Quanta Computer, Inc. v. LG Electronics, Inc. (2008)

Although much speculation occurred prior to the Quanta opinion, the Supreme Court provided a lesson in patent licensing rather than revamping the doctrine of patent exhaustion. The Court did, however, correct the Federal Circuit’s notion that method claims were always excluded from the doctrinal scope.

Under the doctrine of patent exhaustion, an initial authorized sale of a patented item terminates all patent rights to that item. The Supreme Court applied its 1940s precedent under U.S. v. Univis Lens Co., 316 U.S. 241 (1942) to the facts and found the patent licensee’s products, microprocessors or chipsets, were analogous to lens blanks in Univis, because “their only reasonable and intended use was to practice the patent and because they ‘embodie[d] essential features of [the] patented invention.’”

The Court found that the licensing agreement between the patentee LG Electronics (LGE) and the licensee (Intel) authorized Intel’s sales to Quanta Computer (Quanta) and therefore held that “[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control postsale use of the article” (emphasis added). The fact that Intel’s products substantially embodied the patents meant that the method claims of the patents were also exhausted by the authorized sales. 

The Federal Circuit held that the doctrine of patent exhaustion did not apply to method claims. It also held that exhaustion did not apply in the instant case, because LGE did not license Intel to sell the Intel Products to Quanta for use in combination with non-Intel products. In other words, according to the Supreme Court, the Federal Circuit did not properly interpret the contractual agreement between LGE and Intel.

The Supreme Court’s result thus rests in large part in the language of the licensing agreement between LGE and Intel and, arguably, the lack of licensing agreement between LGE and Quanta, rather than in any profound interpretation of the doctrine of patent exhaustion.

The Patents at Issue

The three LGE patents at issue were directed to computer technology and handling of data between memory and other components. The first patent related to updating data commonly stored in both main memory and a processor cache memory, such that the main memory would be updated using the processor cache memory if the cached data version was newer. Therefore, a read request to the main memory would provide the most recent data, and not “stale” data, since the main memory would be updated with the most current data version from the cache when the stale data is requested. The second patent related to coordination of main memory read and write requests in which old data would not be read if there was an outstanding write request. The third patent addressed managing data traffic on a bus connecting two computer components, so that heavy usage components would not unduly monopolize the bus.

The Language of the Patent Licensing Agreement

LGE licensed the three patents to Intel under a cross-licensing agreement which permitted Intel to manufacture and sell microprocessors and chipsets that used the LGE patents. The licensing agreement authorized Intel to “make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of” Intel products that practiced the LGE patents. The licensing agreement contained a limitation in that no license:

“is granted by either party hereto . . . to any third party for the combination by a third party of Licensed Products of either party with items, components, or the like acquired . . . from sources other than a party hereto, or for the use, import, offer for sale or sale of such combination.”

The licensing agreement did not alter the rules of patent exhaustion and also provided that “[n]otwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”

Intel also executed a second, separate agreement with LGE, agreeing to provide written notice to Intel customers that, although it had a broad license “ensur[ing] that any Intel product that you purchase is licensed by LGE and thus does not infringe any patent held by LGE,” the license “does not extend, expressly or by implication, to any product that you make by combining an Intel product with any non-Intel product.”

Additional Case History

Quanta is a computer manufacturer that purchased microprocessors and chipsets from Intel and used them, in combination with non-Intel memory and buses, in ways that practiced the three LGE patents. Quanta performed no modification of Intel products, but only followed the Intel specifications for using the parts in its systems. Quanta was not a party to any licensing agreement, but only received the written notice from Intel, based on Intel’s second agreement with LGE.

LGE sued Quanta, claiming that Quanta’s combination of Intel products with non-Intel components infringed the LGE patents. The District Court initially granted summary judgment to Quanta, holding that the license agreements caused LGE to lose any rights assertable against Quanta under the patent exhaustion doctrine. The District Court later limited its ruling, holding that patent exhaustion did not apply to process or method claims that describe operations to make or use a product. Each of the three LGE patents included method claims. The Federal Circuit affirmed the ruling that patent exhaustion did not apply to method claims, but alternatively concluded that exhaustion did not apply because Intel was not licensed to sell to Quanta for use in combination with non-Intel products under the license agreement.

The Supreme Court’s Analysis

The Court began with a discussion of post sale restriction cases such as Henry v. A.B. Dick Co., 224 U.S. 1 (1912) where patent holders attempted to use their patents to secure market control of other related, but unpatented, items. In summary, the Court explained the policy behind the patent exhaustion doctrine and the case law prohibiting restrictions placed on sold patented articles, that is, to limit the rights granted by a patent to the claimed invention.

The opinion then continued to analogize the Intel products with the lens blanks of Univis. In Univis, the patentee held patents on eyeglass lenses and licensed a buyer to make “lens blanks” (unpolished glass suitable for completing a lens) by attaching various lens segments to create bi-focal or tri-focal lenses. Third party wholesalers were licensed to grind the lens blanks into the completed patented lenses. The third party wholesalers could then sell to Univis licensed retailers for resale at a fixed rate, or to consumers at the same fixed rate. The U.S. brought an anti-trust action against Univis alleging unlawful restraint on trade. The question in Univis was whether the patent rights continued through the sale to the wholesalers, which could have protected Univis against the anti-trust violation.

As stated by Justice Thomas,

“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.”

Method claims provide no escape from this conclusion. Otherwise, patentees could avoid exhaustion simply by adding method claims or by drafting method claims rather than apparatus claims, thus undermining the exhaustion doctrine.

The Court then provided guidance as to the extent a product must embody a patent in order to trigger exhaustion. In Univis, the only reasonable and intended use of the sold lens blanks was to practice the patent because the lens blanks embodied the essential features of the patented invention. The lens blanks were without utility until they were ground and polished into the completed patented lenses.

The Court found that the Intel products similarly could reasonably be used only for incorporation into computer systems that practiced the LGE patents. The products could not function without being connected to memory and buses. Second, the Intel products, like the Univis lens blanks, constituted a material part of the patented invention and substantially embodied the patent, because the only necessary step to practice the patent was the application of common processes or the addition of standard parts. Thus, exhaustion was applicable to all three patents.

Turning to the license agreement and whether Intel was authorized to sell products to Quanta for combining with non-Intel parts, the Court held that nothing in the contract prohibited Intel from making such sales. The written notice provision of the second agreement was not a condition of such sales, and the failure to provide notice did not constitute breach of the licensing agreement. Nor were the sales conditioned on Quanta’s decision to abide by the notice provided. Thus, the Court held that the sales were authorized and that patent exhaustion was implicated with respect to LGE’s three patents.

The Court noted, however, that remedies may still exist under contract theories, which were not presented to the Court. Therefore, although patent damages were eliminated under the patent exhaustion doctrine, this did not act to preclude the availability of contract damages and “[w]hether a patentee may protect himself and his assignees by special contracts brought home to the purchasers.”

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