Patent Exhaustion at the Supreme Court

Quanta v. LG Electronics (on Petition for Certiorari, 2007).

Chipmaker Intel licensed a set of patents owned by the Korean chaebol LG.  By its terms, the license expressly does not extend to Intel's customers and similarly does not cover any customer product made by combining an Intel product with a non-Intel product. 

When LG sued a host of Intel-chip-based computer manufacturers for infringement, they complained of attempted double-dipping.  According to the defendants, their use of licensed Intel-chips implicated the first sale doctrine of patent exhaustion.

First Sale Doctrine: Under the first sale doctrine, an authorized and unrestricted sale of a patented product exhausts the patent's power over that particular product.  Thus, a patentee cannot later sue a customer who uses the product in an infringing manner.

Proceedings: The lower court quickly found that the Intel "unrestricted" license and Intel's sale of its chips under the license exhausted LG's rights to any additional patent recovery. On appeal, the Court of Appeals for the Federal Circuit (CAFC) reversed, finding that when restrictions are placed on a license, "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." The appellate panel found that there was no exhaustion because of express conditions on the use of Intel's licensed products -- specifically that the products could not be combined with non-Intel parts.

Now, the defendants have asked the Supreme Court to decide whether the CAFC erred by holding that LG's "patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license."  On April 16, the Supreme Court requested the views of the Solicitor General -- a major step toward granting certiorari.

Quanta's petition to the Supreme Court begins with hyperbole:

[LG Electronics] purchased a portfolio of patents ... and now contends that those patents are infringed by every computer in the world.

Quanta's argument is quite simple:

• Intel sold chipsets to the petitioners;
• Those sales were fully authorized under the LG license and were made without restriction;
• Therefore, LG's patent rights are exhausted.

Quanta goes on to say that under Supreme Court jurisprudence, a sale cannot be conditional. (No improper restraints on alienation).  And, without citing Arizona Cartridge, the petition lists a set of upcoming problems if conditions for sale are allowed for patented items:

[T]he Federal Circuit's new jurisprudence threatens to kick off a new era of "notices" attached to sold goods.  Obvious candidates include "single use only," "no use outside of Massachusetts," "no repair," "no resale," or "no resale for less than the price of purchase."

On the other side, LG points-out that Intel made a business decision not to cover its customers.  Because of that decision, Intel received a cheaper license, but now the customers must make-up the difference.

[When there are no patent misuse or notice concerns,] parceling out of the exclusivity rights is simply a matter for negotiation in the marketplace, not for a legal override of commercially fashioned terms.

An amicus on behalf of Dell, HP and others identifies the origin of the current CAFC precedent: Mallinckrodt.

Mallinckrodt held that a restriction on the post-sale use and enjoyment of a patented article is enforceable under the patent laws as long as it does not “venture[] beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.”

According to the Amicus (and Quanta), the Mallinckrodt decision and its progeny do not follow Supreme Court precedent as stated in Univis Lens.

Univis Lens ... held that the authorized sale of an article manufactured “under the patent” exhausts all patent claims in the article regardless of any purported limitation on the subsequent use and enjoyment of the article. . . Univis Lens held that a condition on the post-sale use and enjoyment of a patented device violated the antitrust laws because it was not enforce-able under the patent laws, and thus was not protected against antitrust scrutiny. See 316 U.S. at 252 (“[t]he price fixing features of appellees’ licensing system, which are not within the protection of the patent law, violate the Sherman Act”).United States v. Univis Lens Co., 316 U.S. 241 (1942)

Notes

• It turns out that the patents were originally issued to Wang Labs and are indeed quite broad. U.S. Patent Nos. 4,918,645; 5,077,733; 4,939,641; 5,379,379; and 5,892,509
• Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992)
• Jazz Photo v. ITC, 264 F.3d 1094 (Fed. Cir. 2001), cert. denied, 536 U.S. 950 (2002)("United States patent rights are not exhausted by products of foreign provenance. To invoke the protection of the first sale doctrine, the authorized first sale must have occurred under the United States patent.").
• Arizona Cartridge Remanufacturers Association Inc. v Lexmark International Inc, 421 F.3d 981 (9th Cir. 2005)
• United States v. Univis Lens Co., 316 U.S. 241 (1942)

Comments

[Alan Harrison]

Seems like Intel had a pretty aggressive set of litigators involved in the licensing transaction ...

[SF]

To what extent, if any, did Univis Lens rely upon the now debunked presumption of market power in a patented device?

[Miguel]

Was this LG's strategy all along? If so, was Intel complicit in this plan? LG knew, of course, that Intel wouldn't be making chipsets only for in-house use.

Do the agreements between Intel and their customers have indemnity provisions?

[Len]

It sure would be interesting to see the actual licensing agreements.

[Dennis Crouch]

Len, it appears that the actual terms of the licensing agreements are confidential and under seal. Of course, you could filed a petition to the district court to have them produced for the public. There is good reason for their publication since they form the basis of both the CAFC decision and the certiorari petition.

[Alun Palmer]

Miguel has hit the nail on the head. LG knew that Intel chips go into a startlingly large market share of all computers. Anyone who didn't know that would have been living under a rock.

[Mark A. Lemley]

I think the petition is correct that Mallinckrodt is inconsistent with Univis Lens. But if Intel really did bargain for a license that excluded its customers, the case is a pretty bad vehicle for presenting the difficult exhaustion issue to the Court.

[Joe Smith]

"Quanta's petition to the Supreme Court begins with hyperbole:

[LG Electronics] purchased a portfolio of patents ... and now contends that those patents are infringed by every computer in the world. "

OK. So what percentage of the world's computers does LG say are infringing?

[Anyone]

LG alleges that every personal computer in the world using Intel chipset infringe LG's patents.

[David J. French]

David French writes:

For the record, the law in Canada is as follows:

"....the sale of a patented article is presumed to give the purchaser the right "to use or sell or deal with the goods as the purchaser pleases": see Badische Anilin und Soda Fabrik v. Isler, supra, at p. 610. Unless otherwise stipulated in the licence to sell a patented article, the licensee is thus able to pass to purchasers the right to use or resell the article without fear of infringing the patent. Further, any limitation imposed upon a licensee which is intended to affect the rights of subsequent purchasers must be clearly and unambiguously expressed; restrictive conditions imposed by a patentee on a purchaser or licensee do not run with the goods unless they are brought to the attention of the purchaser at the time of their acquisition: see National Phonograph Co. of Australia, Ltd. v. Menck, [1911] A.C. 336 (P.C.)."

Supreme Court of Canada - Decisions - Eli Lilly & Co. v. Novopharm Ltd. [1998] 2 S.C.R. 129
http://scc.lexum.umontreal.ca/en/1998/1998rcs2-129/1998rcs2-129.html

[ct]

Univis Lens as cropped out above misses the point of patent rights... to exclude. If a patent owner cannot control the post-sale use in an explicit agreement, only companies with established manufacturing infrastructure would benefit from exclusion. Joe Inventor that wants a specific development of the claims, but cannot produce himself, risks different uses of his patent if he cannot limit the use down the road.