components substantially embody the patent, the initial authorized sale of the components exhausts the patent. The Court was also careful to parse out and disclaim any holding with respect to potential contractual rights of the patent owner, suggesting that while the patent owner could not seek patent damages after the patent is exhausted with the first sale, contractual remedies may be available.

The case concerns several patents directed to more efficient methods for transmitting digital data in computers and computers with chipsets, memory and buses capable of practicing such methods. LG Electronics, Inc. (LGE), the patent owner, licensed the patents to Intel Corporation (Intel), permitting Intel to "make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of" microprocessors and chipsets made by Intel that used the technology claimed in the patents. The license agreement expressly disclaimed any express or implied license to any third party for a third party's combination of Intel's licensed products with any items or components not made by Intel. Additionally, a master agreement attendant to the license agreement required Intel to provide notice to its purchasers, including Quanta Computer, Inc. (Quanta), that the purchase of the licensed products included a license to LGE's patents, but that the license did not extend, expressly or by implication, to any product made by combining an Intel product with any non-Intel product. LGE sued Quanta for patent infringement when Quanta combined licensed products purchased from Intel with non-Intel components in the manufacture of computers.

The District Court determined that while LGE and Intel had not conveyed an express or implied license to Quanta to use the licensed products with non-Intel components, the product claims of LGE's patents were exhausted with the sale of the licensed products to Quanta. The District Court further determined that the patent exhaustion doctrine did not apply to the method claims in LGE's patents. The Federal Circuit affirmed in part and reversed in part, agreeing that the doctrine of patent exhaustion did not apply to method claims and concluding that, in the alternative, exhaustion did not apply because LGE did not license Intel to sell the licensed products to Quanta for use in combination with non-Intel products.

In an opinion delivered by Justice Thomas, the Supreme Court first reaffirmed that "[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item." Providing a brief synopsis of Supreme Court precedent concerning patent exhaustion, the Court reiterated that "the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it." The Court found particularly relevant its precedent in United States v. Univis Lens, 316 U.S. 241 (1942), where it concluded that "the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent-even if it does not completely practice the patent-such that its only and intended use is to be finished under the terms of the patent."

In view of these precedents, the Court determined that there was nothing in its approach to patent exhaustion that supported the notion that method patents cannot be exhausted. Although recognizing that patented methods may not be sold in the same way as an article or device, the Supreme Court held that methods "nonetheless may be 'embodied' in a product, the sale of which exhausts patent rights." The Court also expressed concern that eliminating exhaustion for method claims would encourage a patent drafter to include method claims in a patent to shield a patented item from exhaustion. Allowing LGE to authorize Intel to sell a completed computer system that practices the LGE patents, but leaving a downstream purchaser susceptible to infringement claims would violate the longstanding principle that "when a patented item is 'once lawfully made and sold, there is no restriction on [its] use to be implied for the benefit of the patentee.'" Accordingly, the Court rejected the argument that method claims are never exhaustible.

Turning to the issue of the extent to which a product must embody a patent in order to trigger exhaustion, the Court determined that its precedent in Univis governed. In that case, patent exhaustion was triggered when the products at issue "embodie[d] essential features of [the] patented invention" and the only reasonable and intended use of the products was to practice the patent. Like the products at issue in Univis, Intel's licensed microprocessors and chipsets were also found to be incomplete articles that substantially embodied the patents because "everything inventive" about each patent was embodied in the microprocessors and chipsets Intel sold. While the Intel microprocessors and chipsets cannot carry out the patented functions unless they are attached to memory and buses, the Court found these additions to be standard components in a computer system.

Lastly, on the issue of whether Intel's sale of the licensed products to Quanta exhausted LGE's patent rights, the Court first emphasized that exhaustion is triggered only by a sale authorized by the patent owner. The Court found significant that although Intel was required, under the master agreement, to give notice to its purchasers that LGE had not licensed those customers to use the licensed Intel parts with non-Intel parts, the license agreement between Intel and LGE did not restrict Intel's right to sell the licensed products to purchasers who intended to combine them with non-Intel parts. Furthermore, the Court noted that neither party contended that Intel breached the agreement in that respect. In any event, Intel's license to sell products embodying the LGE patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in the notice. Further, the Court found that although an explicit restriction in the license agreement that no license to practice the patents was granted to any third party might have been relevant to an implied license defense, it was not relevant to a patent exhaustion defense, which turned only on Intel's own license to sell products practicing the patents.

The Court was clear, however, that its holding was specifically limited to the patent exhaustion principles at issue and had no bearing on LGE's contractual rights. Specifically, in a footnote, the Court stated that "the authorized nature of the sale to Quanta does not necessarily limit LGE's other contract rights. LGE's complaint does not include a breach-of-contract claim, and [the Court] express[es] no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages." With this footnote the Court left open the question of whether LGE could have contractually placed upon Intel conditions for the sale of products substantially embodying the patents - for example, by requiring the downstream purchaser to first enter into a license agreement with LGE before it could purchase the products substantially embodying the patents.

An apparent implication of the Court's holding, among others, is that an owner of a patented method who desires to exert control over downstream use of an article embodying the patented method will need to rely on contractual provisions, as limited by antitrust concerns and business realities, since the patent exhaustion doctrine will prevent such party from invoking patent law to control a downstream purchaser's use of the article post-authorized sale.

For Further Information

For more information about the expansion of the patent exhaustion doctrine, please contact John M. Neclerio, Brian McQuillen, any lawyer in our Intellectual Property Practice Group, any lawyer in our Intellectual Property Litigation Practice Group or the lawyer in the firm with whom you are regularly in contact.

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