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Patent Exhaustion Clarified

Posted in Patent Law

By Audrey A. Millemann

The “first sale” or “patent exhaustion” doctrine provides that the first unrestricted sale by a patent owner of a patented product exhausts the patent owner’s control over that particular item. The doctrine is also analyzed as an implied license to the purchaser of a particular product of the rights to use and resell the product. Stated another way, the initial authorized sale of a patented item terminates the patent owner’s rights with respect to that item. 

 The doctrine also applies to the patent owner’s authorized licensee. The sale by an authorized licensee who manufactures a product within the scope of its license gives the purchaser an implied license of the rights to use and resell the product. Therefore, the resale of the patented product is not an infringement of the patent. 

The patent exhaustion doctrine was the subject of United States Supreme Court’s decision in Quanta Computer, Inc. v. L.G. Electronics,Inc., 170 L. Ed. 2d 996 (2008). There, the plaintiff, LG Electronics, owned three patents covering computer systems, including components and methods. LG licensed its patents to Intel. Under the license, Intel was allowed to manufacture and sell microprocessors and chipsets covered by the LG patents. The license contained the limitation that no license was granted to any third party to combine the licensed products with components from another source. The license also stated that it did not alter the doctrine of patent exhaustion.

Intel also entered into a separate agreement with LG that required Intel to notify its customers that Intel had a license to sell Intel’s products, but that the license did not apply to any product the purchaser made by combining an Intel product with a non-Intel product. Quanta was a computer manufacturer who purchased microprocessors and chipsets from Intel. Despite receiving Intel’s notice, Quanta combined the Intel products with non-Intel components to make computers that practiced LG’s patents. 

LG sued Quanta for patent infringement. The district court initially granted Quanta’s motion for summary judgment on the grounds that the license from LG to Intel exhausted LG’s rights to sue Intel’s customers. On reconsideration, however, the district court denied summary judgment, holding that the patent exhaustion doctrine does not apply to method claims, and therefore, did not apply to LG’s patents because they contained method claims. 

The Federal Circuit Court of Appeals affirmed that part of the district court’s decision holding that the patent exhaustion doctrine does not apply to method claims. 

Quanta appealed to the United States Supreme Court. 

The Supreme Court reviewed the history of the patent exhaustion doctrine. The doctrine traces back to several cases decided by the Supreme Court in the mid-1800s, in which the Court held that upon the sale of a patented product, the patent owner lost all patent rights to that product. In a case decided in 1942, United States v. Univis Lens Co.,  86 L.Ed. 1408 (1942), the Court held that the patent exhaustion doctrine applied to the sale of an item that did not completely practice the patent but did embody the patented invention. The Court in Quanta summarized the decision in Univis as follows: “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.” Quanta, supra, at 1004-5.”

On appeal, LG argued that the patent exhaustion doctrine should not apply to method claims because method patents are not connected to a product and cannot be exhausted by the sale of a product. Quanta argued that the courts have applied the doctrine to method claims in the past, and that, if the doctrine is not applied to method claims, patent owners could avoid the doctrine by including method claims in their patents. 

The Court agreed with Quanta. The Court held that even though methods are not sold in the way that a product is, “methods may be embodied in a product, the sale of which exhausts patent rights.” Id. at 1005. The Court explained that if the doctrine was not applied to method claims, it would be rendered useless. Patent owners could simply include method claims in every patent to avoid losing their patent rights to the products covered by the patents. Id.

The Court then addressed the question of whether a product must completely embody the patent in order for the patent exhaustion doctrine to apply. Quanta argued that LG’s sale of microprocessors and chipsets exhausted LG’s patent rights even though these items needed to be combined with other items in order to practice the LG patents. LG argued that the patent exhaustion doctrine should be limited to products that include all of the components of the patented invention. The Intel products would not be subject to the doctrine because they needed to be combined with other components to practice the LG patents. 

The Court again agreed with Quanta, relying on Univis, supra. The Court held that patent exhaustion applied because the only reasonable and intended use of the Intel products sold to Quanta was to include them in computers that practice the LG patents. In addition, the Court held that:

“Like the Univis lens blanks, the Intel Products constitute a material part of a patent invention and all but completely practice the patent. Here, as in Univis, the incomplete article 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. Everything inventive of each patent is embodied in the Intel Products.”

Id. at 1008. The Court further stated: “the Intel Products embody the essential features of the LGE patents because they carry out all the inventive processes when combined, according to their design, with standard components.” Id.

The Court then analyzed whether Intel’s sales to Quanta triggered exhaustion of LG’s patent rights. Patent exhaustion only applies if the sale is a sale authorized by the patent owner. LG contended that the sale by Intel to Quanta was not authorized because LG’s agreement with Intel did not include a license for Intel to sell to another to make new products by combining the Intel products with non-Intel products. 

The Court held that LG was incorrect. The Court found LG’s license to Intel did not prohibit Intel from selling its microprocessors and chipsets to customers who combined them with non-Intel components to make other products. Id. at 1010. Although the separate agreement between LG and Intel required Intel to give notice to its customers that the license did not include a license from LG to the customers, Intel had performed that agreement. According to the Court, “Intel’s authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta’s decision to abide by LGE’s directions in that notice.” Id.

The court further explained, at id.:

“LGE points out that the License Agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components. [citation omitted.] But the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion. An exhaustion turns only on Intel’s own license to sell products practicing the LGE Patents.”

In conclusion, the Court stated, at 1011:

“The 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 control postsale use of the article. Here, LGE licensed Intel to practice any of its patents and to sell products practicing those patents. Intel’s microprocessors and chipsets substantially emobodied the LGE Patents because they had no reasonable non-infringing use and included all the inventive aspects of the patented methods. Nothing in the License Agreement limited to Intel’s ability to sell its products practicing the LGE Patents. Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta. Accordingly, the judgment of the Court of Appeals is reversed."