Case questions whether Federal Circuit erred in its decision regarding exhaustion of patent rights based on licensed sales by a licensed manufacturer

The question presented to the Supreme Court of the United States in Quanta Computer, Inc. v. LG Electronics, Inc. was whether the U.S. Court of Appeals for the Federal Circuit erred by holding, in conflict with decisions of the Supreme Court and other courts of appeals, that LG’s patent rights were not exhausted as a result of its license agreement with Intel Corporation, that Intel’s sales to its customers were not unconditional and that LG retained the right to sue purchasers, from Intel, of licensed products.

LG is the owner of a number of patents, some covering chip sets and others covering the combination of those chip sets within computer products, as well as method of use patents. LG licensed Intel to manufacture, use and sell the chip sets covered by its patents. Quanta purchased chip sets from Intel for incorporation into its computer products. The Federal Circuit’s reversal of the district court’s non-infringement ruling was not before the court. Thus, for purposes of the appeal, it was assumed that Quanta’s use of the chip sets infringed LG’s patents that covered use of the chip sets in computer products (the combination and method patents). However, the parties disputed whether Intel’s license pertained only to the device patents or, by reason of implied license or exhaustion, included the combination and method patents as well. The parties also disputed whether Intel had knowledge of LG’s intent to enforce its patents against downstream purchasers and users of its chip sets.

Maureen E. Mahoney argued for the petitioner (Quanta). Her argument focused on the issue of patent exhaustion. Although Ms. Mahoney seemed to concede that limited licenses are possible—i.e., that it would have been possible for LG to only license Intel to manufacture and use the chip sets, but not to sell them—she contended that because the LG-Intel license agreement explicitly allowed Intel to sell the chip sets, patent exhaustion applied and LG could not enforce its patents against Quanta. In response to questioning, Ms. Mahoney also seemed to concede that it might be possible to craft a license that only allowed for certain limited sales. Thus, the thrust of her argument was that the particular license between LG and Intel, which did not limit the right to sell, was a broad license that did not limit sales in any way.

Carter Phillips argued for the respondent (LG). Mr. Phillips contended that the doctrine of patent exhaustion—or the first sale doctrine, as he referred to it—is inapplicable to the facts of this case. Mr. Phillips agreed that the doctrine of patent exhaustion did apply, but only to LG’s device patent, not to its method or use patents. He argued that Intel was only licensed under the LG device patents. Insofar as the method or use patents are concerned, Mr. Phillips argued that this case should be analyzed under principles of implied license. To the contrary, he argued that the license to Intel did not give rise to an implied license in or to the combination and method of use patents, which were not part of the LG-Intel license agreement. Also, Mr. Phillips noted that LG only asserted infringement for those sales made by Quanta after such time as Quanta had been notified by LG that it would be liable for infringement. As a result of that notice, Mr. Phillips argued there could be no implied license in this case.

Mr. Phillips expressly stated that he was neither defending nor criticizing the Federal Circuit’s decision in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.32d 700 (Fed. Cir. 1992).

Ms. Mahoney contended that since Intel was not alleged to be liable as a contributory infringer of the combination or method patents, those patents were necessarily covered by the LG-Intel license agreement (which was entered into as part of the settlement of an infringement allegation by LG against Intel).

Chief Justice Roberts and Justice Scalia took an active role in the argument. Chief Justice Roberts took issue with Ms. Mahoney’s characterization of the case as reducing to a relatively non-consequential contract interpretation issue. Justice Scalia took issue with Mr. Phillip’s position that to avoid a finding of implied license, the patentee need only notify the potential downstream infringer of his patent right, and the intent to enforce it, prior to sale by the licensed manufacturer, of the licensed item. According to Justice Scalia, in order for a patent owner to avoid having an implied license arise, the appropriate time to put downstream purchasers of a licensed product on notice that they are at risk of infringing non-licensed patents is at the time of the initial licensing to the manufacturer of the licensed item. In other words, Justice Scalia would require the patent owner to incorporate a notice in the license itself.

Justice Souter echoed Chief Justice Robert’s concern that Quanta’s view of the case would reduce the controversy to a question of contract interpretation. Justice Breyer seems adamant in his opinion that a license to make and sell product under a patent should exhaust the patent owner’s right not only to assert the specifically licensed patent, but any related patent of the same patent owner as well. He questioned whether the ability to assert a related combination or method of use patent against a downstream infringer eviscerated the doctrine of patent exhaustion completely.

This case has drawn widespread attention, and 27 amicus briefs were filed at the Supreme Court. Given the arguments of the litigants and the diversity of questions from the bench, the outcome of this case will likely remain the subject of anxious debate among intellectual property lawyers for at least a few more months.