SCOTUS Agrees to Re-Visit the Scope of Patent Exhaustion

The U.S. Supreme Court announced that it would review the case of Quanta Computer Inc. v. LG Electronics Inc., 06-937, where LG Electronics accused Quanta Computer Inc of Taiwan and others of infringing patents on microprocessor chips in its personal computers.

The question presented in this case is “[w]hether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent’s patent rights were not exhausted by its license agreement with Intel Corporation, and Intel’s subsequent sale of products under the license to petitioners.”

Quanta and the other defendants purchase microprocessors and chipsets from Intel or its authorized distributors and install them in computers. Intel is authorized to sell the products to defendants under an agreement with LG. However, pursuant to this agreement, Intel notified defendants that, although it was licensed to sell the products to them, they were not authorized under that agreement to combine the products with non-Intel products.

LGE brought suit against defendants, asserting that the combination of microprocessors or chipsets with other computer components infringes LG’s patents covering those combinations. The district court granted summary judgment of noninfringement of each patent. It determined that there was no implied license to any defendant, but that, with the exception of one patent, LG’s rights in any system claims were exhausted. The court also found that LG was contractually barred from asserting infringement.

The CAFC reversed (link):

Regardless of any noninfringing uses, Intel expressly informed [the defendants] that Intel’s license agreement with LGE did not extend to any of defendants’ products made by combining an Intel product with non-Intel products. In light of this express disclaimer, no license can be implied.

* * *

This exhaustion doctrine . . . does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the ‘use’ rights conferred by the patentee" . . . Although Intel was free to sell its microprocessors and chipsets, those sales were conditional, and Intel’s customers were expressly prohibited from infringing LGE’s combination patents . . . The "exhaustion doctrine . . . does not apply to an expressly conditional sale or license."

Under the CAFC's Mallinckrodt decision, restrictions on post-sale use is allowable, as long as it does not “venture beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.”

Quanta (and amicus briefs) argue that Mallinckrodt conflicts with the SCOTUS ruling in Univis Lens:

Univis Lens . . . held that the authorized sale of an article manufactured “under the patent” exhausts all patent claims in the article regardless of any purported limitation on the subsequent use and enjoyment of the article . . . Univis Lens held that a condition on the post-sale use and enjoyment of a patented device violated the antitrust laws because it was not enforce-able under the patent laws, and thus was not protected against antitrust scrutiny. See 316 U.S. at 252 (“[t]he price fixing features of appellees’ licensing system, which are not within the protection of the patent law, violate the Sherman Act”). United States v. Univis Lens Co., 316 U.S. 241 (1942).

Opponents of the CAFC's decision have stated that the ruling "threatens to impose a huge financial and practical burden on manufacturers of technology products." (Quanta makes the wildly popular Apple iPhone).

U.S. Solicitor General Paul Clement recommended earlier that the Supreme Court take up the case. To view the SCOTUS brief from the DOJ, click here (link).

The Supreme Court is expected to hear arguments in the case early next year, with a decision likely by the end of June.

See additional information at Patently-O.

- A few weeks ago, LG Electronics filed a separate patent-infringement suit against Quanta Computer, this time for infringing on four patents used to make DVDs.