Thursday, June 26, 2008

Today's IP Committee Legal Quick Hit Continued

In Quanta Computer, Inc. v. LG Electronics, Inc., the Supreme Court recently addressed the 150 year old doctrine of patent exhaustion. The doctrine limits “the patent rights that survive the initial authorized sale of a patented item[,]” arguably forcing patent holders to collect royalties from one level of distribution, rather than from every subsequent level of buyer and sellers. The case has implications for downstream licensing, as a defense to patent infringement, perhaps altering the focus of claim drafting, and emphasizing contractual remedies in patent licensing.

The Supreme Court reversed the Federal Circuit’s ruling, holding that LGE’s authorized sale of microprocessors and chipsets to Intel exhausted both their system and method patent rights. The Court considered the arguments in three stages.

First, the Court addressed the notion that method patents could not be exhausted, holding that “[n]othing in [the] Court’s approach to patent exhaustion supports LGE’s argument that method patents cannot be exhausted.”

Second, the Court “consider[ed] the extent to which a product must embody a patent in order to trigger exhaustion.” Relying on Univis, the Court found that all of LGE’s patents were exhausted. In Univis, the lens blanks had no utility until they were made into lenses. Similarly, the microprocessors at issue only functioned when incorporated into buses and memory to form a computer system. The Court concluded that both the lens blanks and microprocessors “constitute a material part of the patented invention and all but completely practice the patent.” The key determination for the Court here was that Quanta was not required to make any creative or inventive decision when adding the Intel parts to its computer system, holding that “Quanta had no alternative but to follow Intel’s specifications in incorporating the Intel Products into its computers . . . .”

Finally, the Court addressed whether the sale of the patents to Quanta exhausted LGE’s patent rights. Noting that only an authorized sale will trigger exhaustion, the Court held that “[n]othing in the License Agreement restricts Intel’s right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts.” LGE gave Intel the authority to sell regardless of whether Quanta promised to abide by the restrictions put on third parties in a side agreement. The Court did leave open the possibility that LGE could recover other damages, stating that it expresses “no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.”

-Ken Godlewski
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