Quanta v. LG: Will the Supreme Court Clarify the Exhaustion Doctrine?

Editorial and News by Charles R. Macedo, Joseph Casino, Michael Kasdan, and Howard Wizenfeld.

Today, for the first time in half a century, the Supreme Court heard oral argument on the extent to which a patentee can license its patents to different members of the same sales chain for the same product. [Transcript] In Quanta v. LG Electronics, the High Court heard arguments on whether a patentee can grant patent rights and at the same time contract around the exhaustion doctrine.  Further, the issue of whether patent exhaustion applies to method claims was also before the Court.  Charley Macedo attended the oral arguments to get a first hand impression of how the Supreme Court might deal with the issues related to patent exhaustion.

An interesting aspect of oral argument at the Supreme Court was the focus of the Justices on whether patent exhaustion is an issue of patent law, contract law, or antitrust law.  Justice Breyer’s questions appeared to suggest that, under contract law theories, a patentee should not be able to put a post customer restriction in a license because it would impose improper “equitable servitudes on chattel”.  He also suggested that placing such a restriction could violate antitrust law doctrines.  By contrast, Justice Roberts focused on whether exhaustion is a patent law or contract law doctrine.

In fact, the theory of patent exhaustion probably implicates both patent law and contract law.  It implicates patent law because, once an authorized sale is made, the patentee should have no further right to limit the sale of that item in commerce.  It implicates contract and antitrust law to the extent the patentee tries to impose an improper restriction in its license agreement.  Either way, the Supreme Court should preclude a patentee from contracting around the exhaustion doctrine.

The Justices were also interested in knowing why the exhaustion doctrine was codified in the Copyright Act but not in the 1952 Patent Act.  In this regard the Amici were unable to cite to any useful discussion.

During argument LGE also argued that the notices Intel sent to its customers were valid techniques of avoiding a defense of implied license.  LGE objected to the use of the exhaustion doctrine as an end-around to the defense of implied license.

The role of patent protection in the U.S. economy continues to remain important and should not be undermined.  However, once a patentee has authorized goods or services to be sold under its patent, it should not be entitled to obtain a second payment for the same patent.   The Supreme Court has a chance to reestablish this fundamental principle of U.S. Patent Law.  We will have to wait and see if the Court takes advantage of this opportunity.

44 thoughts on “Quanta v. LG: Will the Supreme Court Clarify the Exhaustion Doctrine?

  1. For me, this case breaks down more to the basic facts.

    LG licenses (contracts) for Intel to make chips under some patents, and assemble the chips with other intel parts into computers. In this license, LG and Intel specifically agree that Intel does not have the right and cannot transfer the right to combine with non-Intel components to make computers, and that Intel is required to notify any OEM’s of this.

    Intel sells chips to Quanta and tells Quanta that Intel has no license/right to combine the chips with non-Intel components such that it cannot transfer that right to Quanta and that Quanta may be sued and liable for patent infringement if it does combine the chips with non-Intel components to make computers.

    Quanta takes the chips, combines them with non-Intel components.

    So with respect to the patent infringement, Quanta is either claiming that they were so dumb that they didn’t realize the implications of their actions despite the specific notice from Intel, or that they were so smart that they knew patent exhuastion extended into the current, never before adjudicated context.

    I have a hard time believing that Quanta was that smart or that dumb. I think they did what they wanted despite the implications, and now they want to avoid responsibility.

    I think this case less on the doctrines than it does on the specific actions by the parties in the case.

  2. Having just read the Osborne article, I agree it is a definitive work. One of its paragraphs provides a good summary Osborne’s theory of Univis:

    “Pursuant to Univis Lens, recovery of a royalty for practice of a
    combination claim is not double recovery where the purchased
    component, whether or not the component is patented, does not
    embody all of the essential features of the combination claim.
    Implied license may apply in this situation, but exhaustion does not.
    However, if a component embodies all of the essential features of a
    combination claim, under Univis Lens the authorized sale of such
    component exhausts the combination claim, whether or not the
    component is patented. Thus, where a purchaser obtains a component
    from a licensed source and the component embodies all of the
    essential features of a combination claim, the exhaustion doctrine
    applies if there is an attempt to collect a royalty for practice of the
    combination claim.”

    Note the word “all.” Query, if the sold component has “all” of the essential features of the patent, shouldn’t its sale be an infringement regardless of the other elements of Section 271(c) (knowledge) or (f)(substantial portion)? Shouldn’t this also apply to methods practices outside the United States?

  3. Unfortunately, the ABA site hosting all briefs for Quant v. LG is currently offline. Before this happened I did have the opportunity to once more read the oral argument transcript. But for a single reference by Ms. Mahooney, representing Quanta, to 271(c) appearing on either page 13 or 14 of the transcript, no other mention of is ever made concerning 271. Of course, 271(c) has no bearing on the issue before the court.

    During argument a question was propounded by Justice Ginsburg to Mr. Hungar, representing the views of the USG, about why copyright law deals with the issue before the court, but apparently the patent law does not. Mr. Hungar made some unintelligible reference to Section 109 of the Copyright Act, and then continued with his argument.

    Mr. Phillips, representing LG, made no mention whatsoever about 271. He had the clear opportunity to address Justice Ginsburg’s question and direct her attention to 271(d), and yet failed to do so.

    For the life of me I cannot fathom why the clear relevance of 271(d) was never even mentioned. I do not mean to in any way disparage any of the counsel who participated in the arguments as each is well recognized as able practitioners before the court. However, no matter how able one may be in practicing before the court, this alone is never a substitute for a comprehensive understanding of Title 35.

    It would indeed be a troubling matter if a decision is rendered in total ignorance of the provisions in Title 35. The fact not one single justice even mentioned the section makes it all too clear that amicus briefs in many instances receive only scant attention, and that scant attention is likely made by a freshly scrubbed law clerk who has never been exposed to this field of law. Certainly, the AIPLA and MPEG2 LLC amicus briefs apparently were not deemed particularly noteworthy.

    In view of the above, I believe it fair to say that Quanta v. LG will over time be proven to be merely a “way station” along the path towards the articulation of a comprehensive and comprehensible opinion pertaining to patent exhaustion and other closely allied concepts embraced within patent law. Mr. Osborne’s publication mentioned above lays out such a path, one that deserves serious consideration. See:

    link to morganfinnegan.com

  4. It’s called the prior user defence, and once again the reform bill will leave such a defence limited to business methods only, which is a shame. Strong patents and a prior user defence represents the fairest balance, IMHO.

  5. Bierbelly,

    I agree with you, but there are situations where despite every reasonable effort, someone infringes. An example is when one develops an infringing product in the 18 months between filing and publication, but I am certain there are others.

    As I noted in my first letter above, the solution is not to weaken all patents but to find a reasonable solution for the innocent infringers.

  6. Assume for the moment that the Supreme Court will rule that “unconditional” sales of components whose only use is in a patented combination will exhaust the patent in the combination, will the following avoid the holding?

    “Intel is NOT AUTHORIZED to sell to system integrators components that may form the basis of contributory infringement of LG-system patents by such system integrator; provided however that Intel may sell such components as part of Licensed Systems (defined such that a Licensed System would include the sale of substantially all unassemble components of the system patents). Upon LG’s request, Intel shall cease-and-desist further sales of such components to any such system integrator; provided that LG first have made a bona fide offer of a license under said system patents to said system integrator. Unless and until Intel has received such a request from LG, Intel is under no duty of inquiry and may assume that component customers either have a license from LG under LG systems patents or do not need a license. Upon granting a license to a system integrator, LG shall release Intel of all past damages with respect to sales of such a component to such system integrator. LG covenants not to sue Intel for contributory infringement of a system integrator provided that Intel is in full compliance with the terms of this clause with respect to such system integrator. No compensation paid by Intel to LG under this Agreement shall be deemed or consider to be a present royalty appurtenant to the sale of any such component.”

  7. “For those interested in further study of “patent exhaustion” and related doctrines, the following is an excellent reference that may be of help:

    link to morganfinnegan.com

    The author builds his arguments around the Univis case, and then proceeds to walk the reader through seemingly inconsistent case law to demonstrate that such case law does have a central and unifying theme common to all.”

    Mike,

    I’ve read the Osborne article and it is excellent in explaining “patent exhaustion”, when it applies (and also when it doesn’t apply), how it is different from an implied license, and when restrictions imposed by the patentee on sale are or aren’t enforceable. This article is a must read for understanding “patent exhaustion.” We can only hope and pray that SCOTUS reads it too in Quantum Computer v. LQ Electronics, or we may experience further “collateral damage” in this area of patent law.

  8. “I can see your point where an honest manufacturer does not know of the existence of a sort “submarine patent” until an inadvertently infringing product is already in the market. In such a case, the question should be what can be done to alert an honest manufacturer at an earlier stage of the existence of the patent.”

    How about a FTO search/patent watch for published applications? It’s amazing to me how many want to play the game, but not follow the rules, and then whine when they get called on it.

  9. Alan,

    I believe the “strong patent system” has enough balance.

    If the patented feature is no more than a “little improvement”, there is no reason for anyone to infringe the patent: just sell a product without the improvement.

    On the other hand, if the patented feature seems little but becomes a “must have” on the marketed product, it is apparently worth a lot of money.

    I can see your point where an honest manufacturer does not know of the existence of a sort “submarine patent” until an inadvertently infringing product is already in the market. In such a case, the question should be what can be done to alert an honest manufacturer at an earlier stage of the existence of the patent.

    As for gaming the system, I think (but am not certain) that it is a result of Applicants justifiably going for very broad claims which you could get 5-10 years ago.

    I think this type of gaming can be eliminated by allowing Applicants to file as many claims as they want but examining only a limited number of dependents (e.g., 10) AND by giving the Examiners twice as much time per application to find relevant 102 art.

  10. Alan,
    You wrote about about “every little improvements” (as opposed to big improvements).
    If the improvement is so “little” it must surely be obvious (especially in the light of KSR) so there is no problem.
    If non-obvious and still “litte,” surely it must be easy to design around the mere “little” improvement.

  11. Erez,

    My problem with your “strong patent system” is that it leads to the gaming of the system we see today.

    Patent every little “improvement” you can and hope that you can catch a deep pockets manufacturer. If you do, you’ve won the patent lottery.

  12. Alan:

    The short answer is “Yes, the royalties should be based on the value of the entire car”.

    Each case is different, but in a case analogous to a windshield wiper / car it is only fair to give the seemingly high royalties.

    No one is forcing Car Manufacturer to steal Patent Owner’s wipers. There are plenty of non-patented wipers which could be put in the car, Car Manufacturer could develop new nifty wipers, and even (the horror!) license the wipers from Patent Owner. Importantly, after at most 20 years, Car Owner together with everyone else could use the formerly patented wipers.

    In a “strong patent system” where the royalties are based on the value of the entire system, Car Manufacturer suffers no damage but is forced to enter fair negotiations with Patent Owner. If the negotiations fail, no one is hurt but Patent Owner who hasn’t sold the wipers, will therefore stop paying the annuities so that the wipers become public quickly.

    In a “weak patent system” where the court has to figure out what low value the wipers have, Car Manufacturer steals the wipers, knowing that Patent Owner probably won’t have the money to sue; even if there is a suit the patent will probably be found invalid; even if the patent is found valid, the value of each wiper will be found to be so insignificant that there is no real risk in stealing the wipers.

    Car Manufacturer whose duty is to increase shareholder profits is forced to steal the wipers.

    In a “weak patent system” there is no motivation to innovate, in a “strong patent system” everyone profits in the long run, n’est ce pas?

  13. To me, how you treat the “systems” patent seems to be a big deal.

    One of the ideas behind “patent reform” is that damages awards are too high (RIM case) where the damages are based not on the infringing component, but on the value of the whole “system”.

    Taking the bike case, if damages were based on the value of the bike, and not on the pedal alone, the “reformers” would be up in arms. But, allowing multiple royalties for the “component” is nothing more than trying to get royalties for the “system” or the bike.

    We’ve heard this one before. Should the patent holder on a windshield wiper get royalties based on the value of the entire car? Should the patent owner on a windshield wiper get an injunction to stop production of the car?

    This case is nothing more than the same argument we’ve been hearing for several years, what is the proper measure of royalties for a patented component of a device having numerous patents covering the device?

  14. The part that bothered me from oral arguements was Roberts’ seeming dismissal of the validity of the “system” patent (p48-49 of transcript from SCOTUS’ website) in response to Mr. Phillips argument that Quanta was indirectly challenging the “system” patent’s validity.

    From Roberts I would have preferred

    (1) Roberts perhaps draw a semantic line between direct and indirect challenges to the patent’s validity (given that Quanta waived the right to directly challenge validity), OR

    (2) Roberts perhaps ask Mr. Phillips to ignore the existence of the “component” patent, for a moment, and just concentrate on if the “system” patent, in and of itself, was exhausted. Under this approach, be it valid/useful or not, the “Two Patent” argument is tangential and inconsequential.

    From Mr. Phillips I would have preferred him to address the elephant in the room of the “system” patent’s potential invalidity. Instead he:

    (1) allowed Roberts’ implicit challenge to the validity of the “system” patent to pass without explicitly rebuking/correcting Roberts (perhaps allowing this concern of Roberts’ to sway his opinion later?). Mr. Phillips could have mentioned that if the validity was a concern for this court then perhaps a remand on that issue is appropriate, but barring that possibility the “system” patent is valid.

    (2) didn’t address Breyer’s bike example with the clarification that although it might implicitly seem unfair to allow the “bike” patent holder to enforce that patent against Breyer, it’s important to remember that the bike patent is valid. I believe much of the strength (for Quanta) of that bike example was the implicit “unfairness” of not allowing a user to build their own bike – i.e. Mr. Phillips should have been more explicit and forceful in stressing the validity of this hypothetical “bike” patent (Mr. Phillips did point out in the necessary existence of the “bike” patent for the purposes of that analogy, but I don’t feel like he stressed it strongly enough).

    Finally – I should add the caveat that I am but a mere 1L whose patent knowledge is based only on reading the various briefs for this case combined with conversations with an experienced patent attorney in preparation so we could follow the oral arguments. Be nice :)

  15. Re: seed-saving and exhaustion

    My understanding is that since exhaustion only applies to the purchased article, the patentee’s rights in further seed propagated from the purchased seed are not echausted. In any event, exhaustion does not permit a purchaser to make a patented product anew (a corollary of the notion that it only applies to the purchased article, not to mention the repair cases).

  16. “If you read the old Sup. Ct. cases from which the “patent exhaustion” doctrine arises you will find that old English and pre-Constitution American legal principle (and contract law restriction) to be its source. Bryer had done his homework.”

    Paul,

    Thanks for the tip on where to find this “chattels” issue (it isn’t in the more recent cases that discuss “patent exhaustion” such as Univis Lens). But I wouldn’t necessarily give Breyer credit for doing any homework on this. After his demeaning comments about “raccoon inventions” in KSR International, I no longer give Breyer any slack in the IP area.

    The fact that Breyer does refer to something as archiac as “equitable servitudes on chattels” tells you how outdated the “patent exhaustion” doctrine may be. And SCOTUS seems to completely ignore the potential 271(d) impact on “patent exhaustion” (we’ll have to see if this comes true when the SCOTUS opinion finally comes out). Thank goodness the AIPLA Amicus Brief at least pointed out the potential impact of 271(d), or else there might have been no mention of it at all.

  17. I too was surprised there was no discussion of the affect of 271(d) at oral argument. Numbers of amicus briefs discussed its relationship to the component/combination issue that actually was before the court. IIRC, even LG’s brief discussed it.

    It would be hard to imagine the Supreme Court deciding that exhaustion of a patented combination had occured upon the authorized sale of a contributorily infringing component when the language of Section 271(d) seems to expressly allow the sale or licensing for sale of such a component without detriment to the patentee’s right to sue for infringment of the combination patent. They would at least have to distinguish the statute in some manner I would think.

  18. Re the above comment that “..we once more have a strange comment from the Breyer Patch on the applicability of the doctrine (which I’ve never heard of before, at least in the patent area) “that you cannot impose equitable servitude’s upon chattel”.
    [I.e., only restrictive use covenents running with LAND are enforceable.]

    If you read the old Sup. Ct. cases from which the “patent exhaustion” doctrine arises you will find that old English and pre-Constitution American legal principle (and contract law restriction) to be its source. Bryer had done his homework.

  19. For those interested in further study of “patent exhaustion” and related doctrines, the following is an excellent reference that may be of help:

    link to morganfinnegan.com

    The author builds his arguments around the Univis case, and then proceeds to walk the reader through seemingly inconsistent case law to demonstrate that such case law does have a central and unifying theme common to all.

  20. “Say you buy a pedal from the Schwin shop, and they tell you that you have a license to put the pedal on a Schwin bike, but not a Murray.”

    If all I can ride is a Murray bike and I need the pedal, I’m going to buy it and then the store and I can face off if the store wants to bring it on. But you’d have to be a genuine patent-abusing tool to fail to recognize that (as Larry David’s doctor famously put it) “there is only one prick involved.” Why continue to enable such nonsense?

  21. Missing in the Schwinn-shop analogy is the fact that Schwinn doesn’t make a bicycle (i.e., Intel doesn’t make the other components for a system). So, if you want a bicycle, you have no choice but to put the pedals on the Murray.

    Having listened to the argument, I believe that all or almost all of the Justices will come down on Quanta’s side–even Justices Breyer and Scalia appeared to be on the same page. Various members of the Court may justify such a decision differently (e.g., patent exhaustion, implied license, or some other theory), but they’re not going to let poor old Justice Breyer get chased down the street on his bicycle by some heartless patent attorney (but I repeat myself) wielding an infringement suit–at least on these facts.

    Carter Phillips may have done a good job with the facts he had, but public policy reasons are likely to dictate the outcome of this case. If so, that’s bad news for LG Electronics.

  22. Actually, with the bike example:

    Say you buy a pedal from the Schwin shop, and they tell you that you have a license to put the pedal on a Schwin bike, but not a Murray. And if you put that pedal on a Murray bicycle, patents covering the bicycle with the pedal owned by Joe might be infringed.

    Knowing this, you put the pedal on your Murray. Sure enough, Joe sues you.

    Now the question is, were Joe’s patent rights to the bike with the pedal infringed when you put the pedal on the bike without a license?

    That’s how the bike example really equates. Otherwise, you’re talking about the Univis case, and not the LGE v. Quanta case. They are not exactly the same factually, despite however simplistic some casual observers might attmept to make the LGE v. Quanta case.

  23. “I believe JUD missed the overall tenor of the Justices’ questions. The best example was the hypothetical about buying a “bicycle pedal”. Justice Breyer (pp 37 – 38) asks Mr. Phillips if he buys a bicycle pedal from a licensed dealer and then puts the bicycle pedal on a bicycle (its only useful purpose), could the patentee of the “composition” patent go after him for infringing their “method” or “system” patents. Mr. Phillips said “Oh, to be sure.”

    The Justices are not going to allow a patentee to license the sale of a component that has only one use, and then go after each person in the product chain for patents concerning “systems” and methods”.
    ———————

    Word. And the hypothetical is excellent. The legitimate authorized sale of the bike pedal comes with an implied license to put the pedal on the bike and ride away without worry of harassment from the patentee who owns a patent to a bike with the pedal or the method of riding same.

    Any additional discussion is merely wanking on behalf of greedy harassers who, in most instances, are corporations whose wealth is incomprehensible to 99.99% of the citizens of this country.

  24. “The justices may have denied McFarling so they could wait and see how this case comes out, and the take the next seed-saving case.”

    But the issue is essentially the same, i.e. can a patentee contractually avoid patent exhaustion? Once Monsanto sold the seeds, if their patent is then exhausted as to that purchaser, he is then entitled to do whatever he wants with them. Are they (Monsanto) entitled to prevent him from saving/replanting?

    I recall my Conlaw professor warning us not to look for rhyme or reason from SCOTUS decisions, as they are fraught with politics, in spite of the “non-political” stature of the Court.

  25. “But, more importantly, can someone explain how patent exhaustion applies to self-reproducing patented technology?”

    Notprovided,

    A very insightful question which still leaves me (and many others) puzzled as to why SCOTUS didn’t take McFarling so we don’t have this issue still “hanging in the air” as it may (depending on what SCOTUS says in its opinion or more likely opinions in Quantum Computer). And if you looking to the Breyer Patch (pun intended) for insight on your question, good luck!

  26. The justices may have denied McFarling so they could wait and see how this case comes out, and the take the next seed-saving case.

    But, more importantly, can someone explain how patent exhaustion applies to self-reproducing patented technology? Let’s take for granted that the patent is exhausted with respect to the seeds sold and planted. But the seeds made through the growing of crops are *not* the seeds sold but yet *are* patented. Isn’t that different than just using a bicycle pedal in a bike or whatever?

  27. Bierbelly,

    Thanks for the link to the AIPLA Brief, which I hadn’t seen before. Wow, I’m glad to see I’m not “hallucinating” about the potential impact of 271(d) on “patent exhaustion” (may be because I actually read the statutes which SCOTUS doesn’t seem to do, at least not in the patent area). And I saw how the U.S. Solicitor General’s Brief dismissed the 271(d) issue in a footnote (which is backhanded way of trying to avoid debate on the issue). Again, thanks.

  28. “But what I find very disturbing is that no one, be they the parties, Amici or SCOTUS, ever discussed or even mentioned whether 35 USC 271(d) may have overruled, either explicitly or implicitly, the “patent exhaustion” doctrine.”

    EG, actually, the Amicus brief filed by the AIPLA (I think I found a link to it on this site) was particularly elucidating, and made exactly that point. I do wonder if anyone on the court (including their staff) bothered to read it.

    As to the Agro cases, if the court comes down in favor of Quanta, it should be interesting how they contrast that decision with their own to not grant cert to McFarling.

  29. EG,

    I wholeheartedly concur that reading the argument transcript is an exercise in “migrane” formation.

    Justice Bryer’s constant reference to bicycles leaves me with the firm and definite conviction that he has decided to forego automobiles in favor of pedal-power to do his share for resolving “gloval warming”.

    “Equitable sevitude on chattels” is alive and well for anyone who understands what the phrase means, despite caselaw to the contrary where the miscreant takes the chattel will full notice of the servitude.

    Justice Scalia has decided to drop for the time being the word “gobbledygook”. He did not, however, mention “motivation”, so perhaps he intends to hold it in reserve for a future day.

    No one present in the court has a grasp on the difference between an implied license and an explicit license and when each applies.

    The words “Uh” and “But” are acceptable legal terms when arguing before the Court, with the more they are used the more effective the argument.

    Apparently the possibility of non-infringing uses is not an important factor in deciding exhaustion.

    Section 271 to Title 35 is apparently merely legislative dicta.

    The concepts of joint liability, several liability, joint and several liability, and proportional liability are not especially important in determining who owes what to a patentee. Patent infringement may be a tort, but it is not a tort for which ordinary rules of liability need to be considered.

    Patent lawyers are a crafty lot who are only too willing to run off and sue in “Patent Court”. I wonder if this “Patent Court” is an Article III court?

    Patents are much too easy to obtain, and KSR was a bit** slap along side the head of the CAFC to curtail unimportant stuff for being protected under the Patent Laws.

    We are inclined to craft a bright line test, even if it bears no relationship to economic reality or to the premise underlying why exhaustion was even created in the first place.

    Humor aside, however feeble my attempt may be, the argument presented here (as was the case in KSR, eBay, AT&T, etc.) would most definitely have been much more focused and on point had counsel before the Court been intimately familiar with Title 35 and licensing. Unfortunately, I do not see the trend of using attorneys specializing in practice before the Court changing any time soon.

  30. bierbelly writes:——–
    There is already a remedy in place for this situation, i.e. “implied license”. The Justices really need to take a few courses in Patent Law.
    —–
    Read the transcript. That was addressed at the argument too.

  31. As brought out by the oral argument, this case is fraught with subtle points and distinctions (enough to make my head hurt), including what are the limits of the “patent exhaustion” doctrine, and what conditions, if any, can a patentee still impose on licensees or others after the first sale of a product covered by one patent where other patents may come into play on how that product sold is to be used, and without running afoul of “patent exhaustion). And like KSR International, we once more have a strange comment from the Breyer Patch on the applicability of the doctrine (which I’ve never heard of before, at least in the patent area) “that you cannot impose equitable servitude’s upon chattel”.

    But what I find very disturbing is that no one, be they the parties, Amici or SCOTUS, ever discussed or even mentioned whether 35 USC 271(d) may have overruled, either explicitly or implicitly, the “patent exhaustion” doctrine. 271(d) says: No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement; (4) refused to license or use any rights to the patent; or (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

    271(d) was enacted primarily in response to misuse issues, such as Mercoid misuse, which grew out of line of cases, which includes Univis Lens, where SCOTUS restricted the ability of the patentee to impose conditions on the licensing its patent rights or on the enforcement of its patent rights. In fact, one or more of the 5 provisions stated in 271(d) that protect the patentee in its ability to enforce its rights could apply, directly or indirectly, to the “patent exhaustion” doctrine, especially since 271(d) was enacted to overturn doctrines (such as misuse) that SCOTUS created to restrict the patentees ability to enforce its patent rights. It is entirely possible that the legislative history to 271(d) might have indicated it didn’t apply to “patent exhaustion” but given that 271(d) appears to apply, this should have been discussed and resolved. And why the implications of 271(d) were overlooked by all involved in the Quanta Computer v. LQ Electronics case (other than sheer oversight) remains a mystery to me.

  32. It’ll also be interesting to see what effect any changes in the exhaustion doctrine might have on the “seed saving” cases (e.g., Agro companies suing farmers who save seed and use it in later seasons in violation of contracts whereby their initial seed purchase comes only with a one-growing-season-long license).

  33. KOH,
    I don’t think I missed the tenor of the Justices’ questions. You say: “The Justices are not going to allow a patentee to license the sale of a component that has only one use, and then go after each person in the product chain for patents concerning “systems” and methods”. This would cause chaos in the marketplace.”

    Phillips addressed this quite appropriately, as noted in an earlier comment here: the appropriate remedy is an implied license, which the two lower courts already dismissed as a possibility.

    The other problem is this: if the Justices don’t want to let a patentee “go after each person in the product chain for patents concerning ‘systems’ and methods” they need to talk to Congress, because any ruling along that line would be contrary to 35 USC. The Justices might not like it, but when two patents are issued (even if one is for a component and the other for a related use), the patent laws give the patentee two ways to go after infringers. That, as they say, is a policy decision best left to legislative bodies.

  34. Having Carter defend the PTO – priceless. Having the Chief – say hey i thought you said PTO is clueless boobs in KSR?- what is this double patenting you speak of? Maybe SCOTUS is getting a clue and will look past the NYT editorial page.

  35. P.S. …as to those of you arguing out there regarding no substantial alternate use, how about this:

    1. You buy the chip as an investment.
    2. You put it away in a lock box for 20 years.
    3. After 20 years you open the lock box and sell the chip in hope of getting good ROI on your “investment”. If you invested foolishly in this or in vintage Cabbage Patch collector’s dolls, that’s your headache; not the Supreme Court’s.

    But then again, that vision of truth is too harsh for a compassionate conservative court to see. Now remind me again on how the same court ruled with regard to eminent domain for the rich and powerful? My memory fogs on occasion.

  36. This is an interesting debate that tests the fundamental assumptions of capitalism.

    If I buy an acre of land in the middle of a big city, am I not absolutely entitled, as the “owner” to do “anything” I want with it? In other words, now that the rights of previous claimants have been “exhausted” and the land has entered the river of commerce, can I not build a nuclear power plant in my back yard, or a toxic waste dump, or …? Well you get the picture. My property rights do not give me carte blanche to do whatever I please. Intel knew the deal it was getting into. They paid their 30 coins of silver for the deal struck. Why should they now get absolution from the Supreme Court?

    But then again, this is an interesting debate that tests the fundamental assumptions of capitalism. The “fairest” government that money can buy; that sort of thing.

  37. “The Justices are not going to allow a patentee to license the sale of a component that has only one use, and then go after each person in the product chain for patents concerning “systems” and methods”. This would cause chaos in the marketplace.”

    There is already a remedy in place for this situation, i.e. “implied license”. The Justices really need to take a few courses in Patent Law.

  38. “The Justices are not going to allow a patentee to license the sale of a component that has only one use, and then go after each person in the product chain for patents concerning “systems” and methods”. This would cause chaos in the marketplace.”

    if you sell a microprocessor having only one use:to make computers.
    however when manufacturing your computer you can either combine this microprocessor with other components the “usual” way (use patent 1) or combine it a more efficient way(due to its structure) and save energy(use patent 2) .
    it does make sense to have the right to license separately use patent 2(particularly because it could be patented by others once the information is available);
    It would make sense however that the buyer of a microprocessor gets an implied license of use patent 1(or use patent 1 exhaustion with the sale)(particularly because it could not be patented by others once the information on the microprocessor is available);
    Obviously the terms”only one use” need to be defined a little bit better before drawing any conclusion and thereby keep a stable marketplace with a return on investment for everyone .

  39. I believe JUD missed the overall tenor of the Justices’ questions. The best example was the hypothetical about buying a “bicycle pedal”. Justice Breyer (pp 37 – 38) asks Mr. Phillips if he buys a bicycle pedal from a licensed dealer and then puts the bicycle pedal on a bicycle (its only useful purpose), could the patentee of the “composition” patent go after him for infringing their “method” or “system” patents. Mr. Phillips said “Oh, to be sure.”

    The Justices are not going to allow a patentee to license the sale of a component that has only one use, and then go after each person in the product chain for patents concerning “systems” and methods”. This would cause chaos in the marketplace.

    Also, Chief Justice Roberts (p. 8) was not happy with LG and Intel for putting the disclaimer about “patent exhaustion” in the license agreement. LG and Intel were willing for there to be uncertainty about the sales from Intel, and ultimately force the Supreme Court to rule on something that should have been decided when the license agreement was negotiated.

    I am going to predict that the decision will be 9-0 in favor of Quanta. They are not going to reward LG for negotiating a confusing license agreement or allow them to obtain royalties from down stream purchasers of licensed products. Also, the “first sale” principle will be re-affirmed so there is a stable marketplace.

  40. I’d like to go where you’re taking us. However, this statement doesn’t reflect what seemed to be the tenor of Carter Phillips’ argument:
    “However, once a patentee has authorized goods or services to be sold under its patent, it should not be entitled to obtain a second payment for the same patent. The Supreme Court has a chance to reestablish this fundamental principle of U.S. Patent Law.”

    I thought Phillips pretty convincingly made the point that exhaustion applies to the one patent covering the item sold to the buyer; a point with which you apparently agree. However, Phillips also made a strong argument that this case, unlike the precedents, involves multiple patents, which can’t be simultaneously exhausted. This gets it out of the Question Presented’s “in conflict with precedent” thrust.

    In LG v Quanta, there were *multiple* patents asserted, and Phillips hit the point over and over again (apparently with the agreement of the Justices) that exhaustion of one patent shouldn’t affect other patents covering related technologies. Are you really asserting that exhaustion of rights derived from sale of an item covered by patent A should make patent B unenforceable simply because patent B is directed to a related technology? By presumption of their issuance from the Patent Office, the patents are patentably distinct and valid.

    From the CAFC’s opinion: “LGE brought suit against defendants, asserting that the combination of microprocessors or chipsets with other computer components infringes LGE’s patents covering those combinations. LGE did not assert patent rights in the microprocessors or chipsets themselves.” That doesn’t seem all that remarkable a proposition, and is distinctly different from the Univis Lens precedent.

Comments are closed.