Admin
10-15-2008, 08:17 AM
On June 9, 2008, the Supreme Court decided Quanta Computers, Inc. v. LG Electronics, Inc., and limited a patent owner’s right to seek payment for using a method once a product using the method is sold. The Court held that the authorized sale of a product incorporating a patented method “exhausts” the patentee’s right to seek payment for use of the patented method from a purchaser of the product. As a result, purchasers of the product are free to use the patented method without a separate payment to the patentee.
The primary issue addressed by the Supreme Court in Quanta Computers, Inc. v. LG Electronics, Inc., is the applicability of the patent exhaustion doctrine to a patented method. LG Electronics (LGE) owns three patents directed to methods for microprocessors to retrieve data, organize read and write requests and manage data traffic. LGE entered into a licensing agreement with Intel to manufacture microprocessors that, when combined with common components, would practice the methods claimed in the LGE patents. The licensing agreement permitted Intel to sell the microprocessors and stipulated that the license did not extend to any third parties. Thus, according to LGE, if a third party purchased a licensed Intel microprocessor, then those microprocessors could only be used with other Intel components.
Quanta Computer, however, purchased the licensed Intel microprocessors and used them with computer components made by other companies. As a result, LGE sued Quanta Computer for patent infringement for using the patented methods embodied in the microprocessors without a separate license from LGE.
Quanta argued that it was a good faith purchaser of the licensed Intel microprocessor incorporating the patented method, and therefore LGE’s patent rights were “exhausted.” According to Quanta, it was free to use the licensed microprocessor as it wished. The District Court held that because the LGE patent was for a method invention, it was not subject to patent exhaustion.1 On appeal, the Court of Appeals for the Federal Circuit agreed, and, in the alternative, held that “exhaustion did not apply because LGE did not license Intel to sell the Intel products to Quanta for use in combination with non-Intel products.” 2
The Supreme Court disagreed with both lower courts. The Supreme Court held that while “a patented method may not be sold in the same way as an article or device… methods nonetheless may be embodied in a product, the sale of which exhausts [method] patent rights.” 3 In this case, the Court held that each microprocessor sold by Intel “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.” 4 Finally, the Supreme Court held that “because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patents rights [against Quanta].” 5
For component purchasers, this decision provides reassurance that a patent owner cannot demand a royalty from the purchaser after an authorized sale of a component that “substantially embodies” a patented method or a patent of the component itself. However, for patent owners, this decision presents the potential for unintended loss of the patent rights.
Patent owners are now faced with the burden of not only updating their practices for future licensing transactions, but also reviewing and potentially renegotiating existing agreements, including method patent licenses and manufacturing contracts. In particular, patent owners must determine if any licensed components “substantially embody” a method patent and therefore are now subject to patent exhaustion when they are sold.
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1LG Electronics, Inc. v. Asustek Computer, Inc., 65 USPQ 2d 1589, 1593, 1600 (N.D. Cal. 2002).
2LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006).
3Quanta Computers, Inc. v. LG Electronics, Inc., 553 U.S. ____ (2006).
4Id.
5 Id.
The primary issue addressed by the Supreme Court in Quanta Computers, Inc. v. LG Electronics, Inc., is the applicability of the patent exhaustion doctrine to a patented method. LG Electronics (LGE) owns three patents directed to methods for microprocessors to retrieve data, organize read and write requests and manage data traffic. LGE entered into a licensing agreement with Intel to manufacture microprocessors that, when combined with common components, would practice the methods claimed in the LGE patents. The licensing agreement permitted Intel to sell the microprocessors and stipulated that the license did not extend to any third parties. Thus, according to LGE, if a third party purchased a licensed Intel microprocessor, then those microprocessors could only be used with other Intel components.
Quanta Computer, however, purchased the licensed Intel microprocessors and used them with computer components made by other companies. As a result, LGE sued Quanta Computer for patent infringement for using the patented methods embodied in the microprocessors without a separate license from LGE.
Quanta argued that it was a good faith purchaser of the licensed Intel microprocessor incorporating the patented method, and therefore LGE’s patent rights were “exhausted.” According to Quanta, it was free to use the licensed microprocessor as it wished. The District Court held that because the LGE patent was for a method invention, it was not subject to patent exhaustion.1 On appeal, the Court of Appeals for the Federal Circuit agreed, and, in the alternative, held that “exhaustion did not apply because LGE did not license Intel to sell the Intel products to Quanta for use in combination with non-Intel products.” 2
The Supreme Court disagreed with both lower courts. The Supreme Court held that while “a patented method may not be sold in the same way as an article or device… methods nonetheless may be embodied in a product, the sale of which exhausts [method] patent rights.” 3 In this case, the Court held that each microprocessor sold by Intel “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.” 4 Finally, the Supreme Court held that “because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patents rights [against Quanta].” 5
For component purchasers, this decision provides reassurance that a patent owner cannot demand a royalty from the purchaser after an authorized sale of a component that “substantially embodies” a patented method or a patent of the component itself. However, for patent owners, this decision presents the potential for unintended loss of the patent rights.
Patent owners are now faced with the burden of not only updating their practices for future licensing transactions, but also reviewing and potentially renegotiating existing agreements, including method patent licenses and manufacturing contracts. In particular, patent owners must determine if any licensed components “substantially embody” a method patent and therefore are now subject to patent exhaustion when they are sold.
____________________
1LG Electronics, Inc. v. Asustek Computer, Inc., 65 USPQ 2d 1589, 1593, 1600 (N.D. Cal. 2002).
2LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006).
3Quanta Computers, Inc. v. LG Electronics, Inc., 553 U.S. ____ (2006).
4Id.
5 Id.