Wednesday, January 16, 2008

Quanta Oral Arguments: Will the Supreme Court Clarify the Exhaustion Doctrine?

By Charles R. Macedo, Esq., Joseph Casino, Esq., Michael Kasdan, Esq., and Howard Wizenfeld, Esq. (link)

Today, for the first time in half a century, the Supreme Court heard oral argument on the extent to which a patentee can license its patents to different members of the same sales chain for the same product. In Quanta v. LG Electronics, the High Court heard arguments on whether a patentee can grant patent rights and at the same time contract around the exhaustion doctrine. Further, the issue of whether patent exhaustion applies to method claims was also before the Court. Charley Macedo attended the oral arguments to get a first hand impression of how the Supreme Court might deal with the issues related to patent exhaustion.

An interesting aspect of oral argument at the Supreme Court was the focus of the Justices on whether patent exhaustion is an issue of patent law or contract/antitrust law. Justice Breyer’s questions appeared to suggest that, under contract law theories, a patentee should not be able to put a post customer restriction in a license because it would impose improper "equitable servitudes on chattel". He also suggested that placing such a restriction could violate antitrust law doctrines. By contrast, Justice Roberts focused on whether exhaustion is a patent law or contract law doctrine.

In fact, the theory of patent exhaustion probably implicates both patent law and contract law. It implicates patent law because, once an authorized sale is made, the patentee should have no further right to limit the sale of that item in commerce. It implicates contract and antitrust law to the extent the patentee tries to impose an improper restriction in its license agreement. Either way, the Supreme Court should preclude a patentee from contracting around the exhaustion doctrine.

The Justices were also interested in knowing why the exhaustion doctrine was codified in the Copyright Act but not in the 1952 Patent Act. In this regard the Amici were unable to cite to any useful discussion.

During argument LGE also argued that the notices Intel sent to its customers were valid techniques of avoiding a defense of implied license. LGE objected to the use of the exhaustion doctrine as an end-around to the defense of implied license.

The role of patent protection in the U.S. economy continues to remain important and should not be undermined. However, once a patentee has authorized goods or services to be sold under its patent, it should not be entitled to obtain a second payment for the same patent. The Supreme Court has a chance to reestablish this fundamental principle of U.S. Patent Law. We will have to wait and see if the Court takes advantage of this opportunity.


Download SCOTUS transcript of oral arguments here (link)

See also:

Diane Bartz, "Supreme Court Hears LG-Quanta Patent Case" (Reuters - link)

Laurel Newby, "Justices Skeptical of Patent-Holders' Claim" ( - link) "US High Court Uncomfortable With LG Position in Patent Case" (link)

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