Justices: Thomas (author), Roberts, Stevens, Scalia, Kennedy, Souter, Ginsburg, Breyer, Alito

[Appealed from Fed. Cir., Judges Michel, Newman, Mayer]

In Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937 (U.S. June 9, 2008), the Supreme Court held that the patent exhaustion doctrine applies to method claims and that LG Electronics, Inc.’s (“LGE”) authorized sale of components that substantially embodied the patents-in-suit exhausted the patents.

Respondent LGE licensed a patent portfolio to Intel Corporation (“Intel”). The portfolio encompassed patents directed to components used in personal computers, such as microprocessors and chipsets, and patents directed to methods and systems for combining components into a computer system (“the LGE patents”). The LGE-Intel license agreement permitted Intel to manufacture and sell microprocessors and chipsets covered by the LGE patents. The license agreement prohibited Intel from granting a license to permit third parties to combine Intel products with non-Intel products. In a separate agreement, Intel agreed to give written notice to its customers that the license did not extend to any product made by combining an Intel product with any non-Intel product.

Petitioners, including Quanta Computer, Inc. (collectively “Quanta”), are computer manufacturers that bought microprocessors and chipsets from Intel and received the notices required by the separate agreement. Quanta manufactured computers using Intel parts in combination with non-Intel memory and buses in ways that practiced the LGE patents. LGE subsequently sued Quanta, asserting that the combination of Intel products with non-Intel products infringed the LGE patents. The district court granted Quanta SJ, but on reconsideration, denied SJ as to the LGE patents that contained method claims because the patent exhaustion doctrine does not apply to method claims. The Federal Circuit affirmed-in-part and reversed-in-part. It agreed that patent exhaustion does not apply to method claims. In the alternative, the Federal Circuit concluded that exhaustion did not apply in this circumstance because LGE did not license Intel to sell the Intel products to Quanta for use in combination with non-Intel products.

On appeal, the Supreme Court reversed. The Court first reviewed the history of the patent exhaustion doctrine and concluded that precedent did not support LGE’s argument that the exhaustion doctrine is not applicable to method patents. In so doing, the Court noted that eliminating exhaustion for method patents “would seriously undermine the exhaustion doctrine” by encouraging patentees to shield a patented invention from exhaustion by drafting patent claims to a method rather than an apparatus. Slip op. at 10.

Next, the Court considered the extent to which a product must embody a patent in order to trigger exhaustion. After determining that the products Intel sold to Quanta embodied the patents at issue, the Court applied its holding in United States v. Univis Lens Co., 316 U.S. 241 (1942), to decide whether exhaustion was triggered by Intel’s sale to Quanta under the license agreement. In Univis, the Court 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.

Here, the Court concluded that, because the only reasonable and intended use of the microprocessors and chipsets was to practice the patents and they embodied essential features of the patented inventions, Intel’s sale to Quanta triggered exhaustion. The Court found that LGE suggested no reasonable use for the microprocessors or chipsets sold by Intel other than incorporating them into computer systems that practiced the LGE patents, and that LGE’s attempts to distinguish Univis were not persuasive. Indeed, the Court found that the microprocessors and chipsets embodied everything inventive about each patent and that the only missing step to practice the patents was the application of common processes or the addition of standard parts.

The Court also rejected LGE’s argument that exhaustion does not apply across patents. The Court agreed with LGE that the sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. The Court clarified, however, that if the device practices patent A while substantially embodying patent B, patent B could also be exhausted. Here, the Court found that, while the microprocessors and chipsets practiced thousands of patents, including the LGE patents not at issue, the fact that more than one patent is practiced by the same product does not alter the exhaustion analysis. Rather, the Court explained that the only relevant consideration is whether the products Intel sold partially practiced a patent by embodying that patent’s essential features and would therefore exhaust that patent.

Finally, the Court determined that Intel’s sale of the microprocessors and chipsets to Quanta exhausted LGE’s patent rights. According to the Court, nothing in the LGE-Intel license agreement restricted Intel’s right to sell the microprocessors and chipsets to purchasers who intended to combine them with non-Intel parts. Intel provided notice to its customers that LGE had not licensed those customers to practice LGE’s patents in compliance with the supplemental agreement. But the Court explained that the notice provision appeared only in the separate agreement and a breach of that agreement would not constitute a breach of the license agreement itself. Accordingly, the Court held that Intel’s authority to sell the microprocessors and chipsets was not conditioned on this notice or on Quanta’s decision to abide by LGE’s directions in that notice.

Furthermore, although the license agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components, the Court found that whether third parties received implied licenses was irrelevant because Quanta asserted its right to practice the patents under exhaustion, not implied license. Thus, the license agreement authorized Intel to sell products that practiced the LGE patents to Quanta, and the doctrine of patent exhaustion prevented LGE from further asserting its patents substantially embodied by those products.

In its final footnote, the Supreme Court noted that, although the sale here exhausted LGE’s patent rights, the sale to Quanta did not limit LGE’s other contract rights. The Court, however, expressed no opinion on whether contract damages might be available.