Method Claims Not Exhausted By Sale of Patented Device

LG Electronics (LGE) v. BizCom (Fed. Cir. 2006, 05-1261).

LGE sued a bunch of Intel customers for infringing use of a chipset.  Intel itself was not a defendant because it is licensed to sell the products under an agreement with LGE.  Under the agreement, however, Intel's customers were not permitted to combine the products with non-Intel products.

LGE lost on summary judgment -- the district court found that LGE's rights were "exhausted" as to all but one asserted patent and that LGE was contractually barred from suing over the remaining patent. The appeal addressed, inter alia, implied licenses and exhaustion.

Implied License: A defendant can avoid liability for patent infringement by showing that it had an implied license to practice the patented invention.  To prevail, the defendant must prove that its products (1) have no noninfringing uses and that (2) the circumstances plainly suggest that an implied license should be inferred. Here, Intel expressly informed the parties that they were not licensed to combine the Intel products with other products -- thus those combinations could not be considered licensed in any way.

Exhaustion: The patent exhaustion doctrine is triggered by an unconditional sale of a patented item -- this is commonly termed the "first sale doctrine."

The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods.

The exhaustion doctrine does not, however, apply to express conditions made upon that original sale.

"In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the ‘use’ rights conferred by the patentee."

Exhaustion - System Claims: Regarding LGE's system claims, the appellate panel found that there was no exhaustion because there were express conditions on the use of Intel's licensed products -- specifically that they could not be combined with non-Intel parts.

Although Intel was free to sell its microprocessors and chipsets, those sales were conditional, and Intel’s customers were expressly prohibited from infringing LGE’s combination patents.

Exhaustion - Method Claims: Here, the CAFC made their statement short and to-the-point: "the sale of a device does not exhaust a patentee’s rights in its method claims."

Comments

[Mark A. Lemley]

The court's last conclusion on exhaustion of a method patent, if it really is that blunt, flatly contradicts existing caselaw. Can it really be the case that if I sell a product that has no use except to practice the patented method, buyers of that product get no right to use it? Or is the court just drawing a specious distinction between the implied license and exhaustion theories?

This is another case, like NTP v. RIM, where the court seems to be drawing surprising distinctions between product and method claims.

[David Jaglowski]

"Can it really be the case that if I sell a product that has no use except to practice the patented method, buyers of that product get no right to use it?"

You are assuming that the product has no use except to practice the patented method. That is a special case, and it is inapplicable under these facts because the buyers had the express right to practice the patented method by combining Intel chips.

In the special case, the defendant would be able to argue that the seller had granted an implied license to practice the patented method. However, even the implied license argument is subject to limitations.

Quoting from the decision:
"The trial court found, and we agree, that Intel’s sales of its licensed products to defendants do not warrant the inference of a license with respect to the asserted patents. Regardless of any noninfringing uses, Intel expressly informed them that Intel’s license agreement with LGE did not extend to any of defendants’ products made by combining an Intel product with non-Intel products. In light of this express disclaimer, no license can be implied."

So yes, a buyer that is so imprudent as to purchase a product that has no use except to practice the patented method under a contract that expressly disclaims the buyer's ability to practice the patented method might, in fact, have no right to use it.

Frankly, this is barely a patent law question. LG granted a specific license to Intel, did not sell products embodying the patented inventions, and did not deal with the buyers. Intel could not grant rights greater than the rights granted under the license. It's fundamental property law.