My point was why sell to manufacturers first when there may be a contract problem with the rule of exhaustion. Although, I will say the TPL tried to overcome this issue by selling a manufacturers license Royalty free for a set fee, and also a third party license that contained royalties. Unfortunately though the Supreme Court never addressed that issue in the Quantas ruling. Please note the bold. Especially the last paragraph. Which has been one of my points all along. I think the court was negligent by not discussing contract law which will lead to more challenges because of their unfinished work.

http://en.wikipedia.org/wiki/Quanta_Computer,_Inc._v._LG_Electronics,_Inc

Licensing a limited field

LGE’s argument for non-exhaustion sought to invoke the doctrine of General Talking Pictures Corp. v. Western Electric Co.[22] In that case, the patentee had granted no license for “commercial” amplifiers. Therefore, when a manufacturer licensed only in the “non-commercial” field of use sold an amplifier to an accused infringer, who knowingly resold it in the commercial market, the manufacturer “could not convey to [the accused infringer] what both knew it was not authorized to sell.” By parity of reasoning, LGE said, it had licensed Intel only in the field of manufacturing microprocessor products for combination with specified products and not with other products. But the Court said that was not how LGE had drafted its license to Intel:

LGE overlooks important aspects of the structure of the…transaction. Nothing in the License Agreement restricts Intel’s right to sell its microprocessors…to purchasers who intend to combine them with non-Intel parts. It broadly permits Intel to make, use, or sell products free of the patent claims. To be sure, LGE did require Intel to give notice to its customers, including Quanta, that LGE had not licensed those customers to practice its patents. But neither party contends that Intel breached the agreement in that respect. LGE points out that the License Agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components. But the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion. And exhaustion turns only on Intel’s own license to sell products practicing the…patents.

The Court appears to be saying that LGE simply licensed Intel to make, use, and sell microprocessor products. LGE expressly stated that no license was granted to any third party for combining licensed products with other products; and LGE made Intel tell its customers about the absence of a license. But LGE did not say to Intel that LGE licensed Intel to make, use, and sell microprocessor products only in the field of microprocessor products combined with other LGE-licensed products (so-called Intel products). There was no explicit field-of-use limitation on Intel’s manufacturing, using, and selling rights––no “magic words.” LGE came close––it said it was not licensing third parties to combine licensed product with other products, and it required Intel to notify customers of that––but LGE failed to go right to the point and expressly deny Intel any license to make microprocessor products that would be combined with other products. Furthermore, for some inexplicable reason the parties, with fatal effect, red-flagged the fact that there still was an exhaustion doctrine: “Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”

That this was a critical error (for LGE) is confirmed by the Court’s final statements in its opinion:

The License Agreement authorized Intel to sell products that practiced the patents. No conditions limited Intel’s authority to sell products substantially embodying the patents. …Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta.

Thus, the exhaustion doctrine governed what Quanta could lawfully do with what it bought from Intel. The failure to give third parties a license to combine Intel microprocessor product with other products had no legal significance, because the exhaustion doctrine obviated any need for such a license. Having bought the products from an authorized seller, Quanta didn't need any license.

[edit] No contract issue

Just before closing, the Court added a final note pointing out that the case did not raise, and the Court did not rule on, whether LGE could have enforced a contractual restriction. In footnote 7, the Court commented:

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.

By the same token, the Court said nothing as to specific performance or whether contract rights, if any, could be enforced against Quanta.

[edit] Impact and issues that the court did not consider

The impact of Quanta is problematic, largely because the decision avoided deciding many issues, presumably in the interest of maintaining consensus. (The decision was unanimous.) One academic commented:

It is a very disappointing decision from the Court. It decided so little, and it was such an important case. You are left reading tea leaves.[23]

The Court's failure to approve or reject the precedent on which the Federal Circuit had relied in its decision in Quanta, Mallinckrodt, Inc. v. Medipart, Inc., which had limited the applicability of the exhaustion doctrine when a sale was made "conditional," further contributed to business uncertainty about permissible license restrictions. But, as one commentator observed:

The Supreme Court, in Quanta, was widely expected to rule on whether Mallinckrodt was good law. But the Court sidestepped the issue by narrowly interpreting the license agreement so that it was not a conditional license. ...Because the Supreme Court sidestepped the issue, it remains unclear to what extent a patentee can use a conditional license to impose restrictions on downstream purchasers. [24]

To be sure, in Quanta, the Court held that “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” But what constitutes "authorization"? The Court did not address the issue of "constructive" authorization -- that is, authorization as a matter of law in certain circumstances, whether or not the patentee or licensor likes it or even tries very hard to avoid it.[25] Accordingly, it is uncertain to what extent Quanta undoes Mallinckrodt. That seems to be the unstated message in Quanta, but the Federal Circuit may take an impenitent view, in defiance of the Solicitor General's views as amicus.

[edit] Other transactional forms

There are a number of important issues that the Court did not address in Quanta.[26] One such omission is the Court’s failure to say anything about the other possible formats that this transaction might have used—such as a sale by a manufacturing licensee with a limitation on its grant, or (alternatively) a sale by the patentee or its licensee with explicit restrictions imposed on the buyer's freedom to dispose of the product. The Court did not explain whether or in what circumstances these other formats would be legally effective.[27]