by: Ali-Reza Boloori, Associate Editor, MTTLR
The Supreme Court in Quanta Computer, Inc. v. LG Elecs., Inc.1 made a broad, contemporary affirmation of the principle of patent exhaustion. By answering in the affirmative the question of “whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods,”2 the Court held that exhaustion prevents infringement liability even when a purchaser violates an express restriction which the patentee has placed at the time of sale.
This piece reviews the case, and provides a summary of some of its implications for patentees who seek to maintain some control over downstream activities through their licensing activities.
Factual background and procedural history
LG Electronics (LGE) had procured a portfolio of systems and methods relating to computer technology, including three of the patents at issue in this case (LGE Patents). In its dealings with Intel, LGE entered into two agreements. First, through a cross license (License), LGE permitted Intel to “make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of” Intel’s own products that practiced LGE Patents. It is important to note that none of Intel’s products were capable of practicing the LGE Patents on their own, and needed to be combined with other computer components before they actually practiced the invention. Notably, the License expressly disclaimed any license from being granted to third parties for combining Intel articles made under the License with parts made by other manufactures. The License additionally provided that “[n]ot withstanding anything to the contrary, the parties agree that nothing herein shall … limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”
Another component of the LGE-Intel agreement consisted of the Master Agreement, which inter alia required Intel to notify its customers that the LGE-Intel License did not extend to any product made by combining the licensed Intel product with products made by third parties. Importantly, the Master Agreement contained a provision that its breach would have no effect on the LGE-Intel License, and would not be grounds for its termination. The reason for the additional requirement in the Master Agreement seems to be that LGE wanted to charge additional royalties from Intel’s customers for combining Intel licensed products with non-Intel products.
As a customer, Quanta purchased licensed Intel products and proceeded to build computers using Intel’s specifications and therefore practiced the patented methods and systems licensed by LGE to Intel. In contravention of the Master Agreement, however, Quanta combined the licensed products with non-Intel components. LGE then sued Quanta for patent infringement.
The district court3 granted Quanta partial summary judgment on LGE’s infringement claim. While the licensed products did not practice any of LGE Patents on their own, since they had no reasonable use other than in practicing the invention, their authorized sale triggered patent exhaustion under United States v. Univis Lens Co.4 The court, on reconsideration, held that as a matter of law, patent exhaustion only applies to LGE’s system claims, and not LGE’s method claims. Furthermore, it held that while LGE could have imposed conditions on the sale of essential components of its inventions, it had not done so here: the evidence did not establish that Quanta had agreed to the notice conditions that Intel was supposed to give to its customers in pursuant of the Master Agreement. Therefore, Quanta’s purchase from Intel was unconditional sale, and patent exhaustion applied.
The Federal Circuit affirmed-in-part—as to the district court’s ruling that exhaustion does not apply to method claims5–but reversed-in-part on the ground that exhaustion did not apply to LGE’s system claims. The Federal Circuit based the reversal on the argument that LGE did not license Intel to sell licensed products to Quanta for use in conjunction with non-Intel products.
At the Supreme Court
In a unanimous decision, the Supreme Court reversed the Federal Circuit on all issues. First, it held that exhaustion applies to method claims. Relying on its own precedents, the Court explained that in both Ethyl Gasoline Corp.6 and Univis7, it had already held that “sale of an item that embodied the method”8 exhausted method claims. Holding otherwise would undermine the patent exhaustion doctrine, since it would be very easy for patentees seeking to avoid patent exhaustion to form method claims in place of system claims. Moreover, the court noted that there was no significant difference between method and system claims that in turned required an exception to the patent exhaustion doctrine for the former claim types. In short, the court rejected a categorical exclusion of method claims from the application of patent exhaustion in the context of a sale of a device covered by corresponding system claims.
The Court next ruled on the sufficient degree to which a product must embody a patent for exhaustion to be triggered. Since the only reasonable and intended use of the Intel products was to practice the LGE Patents, and since the only remaining steps required by Quanta to fully practice the LGE Patents was “application of common processes or the addition of standard parts,”9 Intel’s licensed products sufficiently embodied the essential features of the patented invention.
Finally, the Court held that the Intel-Quanta sale was “authorized” by the patentee, and therefore under Univis, LGE’s patent rights were exhausted. Although the Master Agreement required Intel to notify purchasers that they were not authorized to combine the licensed products with non-Intel parts, LGE did not argue that Intel breached this agreement. Rather, the License itself gave Intel an unconditional right to sell the patented invention, the only factor required for patent exhaustion to apply.
Where does Quanta leave patent exhaustion?
In summary, Quanta stands for the proposition that unrestricted, authorized sales of articles that at minimum substantially embody patentedg inventions—based on either method or system claims—trigger patent exhaustion. The first point to be taken away from this case is that patentees may still place express restrictions on their licensees to avoid triggering patent exhaustion. What the Court insisted on in Quanta, however, was that such restrictions be clearly stated within the patent license.10
In addition, the Court suggests that even if patent exhaustion bars patentees under similar circumstances from seeking damages under patent law, breach of contract claims may still be viable options for seeking redress11. Contract law, however, is a less desirable source of redress than patent law for several reasons: first, breach-of-contract claims require both privity and agreement between the patentee and purchasers. These factors are typically absent between the original patentee and purchasers even one level downstream from the original purchaser. Moreover, patent laws typically provide stronger relief for patentees, especially since the Patent Act allows for treble damages.12
1 Quanta Computer, Inc. v. LG Elecs., Inc., 128 S. Ct. 2109 (2008).
2 Quanta, 128 S. Ct. at 2113.
3 LG Elecs., Inc. v. Asustek Computer, Inc., 65 U.S.P.Q. 2d 1589, 1593, 1600 (N.D. Cal. 2002).
4 United States v. Univis Lens Co., 316 U.S. 241, 62 S. Ct. 1088 (1942).
5 LG Elecs. Inc. v. Bizcom Elecs. Inc., 453 F.3d 1364 (Fed. Cir. 2006).
6 Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940)
7 Univis, 316 U.S. 241.
8 Quanta, 128 S. Ct. at 2122.
9 Quanta, 128 S. Ct. at 2120.
10 Quanta, 128 S. Ct. at 2122 (stating that “[n]othing in the License Agreement limited Intel’s ability to sell its products practicing the [LGE Patents]”).
11 Quanta, 128 S. Ct. at 2122 n.7 (noting 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 [the Court] express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.”).
12 See 35 U.S.C. § 284 (2000).
That was very informative. Mentioned below is an excerpt of an article on Patent exhaustion in India:
“A patent grants the Patent holder exclusive rights to prevent others from making, using, selling, offering for sale in the territory of patent grant or importing an invention into the territory of patent grant. Once an unrestricted sale of the patented invention is made, the rights of the patent holder with respect to the product are exhausted and this is called as the Doctrine of Exhaustion or First Sale Doctrine……to read more please visit: http://indianipinfo.blogspot.com/2010/10/patent-exhaustion-in-india.html