[Infowarrior] - SCOTUS rules in favor of 'patent exhaustion'

[Richard Forno]

http://www.patentlyo.com/patent/2008/06/supreme-court-d.html

Supreme Court Decides Quanta v. LG Electronics, __ U.S. __ (2008),

Quanta v. LG Electronics, __ U.S. __ (2008)

Justice Thomas delivered the Supreme Court’s 19–page unanimous  
decision that provides some new life to the doctrine of patent  
exhaustion.  The opinion reverses the Federal Circuit and holds that  
under the exhaustion doctrine applies to the authorized sale of  
components that “substantially embody” a process patent. Here, Intel’s  
authorized sale of chip components to Quanta exhausted LGE’s patent  
rights.

Buried in this statement are two important holdings: (1) method claims  
can be subject to exhaustion and (2) sales of products that that do  
not fully practice the invention can still trigger exhaustion when the  
products include essential features of the patent and the “reasonable  
and intended use” of the product is to practice to patent.

In coming to its conclusions, the court reiterated its longstanding  
rule that “the right to vend is exhausted by a single, unconditional  
sale, the article sold being thereby carried outside the monopoly of  
the patent law and rendered free of every restriction which the vendor  
may attempt to put upon it.” Motion Picture Patents, 243 U. S. 502  
(1917).  The Motion Picture decision is more nuanced than the even  
older statement from Adams, which the opinion also quotes approvingly:  
“[W]hen a patented item is ‘once lawfully made and sold, there is no  
restriction on [its] use to be implied for the benefit of the  
patentee.’” Quoting Adams v. Burke (1873).

Contractual Limits: Although the defendant won in this case, the  
Supreme Court gave some glimmer of hope to those hoping to limit the  
scope of patent exhaustion through specific licensing terms. In this  
case, the court found that the LGE-Intel license did not limit the  
scope of what Intel could sell.  Rather, the contract “broadly permits  
Intel to ‘make, use, [or] sell’” the invention. Under that  
interpretation of the contract, LGE’s patent rights over a particular  
component are extinguished as soon as that component is sold –  
regardless of whether the license included post-sale restrictions.

     “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. 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. And exhaustion turns only on Intel’s own  
license to sell products practicing the LGE Patents.”

The practical impact is that the patentee has direct power through  
only the first level of the production/marketing process and forces  
the patentee to rely on contract rather than patent rules. This shift  
is less preferred by patentees because (1) contract law requires  
agreement and privity and (2) patent law typically results in stronger  
relief than contracts (despite eBay).  Because there is usually a lack  
of privity with downstream users, and the manufacturer is unlikely to  
agree to be liable for improper downstream uses, it appears that a  
patentee will now have even more difficulty controling downstream  
users and purchasers.

Authorized: Despite the broad language of Adam v. Burke, the Supreme  
Court appears to have conceded that a license may include some  
restrictions.  Interestingly, the court indicated, the sale might not  
have been authorized if sale had been done in a way that breached the  
contract between Intel and LGE.

     “No conditions limited Intel’s authority to sell products  
substantially embodying the patents. Because Intel was authorized to  
sell its products to Quanta, the doctrine of patent exhaustion  
prevents LGE from further asserting its patent rights with respect to  
the patents substantially embodied by those products”

In Footnote 7, the court limited its holding to patent exhaustion —  
and expressing “no opinion on whether contract damages might be  
available even though exhaustion operates to eliminate patent  
damages.”  This means that violation of use restrictions associated  
with an authorized sale will not constitute patent infringement.  
However, it may still constitute a breach of contract. The case says  
little to nothing about the growing tendency of providing products as  
a service rather than through the sale of goods.  Those offering the  
service believe that their business structure moves the deal outside  
of the “first sale” doctrine because the products are transferred via  
a license & service agreement rather than the sale of goods.

Notes:

     * “The sale of a device that practices patent A does not, by  
virtue of practicing patent A, exhaust patent B. But if the device  
practices patent A while substantially embodying patent B, its  
relationship to patent A does not prevent exhaustion of patent B.”