Though a win for Quanta was somewhat expected, the decision could have an impact on existing patent licence agreements, as well as the way patentees draft and negotiate royalties for licences going forward.
The case relates to suits filed by LG Electronics in 2000 and 2001 alleging that Quanta and other computer makers infringed several of its patents for microprocessor chips in personal computers.
LG had licensed the patents to Intel, which then sold the chips to the computer companies. However, the licence agreement did not expressly authorize Intel’s customers to combine the chips with non-Intel products, which Quanta did.
In December 2004, a trial court ruled in favour of Quanta and other manufacturers, citing the doctrine of patent exhaustion, also commonly known as the "first sale" doctrine. Under this principle, a patent owner's right is exhausted upon the first sale of the patented product.
The Supreme Court’s opinion, delivered by Justice Clarence Thomas, disagreed with the Court of Appeals for the Federal Circuit’s holding in July 2006 that patent exhaustion "does not apply to an expressly conditional sale or license" and that "regardless of any noninfringing uses, Intel expressly informed [the defendants] that Intel's license agreement with LGE did not extend to any of defendants' products made by combining an Intel product with non-Intel products”.
In his opinion, Justice Thomas said: “Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents.”
LG had argued that the principle of patent exhaustion does not apply to method claims, which are contained in each of the LG patents in question (US patent numbers 4,939,641; 5,379,379; and 5,077,733).
But the Court disagreed today, arguing: “It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be ‘embodied’ in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials. To the contrary, this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method.”
In an interview with Managing IP in November, Carter Philips of Sidley Austin, who represented LG in the case, said: "The licensing schemes that have been in place for 20 years are predicated on the assumption that patent owners can do what they want with their patents."
He added: "If we don't retain the current system, it could deter licensing in general and will create greater expense for first licensees."
Speaking after today’s opinion, Steven Pokotilow of Stroock & Stroock & Lavan said that the decision provides clarity for patent owners and was well-reasoned, particularly because “it states a test and gives guidance to the lower courts” in terms of considering the extent to which a product embodies a patent.
He added: “I think this case applies to a narrow set of facts and a narrow set of commercial practices and it won’t have a broad impact. The decision was very consistent with the Supreme Court’s basic treatment of patent cases in that the Court is not prepared to accept general rules in patent law.”
George Best of Foley & Lardner called the decision “interesting” and said that it may leave the door open for patentees to draft licences that could circumvent the doctrine of patent exhaustion.
“It implies that if the contract had been written in a different way, the outcome may have been different for LG,” said Best.
He continued: “Like any case that turns in part on the language of a particular contract, it won’t be capable of being broadly interpreted, but there are a lot of contracts and agreements already in existence that you’ll have to go back and view with an eye toward whether the restrictions are still valid.”
