Supreme Court to Decide Patent Exhaustion Case

Quanta v. LG Electronics (Supreme Court 2007)

The Korean chaebol LG licensed a set of patents to Intel.  The license expressly excludes 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 (including Quanta), their use of licensed Intel chips implicated the first sale doctrine of patent exhaustion.

Now the Supreme Court has granted certiorari to determine whether LG’s narrow license terms avoid exhaustion.

Question presented: “Whether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent’s patent rights were not exhausted by its license agreement with Intel Corporation, and Intel’s subsequent sale of products under the license to petitioners.”

Exhaustion – also known as the first sale doctrine – serves as a default rule in both patent and copyright laws. Under the principle, a license fee is only be charged one time per object. Thus, a rights holder controls the first sale of a protected object, but does not control subsequent sales. The copyright rule is codified in Section 109. The patent rule, however, is only based on case law.

Lower Court Ruling: The lower court found that Intel’s "unrestricted" license and Intel's sale of its chips under the license exhausted LG's rights to any additional patent recovery.

CAFC Ruling: 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.

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)
  • Birdwell, ''Exhaustion of Rights and Patent Licensing Market Restrictions,'' 60 J. Pat. Off. Soc'y 203 (1978)

30 thoughts on “Supreme Court to Decide Patent Exhaustion Case

  1. SF- my break time is up so in brief: I realize that Intel got a better deal, and it was a bad type of deal to have made, it shouldn’t be allowed in the first place because it allows LG’s rights to magically extend. I understand why the deal was made also, still doesn’t make it a good thing to allow. Companies like LG understand that they’re liscensing things that go into making chips. Underline chips. They didn’t liscense something that went into making “computers” or “calculators” etc. there are many layers, and if LG wants to liscense all it’s tech’s up to those other layers then they need to make the chips themselves and sell them at huge prices. The one thing that I don’t understand though is why someone as reputable as Intel would try to pull something like this, I mean I do, but overall why would they let such a crappy deal go down on thier customers? Imo someone in the upper mgmt of their sales dept. was asleep on the job. I’ve got a few more hours on mine tonight so I gtg. See your responses much later tonight.

  2. EG#2- Now we see where you’re coming from with your statements. Yes, as a 2nd gen. pat. attorney I have no doubt you feel the way you’re expressing. You speak of the nontechnical literacy of the SC judges and you have some merit to what you say. But at the same time you have to realize, they represent the general population, 99% of which cannot tell me what a transistor is, much less how to make one at 10 nm, nor how to make any part of the 15+ machines required to perform such an opperation.

    However, now comes the meat of the matter. The law is becoming too “mucked up” to reuse the phrase you used. When congress said in 103 “obvious” they meant what they said, “obvious”. Not “obvious” if someone showed you specifically what was to be done, and suggested you do it, or gave a clear motivation. If they gave you all that then it’s a locked 103, no judgement required. The Fed. Circ. just said that the only 103′s they wanted to see were the ones locked down already, no judgement required. But in any case, congress just said “obvious” in the law. And that’s inherently a judgement call, that’s why there is no “clear guidelines” as so many people toute as being needed, when in fact, it’s not needed. What is needed is judgement. Like it or not, that’s the case. And what KSR says reflects this somewhat. If it’s so close as to need to be seriously debated, then you may as well not debate it if common sense etc come into play. Underline seriously. What we need is some SC to come out and say “prove beyond a reasonable doubt that it’s NOT obvious in light of the facts against you and we’ll hear you out and give you a patent”, till then, you don’t have a case. If the runner and the baseman both hit 2nd at the same time, guess what, the runner gets it. If the examiner or judge hits with a close 103, and you hit with a close arguement, guess who gets it? Within reason of course, but you get the idea. You’re asking the american people for something that is WAY more than your 1000$ is giving and is even more than that in terms of the damage done if you get something that was wrong. Judgement doesn’t come cheap, so if you have something that needs judging, like an obviousness issue, either be prepared to pay, or drop the matter. That’s just how it is, the SC is just giving you a hint so far. Take it and be good imo.

    From my close to uninformed public’s perspective as a beginner,
    examiner 6k

  3. Examiner6K: The licensee (Intel) was able to get a much lower royalty rate because Intel did not have to pay for all of the potentially valuable end uses of the licensor’s technology. (The royalty could be high for some end-uses and much lower for other end uses — depending upon the value of the end use.) Instead of paying for all of its customers’ end uses, Intel paid a smaller royalty for itself, allowing its customers (who know their profit margins on their end uses, presumably larger than Intel’s) to negotiate a fair royalty amount for their end use in view of what Intel already paid. This allows Intel and its customers to bear proportionately the royalty.

    Your cord analogy would be permissable repair under Supreme Court precedent assuming that the cord itself was not patented.

  4. EG- This is not my field at all, all this after sale liscensing and what have you, but lets be reasonable. Intel can’t decide for it’s customers what they want to use something intel sells them. That’s like saying, here I’d like to sell you a blender, but you can only use it to blend strawberrries, not raspberries, also, you are forbidden to use this blender with anything other than a cord made by GE, even if your original cord runs wears out. etc. etc. Frankly, it’s the Fed. Cir. that has been mucking things up for the last I don’t know how long imo, in both this area and the patent application process. You just don’t think it mucked it up because you’re used to the muck and are quite happy in it atm and probably have been for quite some time. Ordinary people do not see things like a “trained” lawyer will because they don’t particularly care about the one case that set some standard way back when. What they care about are things that affect the system they live in every day and I can tell you right now nobody wants to buy a chip from intel or anyone else and be told what system they can or cannot integrate it into. It’s up to the original liscence to take care of those costs, Intel has to build them in to the end cost for the end purchaser. Simple as that, nobody buying the stuff wants to care about that bs, having to get all these permits and crap for driving, sat. tv install, etc. etc. that we have in day to day life is quite enough in my normal day to day exp. thanks.

    The supreme court is looking out for the country and I for one am grateful, I hope all the rest of them that come after this one will do as well.

    Examiner 6k

  5. To GP and EG:
    If Intel’s customers could not, without infringing, use Intel’s chips in combinations falling within LG’s patent claims, then what COULD the customers use the chips for? Are they useful for anything else? (I’m not a “computer person”.) Thanks.

  6. Even if Intel disclaimed UCC 2-312, it would seem unusual to not include any warranty of non infringement or indemnity. But, even it provided warranties against direct infringement, Intel might still disclaim warranties for combinations of its chips with non Intel components such as motherboards. Given its market position, Intel just might have the power to do this.

    Assume Intel warranties do disclaim combinations of its chips with non Intel components, and further assume that Intel did notify its customers that their LGE license did not extend to such combinations, how are Intel’s customer’s harmed in any way by having to deal with LGE directly? If Intel could not deal with LGE on the basis, it might have been impossible for Intel to enter into a broad cross license with LGE.

    These are difficult issues indeed.

  7. Does anyone see any familiarity with the case currently pending in Europe (Germany and Netherlands) between Nokia and Qualcomm where Nokia alleges exhaustion of patent rights against Qualcomm’s patents as they have been licensed to TI who subsequently manufactures the chipsets for the handset makers?

  8. Are the claims being challenged combination claims that include features of the component sold as only a portion of the claim elements? If so, have the parties stipulate or has it been held that these features are essential features of the combination claim?

    (Sorry, I admit that I’m lazy and have not read the decisions — yet)

  9. I agree that Intel and LG apparently entered into their arrangement so that Intel would not have to worry about future claims of contributory infringement. This is one of the reasons why I look forward to more information coming to the forefront to help place into perspective the respective motivations of LG and Intel. The facts very well may provide a wealth of insight to those new to licensing and the business dynamics that result in agreements such as this one. Besides the preparation of patent applications, I have found precious few more legal challenges than crafting a licensing arrangement that reflects the true concerns and long range goals of business enterprises. If nothing else, it may very well point out just how important it is that counsel thoroughly understand business plans so that a meaningful license can be crafted. I learned long ago that effective licensing programs require the close cooperation of four distinct disciplines, namely, attorneys, marketing/business development, technology managers, and financial planners. In the case of technology spin-outs involving venture capital, I would add yet another legal discipline…one well steeped in the intricacies of forming new entities, the allocation of equity in the entity, etc.

    Against this backdrop counsel is expected to help a client get from Point A to Point B in as efficient a way as possible without running afoul of the law. Far too often I have seen counsel focus merely on legal issues, and glaringly negelect to thoroughly understand the business issues that are meant to be addressed. Hopefully the facts as they are presented will make this point clear.

    Merely as an aside, whenever drafting a patent application the first thing I do is set out claim protocol. Everything else follows. In the case of licensing, my first focus is always on a good set of definitions. Again, everything else follows.

    It seems to me that this case holds the promise of being a good learning for those about to embark on adding licensing to their area of expertise. I will think about the legal issues presented once I have a firm handle on what actually transpired and the business reasons therefor. Now, if only the SC would do the same to avoid yet another “learned” opinion that relies upon an unclear set of facts.

  10. I would rather listen to Breyer spout about raccoon traps. I feel like the Federal Circuit sometimes spends so much time on the minutiae of individual technologies and licensing agreements that they lose track of the bigger picture. I can’t blame them. They are surrounded by a bunch of lawyers arguing for larger and broader rights–and, you know, peer pressure. The Supreme Court restores a bit of balance.

    With all due respect to DC, I’m not sure that exhaustion and first sale are merely “default rules.” In copyright, where I’m more comfortable, 17 USC ยง 109 is titled “limitations on exclusive rights.” The right of the copyright owner simply does not extend to preventing first sales. The owner might have an agreement with the initial purchaser, but that can’t be leveraged into a suit against a subsequent purchaser.

  11. A Newbie,

    Article 2 warranties can be (and are typically) disclaimed in the Intel contracts with its customers, which I understand was the situation here.

  12. It seems to me that Intel’s customers have a cause of action against Intel under UCC Art. 2 sec. 312 (Warranty of title; Against infringement).

    Intel has rights to make chips, but its customers cannot use/sell those chips with other non-Intel products – seems pretty silly. Although I am no electronics major, I don’t think Intel chips (or any other chips for that matter) can be used in isolation by anybody for anything.

  13. “While Congress required all appeals of patent cases to be taken to the CAFC, it certainly did not divest the SC of jurisdiction to hear appeals from the CAFC. Congress can withhold SC jurisdiction of patent cases anytime it feels like, and yet it has failed to do so. Indeed, there has never been even a proposal to do so. So your suggestion that the SC is somehow subverting congressional intent by overruling the CAFC is flawed.”

    GP, I’m not questioning (and never would) the right of the Supreme Court to take appeals from the Federal Circuit. (BTW, I’m a second generation patent attorney and proud of it.) What I am concerned about is how many petitions for cert the Supreme Court has now taken in the patent arena within the last few years. I’m also not saying that the Federal Circuit has, to a large degree, been it’s own worst enemy in this regard, including this recent “patent rights exhaustion” issue.

    But what is particularly disturbing is that the Supreme Court is becoming more and more lately the “policy maker” on many patent law issues. That’s definitely not what Congress intended back when the Federal Circuit was created in the early 1980′s. The Supreme Court’s ignorance of the patent law and especially the patent statutes (35 USC 103 is glaring example) could fill volumes. Instead, the Supreme Court tends to spout rhetorical nonsense (like the implausibility of patentability of a combination of old elements which flies in the face of 35 USC 103), provide minimal guidance to the lower courts (including the Federal Circuit) on how to apply their ruling (KSR International is no more clear than Graham on how to apply the obviousness standard), and manifest arrogance in their unwillingness to even try or get help to understand the technology they’re dealing with (the Microsoft v. AT&T, while plausibly correct, manifests a complete lack of understanding of how software works, with the exception of dissenting Justice Stevens).

    With all its flaws (and there are quite a few), I’m much more willing to put my faith in the Federal Circuit to render order from the patent law chaos (if they would only listen to Judge Newman more often) than 9 Justices who are obviously technology challenged, are unwilling to educate themselves on that technology, give at most lip service to the patent statutes, and use rhetoric instead of logic. At least the Federal Circuit has technical clerks who bother to help the court write cogent and understandable descriptions of the technology involved. Or would you rather have Justice Breyer talk about raccoon traps (if you don’t believe go check the transcript to the oral argument for the KSR International case). If you sense that I have no faith that the Supreme Court, as currently constituted, can properly and understandably articulate patent law jurisprudence, you’re absolutely right.

  14. “While Congress required all appeals of patent cases to be taken to the CAFC, it certainly did not divest the SC of jurisdiction to hear appeals from the CAFC. Congress can withhold SC jurisdiction of patent cases anytime it feels like, and yet it has failed to do so. Indeed, there has never been even a proposal to do so. So your suggestion that the SC is somehow subverting congressional intent by overruling the CAFC is flawed.”

    GP, I’m not questioning (and never would) the right of the Supreme Court to take appeals from the Federal Circuit. (BTW, I’m a second generation patent attorney and proud of it.) What I am concerned about is how many petitions for cert the Supreme Court has now taken in the patent arena within the last few years. I’m also not saying that the Federal Circuit has, to a large degree, been it’s own worst enemy in this regard, including this recent “patent rights exhaustion” issue.

    But what is particularly disturbing is that the Supreme Court is becoming more and more lately the “policy maker” on many patent law issues. That’s definitely not what Congress intended back when the Federal Circuit was created in the early 1980′s. The Supreme Court’s ignorance of the patent law and especially the patent statutes (35 USC 103 is glaring example) could fill volumes. Instead, the Supreme Court tends to spout rhetorical nonsense (like the implausibility of patentability of a combination of old elements which flies in the face of 35 USC 103), provide minimal guidance to the lower courts (including the Federal Circuit) on how to apply their ruling (KSR International is no more clear than Graham on how to apply the obviousness standard), and manifest arrogance in their unwillingness to even try or get help to understand the technology they’re dealing with (the Microsoft v. AT&T, while plausibly correct, manifests a complete lack of understanding of how software works, with the exception of dissenting Justice Stevens).

    With all its flaws (and there are quite a few), I’m much more willing to put my faith in the Federal Circuit to render order from the patent law chaos (if they would only listen to Judge Newman more often) than 9 Justices who are obviously technology challenged, are unwilling to educate themselves on that technology, give at most lip service to the patent statutes, and use rhetoric instead of logic. At least the Federal Circuit has technical clerks who bother to help the court write cogent and understandable descriptions of the technology involved. Or would you rather have Justice Breyer talk about raccoon traps (if you don’t believe go check the transcript to the oral argument for the KSR International case). If you sense that I have no faith that the Supreme Court, as currently constituted, can properly and understandably articulate patent law jurisprudence, you’re absolutely right.

  15. “Test” is right on here (but I think there’s more too it as I explain below). If the Supreme Court reverses and is not careful to narrow its holding, it could hamper the ability of putative indirect infringers to independently (of direct infringers) shield themselves from suit. And this would be the case although the component-suppliers are not proven indirect infringers until a court determines there are no substantially non-infringing uses of the component claim element, etc., under contributory theory or proves actively induced infringement.

    On the other hand, it seems reasonable that once LG granted Intel a license to make, use, sell, offer for sale, and import that it knew would be attached specifically to those components that were sold to the defendants, it’s reasonable that Intel’s sale of those components triggered patent exhaustion. Because Intel’s sale was protected under that license from indirect infringement claims, it makes sense that Intel’s customers should be shielded for liability from the direct infringement claim that would have been the condition-precedent to that indirect claim.

    Intel’s resale restrictions are contractual, not a matter of patent law.

    Here’s another way to see it. Didn’t LG grant full rights to Intel but only “use” resale rights? Well, if LG has no power to restrict reuse rights under the patents, then the FC was wrong. If LG gave up its property rights as a matter of law by granting Intel full exclusivity rights itself under the patents specifically for those components, it didn’t have the property right to restrict the reuse of those components. LG wasn’t parceling out its exclusivity rights in trying to rstrict reuse. It was restricting Intel’s. That may be a contract issue, but under property law, you can’t restrict property rights you no longer have.

    Only if LG had granted Intel itself “use” rights alone would Intel’s granted property rights be restricted to that stick in the bundle.

  16. Slonecker: Nothing Intel sells directly infringes. Intel took the license because it would likely be liable for inducement \ contributory infringement.

  17. What you wrote was

    “Some readers may not be aware of the 3 different names that can be used for this same general issue, which are “the first sale doctrine” aka “exhaustion of rights” aka an “implied license”.”

    This was what I was responding to. These are not 3 different names for the same doctrine. These are subtly different doctrines.

  18. “first sale/exhaustion is NOT the same as ‘implied license’”

    Well, of course. How’s that relevant to whether there were legimate reasons for the license, which was what I was discussing?

  19. An interesting set of facts, at least the facts recited in the CAFC opinion. If I read it correctly, nothing Intel manufactures and sells infringes any of LG’s patents. The problem seems to arise when Intel’s products are combined with third party components, the resulting combination purportedly infringing one or more of the claims in LG’s patents. I am quite interested to learn more about the factual scenario because already I have read at least one amicus brief on behalf of Dell, HP and Gateway that starts out with a recital that Intel’s products infringe rights held by LG. Strange, since the CAFC said exactly the opposite.

  20. Note to anonymous – first sale/exhaustion is NOT the same as “implied license”. the question for first sale/exhaustion is whether the sale of a licensed product carries a license to the patents to an upstream buyer/user; the question for implied license is whether a licensed sale implies a license to other, otherwise unlicensed, patents.

  21. Some readers may not be aware of the 3 different names that can be used for this same general issue, which are “the first sale doctrine” aka “exhaustion of rights” aka an “implied license”.

    In addition to the prior cases in this area that Dennis helpfully listed at the bottom of this report today, there is an even earlier Supreme Court case that I think ought to also be considered, which is the General Talking Pictures case – GENERAL TALKING PICTURES CORP. v. WESTERN ELECTRIC CO., INC., 305 US 124 (1938). [I did my antitrust course paper on this interesting and controversial subject in law school in 1962, so this Quanta v. LG cert acceptance is not exactly timely, but still appropriate.]

    P.P.S. The interesting history of this issue goes back to 12th century English case law on the “restraint on alienation of chattels.” I note that you did not cite any of them. [

  22. Alan:

    The customers could use what Intel sold. The customers just couldn’t combine what Intel sold with other components. This allowed Intel to pay a lower royalty based on their products rather than paying for their customers’ larger combinations, which might justify a larger royalty.

    Intel customers, knowing that they would have to pay a royalty for any new combination, were free to negotiate a lower price from Intel to accomodate payment of the royalty.

    This is perfectly fine because it allows the cost of the royalty to be borne proportionately to those that infringe.

  23. “… before the Justices completely muck up the patent law and render the Federal Circuit’s Congress mandated expertise in this area null and void. ”

    EG, while Congress required all appeals of patent cases to be taken to the CAFC, it certainly did not divest the SC of jurisdiction to hear appeals from the CAFC. Congress can withhold SC jurisdiction of patent cases anytime it feels like, and yet it has failed to do so. Indeed, there has never been even a proposal to do so. So your suggestion that the SC is somehow subverting congressional intent by overruling the CAFC is flawed.

  24. I may be completely off on this, but why do I feel that a license that says “you can make all you want, but your customers have no right to use what you make” does not pass the smell test?

    Maybe A Newbie has a point, was Intel in on a scam? Or did Intel think they knew their customers would never be held liable and got a reduced royalty to boot?

  25. Not a surprise that cert was granted, given that the US Solicitor General’s Amicus Brief supported the petitioner. Given what happened in KSR International and AT&T v. Microsoft, it would be a surprise if the Federal Circuit wasn’t reversed by the Supreme Court. I’m just hoping this stream of patent cases being heard by the Supreme Court ends soon before the Justices completely muck up the patent law and render the Federal Circuit’s Congress mandated expertise in this area null and void.

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