By Scott Cameron
After more than 150 years, the U.S. Supreme Court recently took exhaustion, or at least the doctrine of patent exhaustion, to new levels. The doctrine of patent exhaustion, also known as the first sale doctrine, has been used routinely to limit the patent rights that survive the initial authorized sale of a patented item. In QuantaComputer, Inc. v. LG Electronics, Inc., decided June 9, 2008, the Supreme Court reaffirmed the doctrine and held that it applied not only to patents on an apparatus, but on a method as well.
The doctrine of patent exhaustion generally states that once a patent owner has sold an item that embodies or contains the patent, he loses control over that item, and as to that particular item, the patent contained within it. Thus, a patent owner cannot sue one who purchases a patented item for patent infringement for using the item.
LG Electronics, Inc. (“LGE”) owned a number of patents important to the computer industry. Among other things, the LGE patents at issue disclose a system for handling memory that ensures that only the most current data is retrieved from the main memory, a method of organizing read and write requests to ensure that only the most up-to-date data is used while maximizing speed, and a means of handling data traffic on a bus connecting two components so that no device can monopolize system resources. LGE licensed these (and other) patents to Intel Corporation, permitting Intel to make, use, and sell microprocessors and chipsets that practiced these LGE patents. LGE sought to control the use, however, by making it clear that the Intel license did not extend to any third party who purchased an Intel microprocessor or chipset if that third party used it in combination with non-Intel parts. The intent was to force any third party to obtain its own license with LGE to use the patents in the Intel components. Intel was required to, and did, provide notice to its customers that the LGE license did not extend to them.
LGE filed patent infringement suits against several computer companies in the US District Court for the Central District of California. These companies were using the Intel components in their computers without receiving a license from LGE, the patent holder. The district court granted summary judgment of non-infringement for the defendants as to most of the patents based on the doctrine of patent exhaustion, but ruled that the doctrine did not apply to the method patents. The district court ruled that the agreement between LGE and Intel did not limit Intel’s ability to sell its components, even though it did not grant a license to the buyer. Therefore, the authorized sale cut off LGE’s patent rights in the items sold. In essence, while no license was granted, none was needed because LGE no longer controlled the item.
The US Court of Appeals for the Federal Circuit disagreed, finding that the agreement between LGE and Intel did not authorize a sale to the third parties, and reversed the district court on this point. The Federal Circuit agreed that the doctrine of patent exhaustion did not apply to method patents. In a unanimous decision, the Supreme Court made clear that the doctrine does apply to method patents, reversing the Federal Circuit.
To understand why the Supreme Court’s ruling makes sense, a short discussion on method patents compared to patents on an apparatus is helpful. The image conjured up when one hears the word patent is protection on a device – something physically built and stamped with the patent number. However, an inventor can also patent the method of making the device, and the method of using the device. As the Supreme Court noted, a “patentee seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus.” Indeed, the patentee could achieve this result by simply adding a method claim onto its apparatus claim in the patent. The Court stated that to allow this would “seriously undermine the exhaustion doctrine,” and it refused to “allow[ ] such an end-run around exhaustion.”
LGE argued that the exhaustion doctrine does not apply here because the Intel components do not fully practice the patents. In fact, they could not practice them until they are combined with memory and busses in a computer. Because the components themselves did not practice the patents, LGE contended that their sale cannot exhaust LGE’s patent rights. LGE faced an uphill battle in light of United States v. Univis Lens Co., 316 U.S. 241 (1942), which found that the exhaustion doctrine applied even though the product sold, unfinished lenses, was not a complete embodiment of the patent-at-issue and could not be used until finished by the purchaser.
The patents at issue here could not be used until the Intel components were connected to a computer. The Court agreed with the defendants that Univis was on point and controlled. Like in that case, the only reasonable and intended use of the Intel components was to practice the patents, and the Intel components embodied essential features of LGE’s patented invention. Thus, just as in Univis, the fact that the item sold was not exactly the item patented did not preclude the defense of exhaustion.
Finally, the Supreme Court found that there was an authorized sale to complete the exhaustion analysis. LGE argued, as it did successfully in the Federal Circuit, that its restriction on the Intel license and requirement that Intel provide notice of the limitation prevented the finding of an authorized sale. However, the Supreme Court pointed out that nothing in the agreement between LGE and Intel prevented a sale to third parties, and in fact expressly permits Intel to “make, use, or sell” products which include LGE’s patents. The Court found that the disclaimer of licenses to third parties was irrelevant because Quanta’s right to practice the patents was not based on an implied license; it was based on exhaustion of LGE’s rights. The sale from Intel to the customers, defendants in this matter, was authorized by LGE and therefore exhausted its patent rights as to the items sold.
There is a lesson to be learned from QuantaComputer. Quite simply, it is that the courts will enforce the actual terms of a bargained contract, even when that contract involves patented items. Here, LGE could have avoided the result by requiring Intel to condition any sales of its items on the buyer obtaining a license from LGE to use the patents. That way, there would not have been an authorized sale that would cut off LGE’s rights. LGE didn’t do that, however. It only required Intel to give notice that the buyer did not have a license with LGE to practice the patents. While the intent was the same, the court drew the fine line right where the parties had specified. The sales made by Intel were authorized, and even though LGE intended the buyer to obtain a license, the sale was not conditioned on it. That fine distinction cost LGE its patent rights as to all items sold by Intel. Very likely, the attorney that drafted or approved the agreement with Intel has some explaining to do. Did the last contract you drafted really say exactly what you wanted it to say?