Quanta v. LG Electronics (Supreme Court 2007)

The Korean chaebol LG licensed a set of patents to Intel. The license expressly excludes Intel's customers and similarly does not cover any customer product made by combining an Intel product with a non-Intel product.

When LG sued a host of Intel chip-based computer manufacturers for infringement, they complained of attempted double-dipping. According to the defendants (including Quanta), their use of licensed Intel chips implicated the first sale doctrine of patent exhaustion.

Now the Supreme Court has granted certiorari to determine whether LG’s narrow license terms avoid exhaustion.

Question presented: “Whether 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.”

Exhaustion – also known as the first sale doctrine – serves as a default rule in both patent and copyright laws. Under the principle, a license fee is only be charged one time per object. Thus, a rights holder controls the first sale of a protected object, but does not control subsequent sales. The copyright rule is codified in Section 109. The patent rule, however, is only based on case law.

Lower Court Ruling: The lower court found that Intel’s "unrestricted" license and Intel's sale of its chips under the license exhausted LG's rights to any additional patent recovery.

CAFC Ruling: On appeal, the Court of Appeals for the Federal Circuit (CAFC) reversed, finding that when restrictions are placed on a license, "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." The appellate panel found that there was no exhaustion because of express conditions on the use of Intel's licensed products -- specifically that the products could not be combined with non-Intel parts.

Quanta's argument is quite simple:

• Intel sold chipsets to the petitioners;
• Those sales were fully authorized under the LG license and were made without restriction;
• Therefore, LG's patent rights are exhausted.

Quanta goes on to say that under Supreme Court jurisprudence, a sale cannot be conditional. (No improper restraints on alienation). And, without citing Arizona Cartridge, the petition lists a set of upcoming problems if conditions for sale are allowed for patented items:

[T]he Federal Circuit's new jurisprudence threatens to kick off a new era of "notices" attached to sold goods. Obvious candidates include "single use only," "no use outside of Massachusetts," "no repair," "no resale," or "no resale for less than the price of purchase."

On the other side, LG points-out that Intel made a business decision not to cover its customers. Because of that decision, Intel received a cheaper license, but now the customers must make-up the difference.

[When there are no patent misuse or notice concerns,] parceling out of the exclusivity rights is simply a matter for negotiation in the marketplace, not for a legal override of commercially fashioned terms.

An amicus on behalf of Dell, HP and others identifies the origin of the current CAFC precedent: Mallinckrodt.

Mallinckrodt held that a restriction on the post-sale use and enjoyment of a patented article is enforceable under the patent laws 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.”

According to the Amicus (and Quanta), the Mallinckrodt decision and its progeny do not follow Supreme Court precedent as stated 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)

Notes

• It turns out that the patents were originally issued to Wang Labs and are indeed quite broad. U.S. Patent Nos. 4,918,645; 5,077,733; 4,939,641; 5,379,379; and 5,892,509
• Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)
• Jazz Photo v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002)("United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.").
• Arizona Cartridge Remanufacturers Association Inc. v Lexmark International Inc, 421 F.3d 981 (9th Cir. 2005)
• United States v. Univis Lens Co., 316 U.S. 241 (1942)
• Birdwell, ''Exhaustion of Rights and Patent Licensing Market Restrictions,'' 60 J. Pat. Off. Soc'y 203 (1978)