Supreme Court Reverses CAFC in Quanta: Method Patents Exhaustible

Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937, June 9, 2008.

LGE holds a number of patents related to computer technology. LGE licensed the patents to Intel, authorizing them to manufacture and sell microprocessors and chipsets using the LGE Patents. A separate agreement with LGE (Master Agreement) required Intel to give its customers written notice that the license does not extend to a product made by combining an Intel Product with a non-Intel product.

Quanta purchased microprocessors and chipsets from Intel. Quanta then manufactured computers using Intel parts in combination with non-Intel parts, but did not modify the Intel components. LGE sued, asserting that this combination infringed the LGE Patents.

On appeal, the CAFC held that the patent exhaustion doctrine does not apply to method patents, which describe operations to make or use a product; and concluding, in the alternative, that exhaustion did not apply because LGE did not license Intel to sell the Intel Products to Quanta to combine with non-Intel products.

SCOTUS Holding:

Because the doctrine of patent exhaustion applies to method patents, and because the License Agreement authorizes the sale of components that substantially embody the patents in suit, the exhaustion doctrine prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.

Off the bat, the SCOTUS noted that "nothing in this Court's approach to patent exhaustion supports [the] argument that method claims, as a category, are never exhaustible." Noted the Court:

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 which exhausts patent rights. The Court has repeatedly found method patents exhausted by the sale of an item embodying the method . . . Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine, since patentees seeking to avoid exhaustion could simply draft their claims to describe a method rather than an apparatus. On LGE’s theory here, for example, although Intel is authorized to sell a completed computer system that practices the LGE Patents, downstream purchasers could be liable for patent infringement, which 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 [patentee’s] benefit," Adams v. Burke, 17 Wall. 453, 457.

The extent to which a product must embody a patent in order to trigger exhaustion:

Relying on United States v. Univis Lens Co., 316 U. S. 241 (1942), the Supreme Court reiterated that "the authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold." Thus, a sold (but incomplete) item that is "without utility" until it is in a final, usable (and infringing) form, would qualify for exhaustion. Added the Court:

A microprocessor or chipset cannot function until it is connected to buses and memory. And here, as in Univis, the only apparent object of Intel’s sales to Quanta was to permit Quanta to incorporate the Intel Products into computers that would practice the patents.

Additionally, the Court added that method claims may be exhausted if they "embodie[d] essential features of [the] patented invention":

[T]he Intel Products constitute a material part of the patented invention and all but completely practice the patent. Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts.

Exhaustion accross different patents:

With regard to LGE’s argument that exhaustion does not apply across patents, we agree on the general principle: The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B . . . While each Intel microprocessor and chipset practices thousands of individual patents, including some LGE patents not at issue in this case, the exhaustion analysis is not altered 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—by, for example, embodying its essential
features—exhaust that patent.

* * *

The authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article.

REVERSED

Download the slip opinion here.

NOTE: In footnote 7, the Court left open the possibility of filing a breach of contract claim for LGE in light of the circumstances:

We note 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 we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages. See Keeler v. Standard Folding Bed Co., 157 U. S. 659, 666 (1895) ("Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning an effect of the patent laws").