AIPLA Reports

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Current Developments in Intellectual Property Law
Copyright © 2008 AIPLA

June 10, 2008

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Patents/Supreme Court/Patent Exhaustion
Sale of Article That Substantially Embodies Patent Exhausts Patent Rights
Quanta Computer, Inc. v. LG Electronics, Inc., U.S., No. 06-937, 6/9/08.

The authorized sale of an article that “substantially embodies” a system or method patent exhausts patent owner’s rights in those patents, the Supreme Court held June 9, 2008. The unanimous Court reversed the Federal Circuit’s decision that the sale was conditional, thus avoiding the exhaustion patent rights, and that the exhaustion doctrine does not apply to method patents.

Background

LG Electronics licensed its system and method patents to Intel for the manufacture of computer components. The agreement contained an express limitation that the license did not extend to Intel customers that combined an Intel product with a non-Intel product. The license also required Intel to provide notice to its purchasers of the license limitations. 

When LG sued computer makers (including Quanta) for using the Intel-licensed chips in non-Intel products, the district court found that LG’s rights in the system and method patents were exhausted by Intel’s sales of corresponding components to computer makers.  65 USPQ2d 1589 (N.D. Cal. 2002).  The district court relied on the Supreme Court’s decision in United States v. Univis Lens Co., 316 U.S. 241 (1942).

However, the Federal Circuit reversed without any reference to Univys.  453 F.3d 1364 (Fed. Cir. 2006).  It simply held that patent exhaustion did not apply because the transaction between LG and Intel was conditioned on a requirement that Intel customers be notified that the Intel products may not be used with non-LG products.  It also held that patent exhaustion does not apply to method patents. The Supreme Court agreed to review whether LG’s patent rights were exhausted by the LG-Intel license and Intel’s subsequent sales.

Components “Embodied” System and Method Patents

The Supreme Court unanimously reversed the Federal Circuit, concluding that the sale of the Intel components, which had no reasonable non-infringing uses, was sufficient to trigger the exhaustion doctrine for the patented articles. 

Justice Clarence Thomas observed that this case is controlled by Univis, which concluded that “the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent—even if it does not completely practice the patent—such that its only and intended use is to be finished under the terms of the patent.”  The Supreme Court, he noted, has repeatedly held that method patent rights were exhausted by the sale of “an item that embodied the method.”  In Univis the sale
of optical lens blanks that partially practiced a patent exhausted the method patents that were not completely practiced until the blanks were ground into lenses, he pointed out.

Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine, according to the court, because patentees could avoid patent exhaustion simply by drafting their patent claims to describe a method rather than an apparatus.

The Court considered to what extent a product must “embody a patent” in order to trigger exhaustion.

Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the Intel Products. They control access to main and cache memory, practicing the ’641 and ’379 patents by checking cache memory against main memory and comparing read and write requests. They also control priority of bus access by various other computer components under the ’733 patent. Naturally, the Intel Products cannot carry out these functions unless they are attached to memory and buses, but those additions are standard components in the system, providing the material that enables the microprocessors and chipsets to function.

*          *          *

In this case, the inventive part of the patent is not the fact that memory and buses are combined with a microprocessor or chipset; rather, it is included in the design of the Intel Products themselves and the way these products access the memory or bus.

The Court turned away LG’s attempt to rebut the contention that the Intel components had no reasonable non-infringing use.  LG listed the non-infringing uses of sales overseas, use as replacement parts, and use with the patented features disabled. However, Justice Thomas in footnote 6 wrote that the issue is whether the product can be used only in “practicing the patent,” not whether those uses are infringing.

Sales Were Authorized

The Court was not convinced that Intel’s authority to sell its products embodying the LG patents was conditioned on notice to its buyers that the LG license did not extend to combinations of Intel and non-Intel components.  Justice Thomas pointed out that the notice requirement was found in the Master Agreement, not in the patent license, suggesting that violating that requirement would not breach the patent license.

The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel’s authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.

Missing from the opinion is any mention of the Federal Circuit ruling in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), which spelled out the ability of patent owners to avoid exhaustion by making conditional sales.  In addition, The Court’s footnote 7 states “we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.”

To read the Court’s opinion, click here.

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