AIPLA Reports

A Periodic Notification of AIPLA Activities and
Current Developments in Intellectual Property Law
Copyright © 2008 AIPLA

January 18 , 2008

Click HERE for PDF version.
Click HERE for AIPLA Reports Archives.

Patents/Supreme Court/Patent Exhaustion
Supreme Court Hears Oral Argument on Patent Exhaustion Doctrine
Quanta Computer, Inc. v. LG Electronics, Inc., U.S., No. 06-937, oral argument 1/16/08.

The Supreme Court on January 16, 2008, heard oral argument on the proper rules for applying the patent exhaustion doctrine and on the limits of a patentee’s downstream control over sold products containing a claimed invention.  The difficult question that emerged from the argument is whether authorized sales of patented computer components, which have no use other than to be incorporated into a patented system and used in a patented method, can trigger the exhaustion doctrine with respect to the system and method patents.

Background

In this case, patentee LG licensed Intel to make, use and sell products under a variety of patents covering systems, methods, and components; Intel in turn produced computer components and sold them to computer makers, such as Quanta. LG subsequently sued Quanta and others for infringing its systems and method patents.  In its defense, Quanta argued that Intel’s sale of the components, which could only be used in the LG systems and methods, exhausted LG’s rights in those systems and methods asserted in the lawsuit.

The District Court found LG’s patent rights exhausted under United States v. Univis Lens Co., 316 U.S. 241 (1942), and the Federal Circuit reversed, ruling that no exhaustion applied because Intel’s right to sell was conditioned on a requirement of giving notice to its buyers of LG’s patent rights.

Petitioner’s Argument

Maureen Mahoney, of Latham & Watkins LLP, argued for Quanta that patent exhaustion is triggered by an authorized sale of a patented article which is within the scope of the patent.  Justice John Paul Stevens asked which transaction actually triggered patent exhaustion in this case.  Mahoney explained that the transactions worked together to achieve that effect.  She rejected the Federal Circuit’s contention that the notice requirement in the LG-Intel license introduced a condition that prevented exhaustion.

What if LG had expressly told Intel it may sell only to buyers who have obtained a license from LG, Justice Ruth Bader Ginsburg asked.  Mahoney acknowledged that such a condition forestall exhaustion, but she pointed out that no such condition was included here because Intel understood that could expose it to contributory infringement liability. 

Does that mean the patentees knew how to achieve the desired result but choose not to spell it out, relying on confusion under the patent exhaustion doctrine, Chief Justice Roberts asked.  In this case, Mahoney answered, it means that the exhaustion doctrine was not avoided.  She pointed to the District Court’s ruling under Univis that the patentee’s rights in the system and method patents were exhausted by the authorized sale of the components.  Nor can the patentee avoid the exhaustion doctrine by requiring its licensee to notify buyers of its patents, she maintained, citing Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908).  In that case, copyright owners were not allowed to circumvent the exhaustion doctrine by placing a notice on books purporting to limit their subsequent distribution or resale price.

Solicitor General’s Argument

Deputy Solicitor General Thomas Hungar told the Court that the Federal Circuit decision gives patentees the power to circumvent the exhaustion doctrine by merely adding conditions to their sales agreements.  Supreme Court precedent, however, makes clear that the exhaustion doctrine overrides restrictions that patentees attempt to impose on post-sale uses or resales.

But doesn’t a mere license of patent rights prevent the application of the patent exhaustion, Chief Justice Roberts asked.  Yes, if the license specifies particular conditions under which the licensee may sell the patented product, Hunger conceded; if the licensee’s sales violate such conditions, the sales would be unauthorized and infringing, he explained.  And would buyers from such a licensee infringe by using the purchased product as well, the Chief Justice asked.  Yes, Hungar answered, adding however that those are not the facts of this case because the record is clear that Intel’s sales were authorized.

Respondent’s Argument

Arguing for LG, Carter Phillips, of Sidley Austin LLP, asked the Court to focus on what was actually sold in seeking a trigger to the exhaustion doctrine.  It was computer components that were sold, he said, whereas the lawsuit here is asserting separate patents on systems and methods.  But the sold components had no uses other than in infringing systems and methods, Chief Justice Roberts pointed out.

If the sale of components is argued to excuse infringement of corresponding system and method patents, the appropriate rationale would be an implied license, according to Phillips. However, both the District Court and the Federal Circuit agreed that the facts of this case do not support an implied license.  The lawsuit deliberately focused on acts of the defendants after they had received notice of the patent rights, he noted.

Justice Stephen Breyer posed a less high-tech example, where patented bicycle pedals are licensed to a bicycle maker, who in turn sells the completed bicycle to consumers.  If the owner of the pedal patent also holds a system patent on the assembled bicycle, what will prevent “19 patent inspectors” from chasing the buyer of the bicycle down the street, he asked.  Here again, Phillips answered that, absent notice to buyers of the relevant patents, an implied license would prevent system patent owners from asserting infringement against buyers of the assembled bicycle.

(Ed. Note: The AIPLA amicus brief answers this question by pointing to the Uniform Commercial Code, § 2-312(2) (2004), which states that “a seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement.”)

The sale of the components was a first sale that exhausted the patent rights in those components, Phillips conceded, but he denied that those component sales also operated to exhaust the rights in the corresponding system and method patents.

Justice Stevens asked if the reason for finding no implied license was the notice of patent rights or the fact that the sold components had no non-infringing uses.  Justice Antonin Scalia pointed out that the notice of patent rights could not obviate an implied license because it came too late.  He insisted that the notice needed to be part of the LG-Intel license in order to be effective in the Intel sales.  Phillips responded that there has been no contention that the Intel sales were unauthorized.

Justice Souter pointed out that the condition in the LG-Intel license was not a limitation on Intel’s right to sell, but rather a required notice to Intel's buyers of the consequences of certain acts.  Phillips replied that that analysis ignores the fact that the lawsuit was not brought on patents for the sold products but on the separate system and method patents.

Justice Breyer said that LG’s argument allows a patentee to defeat the exhaustion doctrine by obtaining patents on both components and the corresponding system using the components.  Phillips responded that there is nothing automatic about getting a patent on a system as well as a patent on components used in the system. If, however, there is something amiss about such patent ownership, the appropriate remedy is a validity challenge, not an exhaustion defense.

Chief Justice Roberts interjected that the KSR case demonstrated the limitations of brining a validity challenge. He also observed that LG could have achieved what it wanted if it had adequately conditioned downstream sales in its license with Intel.  Instead, the license only required a notice to buyers that certain actions would have liability consequences.

Responding to Justice Stevens, Phillips said LG’s position does not rely on the rationale of the Federal Circuit’s decision below.

To read the transcript of the Supreme Court oral argument, click here.
To read the AIPLA amicus brief in this case, click here.
To read other briefs filed in this case, click here.
To read the Federal Circuit decision in this case, click here.

TOP

TOP

Related Files