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.”

61 thoughts on “Supreme Court Decides Quanta v. LG Electronics, __ U.S. __ (2008),

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  3. Why did the SC not discuss the fact that patent exhaustion depends on the country in which the patented method/apparatus is places in circulation?
    The prerequisites for exhaustion are that the patented apparatus or the product of a patented method is placed in circulation IN A SPECIFIC AREA by the patent proprietor or a third person acting with the approval of the proprietor.

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  4. I’m curious too about the effect Quanta will have on the doctrine of permissible repair. SCOTUS stated “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.”

    If Patent A has claims for combination A that includes part B, and Patent B has claims only for part B, does Quanta provide support for the argument that the patentee’s unrestricted sale of combination A allows a consumer the right to repair combintaion A with an infringing part B?

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  5. I’m not sure this is all that harmful to patent owners. To the extent that the opinion forces patent owners and patent licensees to work these issues out by contract rather than dragging the whole rest of an industry into the fight with them, I think this decision will eventually redound to the benefit of patent owners. It’s a shame that LGE had to be sacrificed at the altar of establishing new bright-line rules. Patent owners have never had economical way to control downstream users. That’s what the patent like Apple are in the best position to do.

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  6. I think you’re missing a key point. There were two issues in Quanta — (1) whether sale of a mere component, not the finished article, can ever trigger exhaustion, and (2) whether the reservation in the Intel-LGE license that Intel had no authority to convey sublicense to its purchasers, or the notice sent to those purchasers, negated exhaustion in some way.

    Whatever you think the right “essential features” test should be, that issue is relevant only to issue #1. And the ongoing viability of Mallinckrodt is all about issue #2. What the Court said on THAT issue is not limited to cases also presenting an “essential features” question, and has nothing to do with “essential features.”

    On issue #2, the Federal Circuit analyzed this case through the lens of its distinction between “conditional” and “unconditional” sales. The Supreme Court repeatedly and conspicuously embraced the other side of that debate — that an “authorized” sale exhausts the patent and “prevents the patent holder from invoking patent law to control postsale use of the article.” (19). Its opinion reads just like the district court’s opinion in Mallinckrodt, or like the briefs filed by Quanta and the United States. And the Court made very clear that it views the old AB Dick/Motion Picture Patents line of cases as being about general exhaustion principles, not special antitrust concerns limited to postsale restraints that the court considers anticompetitive–which is completely inconsistent with the Federal Circuit’s reasoning in Mallinckrodt. The whole dispute between the district court and Fed Cir in Mallinckrodt was over how to read AB Dick and Motion Picture Patents, and the Supreme Court has just issued an opinion strongly reaffirming that MPP overruled AB Dick on exhaustion grounds, without mentioning the relevance of antitrust-related concerns in any way. It has also just held that sales the Federal Circuit considered “conditional” were in fact free and clear because the sale was authorized and the seller did not violate his license. What more do you think LGE could have said in its license to Intel, without denying Intel the authority to sell to Quanta, that you think would have satisfied the Supreme Court?

    Obviously “Roberts Court minimalism” won out over any broader effort to clean up the law in this area, and they have postponed final resolution of the issue for another day. But I think the handwriting is on the wall.

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  7. Nothing in Quanta leads to the conclusion that it overruled Mallinckrodt. A lot of people (actually most everybody) are misconstruing Quanta. If you want to understand it, you have to study the history and read the good commentaries explaining the essential features standard. All of the briefs filed in Quanta missed it completely. Trying to determine what Quanta means by looking at the briefs is thus an exercise in futility and idiocy.

    In addition to the above Mallinckrodt comments, there have been published conclusions to the effect that there is a tension between exhaustion and contributory infringement, Section 271(d) is applicable and the Court missed it, field of use restrictions are no longer allowed, Quanta said nothing about implied license, Quanta effects the seed cases etc. These conclusions are all wrong.

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  8. Agreeing with the above comment: “I think it’s a safe bet that Mallickrodt v. Medipart is now overruled, and the “not for resale” or “single use only” restrictions it authorized are no longer viable–unless, of course, the patentee retains title to the product (so there is never any sale), or structures its manufacturing licenses such that (as in General Talking Pictures) the manufacturer is just flat prohibited from selling to certain kinds of customers and commits infringement if it does.”
    As I recall, in the Quanta oral argument no one would even defend the CAFC Mallickrodt decision!
    Also, wasn’t it an unusual fact situation anyway, in which public health reasons were apparently used as a rationale for a post sale restriction exception to patent exhaustion?

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  9. Confused: The Quanta Court distinguished Aro — the invention in Aro was in the total combination, not a subcomponent. Aro was not inconsistent with the Court’s “essential, or inventive, features” holding in Univis or Quanta.

    The repair/reconstruction doctrine has always been based on the patent exhaustion doctrine. Nothing new has happened in Quanta. In future repair/reconstruction cases, a court would be well advised to pay heed to Quanta.

    The inventive “feature” can be manifested in different ways, and trial courts and licensing attorneys will have to find how it is manifested in every potential exhaustion situation.

    In Aro, the patentably distinct feature of the invention was NOT in the component sold because the combination itself was the “invention.” Check out the 2004 Osborne article — where the author hypothesized that had the invention in the Cyrix v. Intel case been in some unique aspect of forming a combination with external memory, there would have been no exhaustion. The same would have been true in Quanta since both cases dealt with the same sort of Intel microprocessors.

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  10. Literatari, My question is directed to distinguishing this from the court’s repair/reconstruction doctrine. It seems rather inconsistent for the court to apply an “essential elements” test to determine if a method patent has been exhausted on the one hand, but on the other hand flat out reject an “essential elements” test in determining whether a modification to a patented product constitutes a permissible repair (i.e. the patent right has been exhausted) or impermissible reconstruction (the patent right has not been exhausted) of the patented product. The court flat out rejected an essential elements test in Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961). I see in the Quanta decision that LGE cited the Aro case, but the court’s “essential elements” test quashed LGE’s argument. Just seems there may be some inconsistency here. Maybe I am missing something, or should just set some time aside to thoroughly read the case.

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  11. I was just questioning whether it’s really a good idea to inject issues of patentable distinctiveness into exhaustion, which (unlike validity!) is supposed to be an easy threshold question. And while you are right that the opinion sometimes says “material part of the patented invention” (the contributory infringement test) sometimes it emphasizes that the sold chips embodied everything inventive about the patented system. I’m not sure I see why you’re so confident that those are the same.

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  12. Scott: Regarding your response to Confused: “I think you’re right, and that the “essential elements” analysis is the most curious thing about the Court’s opinion. Univis Lens says that sale of an unfinished component exhausts the patent if it “embodies essential features of the invention” such that it is “within the protection of the patent.” The most straightforward way to interpret that language would have been that a component sale exhausts the patent if that component contributorily infringes the patent. But the Supreme Court seems to have added an additional gloss, that you have to show that the sold component embodies all of the “inventive” features of the patent. I wonder how a reviewing court is supposed to sort that out. It was obvious in Quanta v. LGE but I suspect will not always be.”

    The essential elements analysis is not curious at all and Thomas explicitly explained what he meant — patentable distinctiveness. Courts determine what is patentably distinctive all the time — in validity/invalidity determinations in patent lawsuits. No big deal, and makes perfect sense. As to your point re: contributory infringement, that is the standard under Quanta — note Thomas’s use of the word “material” — that is the contributory infringement standard. As to you people with seed fixations, Quanta dealt with a component which did not fully embody a system/method claim whereas the seed cases deal with restrictions on making/use of an entirely different product (not the one transferred under license).

    It’s all there for you boys, just read the case and look back at the good commentaries on this subject. Don’t make me have to keep coming back here.

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  13. “you have to show that the sold component embodies all of the ‘inventive’ features of the patent. I wonder how a reviewing court is supposed to sort that out.”

    I wonder what strategy Monsanto will take to show that there is something “inventive” about planting seeds, obtaining seeds from the crop, and planting the obtained seeds in a second crop.

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  14. btw, i kind of feel sorry for the guy quoted in footnote 5, and is it just coincidence that he has last name “thomas”?

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  15. I agree with Leopold that the factor the Supreme Court decided on is “authorized versus unauthorized” sale and that the conditionality of the sale is not relevant. If the sale is authorized (which it was according to the Supreme Court), and if the item sold substantially embodies the patent claim asserted, then the patent rights are exhausted. Granted, Clarence Thomas does mention that “no conditions limited Intel’s authority to sell products substantially embodying the patents”, but that was stated to point out that Intel’s sale to Quanta was authorized. What would be interesting is if Intel had failed to include the notice … would Intel’s sale have then been unauthorized and would quanta now be liable for patent infringement?

    I think Thomas’s lengthy IIIB discussion is not dicta: one still has to determine whether the sold article embodies the essential features of the asserted patent claim(s). In this regard, Thomas points out that it is the nature of the final step(s) needed to fall within the asserted claim that determines whether or not the sold item embodies the essential features of the claim; if the final step is “common” and “noninventive” then it does (and there is patent exhaustion); presumably, if the final step is “uncommon” and “inventive” then it does not and there would NOT be patent exhaustion. Kind of like he is saying… there are “combination/use” claims and then there are REAL “combination/use” claims. Problem is…how are we supposed to tell the difference?

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  16. Mr. Hutz: I think you’re right that field of sale limitations imposed on manufacturing licensees will still be enforceable. My point is that they are enforceable against the buyer only if they render the sale unauthorized. If the license says “Manufacturer is not authorized to sell to commercial buyers,” then that is just like General Talking Pictures and if it sells to a commercial buyer then there is no authorized sale to trigger exhaustion, and both manufacturer and buyer are infringers. But if the license says “Manufacturer can sell to whoever they want and is immune from infringement suits, but its customers can only use the product in non-commercial applications” then that is just like Quanta v. LGE. The restriction is defeated by exhaustion.

    Confused: I think you’re right, and that the “essential elements” analysis is the most curious thing about the Court’s opinion. Univis Lens says that sale of an unfinished component exhausts the patent if it “embodies essential features of the invention” such that it is “within the protection of the patent.” The most straightforward way to interpret that language would have been that a component sale exhausts the patent if that component contributorily infringes the patent. But the Supreme Court seems to have added an additional gloss, that you have to show that the sold component embodies all of the “inventive” features of the patent. I wonder how a reviewing court is supposed to sort that out. It was obvious in Quanta v. LGE but I suspect will not always be.

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  17. I only briefly reviewed the case, and I know it is not focused on repair/reconstruction, but my recollection tells me that SCOTUS has always declined using an “essential elements” analysis in determining whether a component embodies, i.e. is a reconstruction of, an invention. It seems odd that SCOTUS would apply the analysis here (patent exhaustion with respect to a method patent), but decline to apply it when analyzing repair/reconstruction. Is there a distinction? Of note also is that the Japan courts use an “essential elements” analysis in their repair/reconstruction analysis.

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  18. Quoth Leopold “A signal claim is certainly intangible. According to the Federal Circuit, a signal is intangible”.

    Peyhaps you should consult some dictionaries on the meaning on intangible.

    American Heritage has the first definition as being
    “1. Incapable of being perceived by the senses”.

    A signal that can’t be perceived is of course an oxymoron. All signals are tangible.

    Now even if you go with such a restricted definition as “incapable of being perceived by the sense of touch, as opposed to other senses” there are still plenty of signals that *are* so capable of being perceived – braille would be pretty pointless otherwise.

    The word you are looking for is “incorporeal”, not “intangible”.

    Cheers, Luke

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  19. Scott,

    I don’t know Mallinckrodt off the top of my head, although I may have read it in law school. That was awhile ago.

    However,

    (1) The Court clearly distinguished “General Talking Pictures” from the present facts. The implication is that I can restrict the rights of the entity I contract with;

    (2) The Court also made decision with respect to standard contract remedies. These, of course, are always available to the patent holder, but require privity of contract. I ensure that besides limiting the scope of the license, I also tie any unauthorized use or sale to a breach of the contract.

    Again, what you are selling ma make a difference. In my case, we are selling a component of a product we normally sell for use in a line of business outside our core business. There are strong field of use restrictions in the agreements.

    In view of this case, I believe it’s likely are patent rights will still be enforceable along with the contract rights.

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  20. The usage of the phrase “conditional sale” in the old Supreme Court cases is one of these areas where modern lawyers get tripped up because so much of the old common law context of those cases is no longer familiar. At the time, it meant a sale subject to a condition precedent to the transfer of title, such as an installment sale where title does not shift to the buyer until the last payment. Such structures were used much more commonly before the modern law of secured transactions. So a “conditional sale” did not trigger exhaustion because until the condition was satisfied there was in fact no sale at all (i.e., no transfer of title). The United States’s brief in Quanta explains all this.

    Trying to say that “conditions” post-sale are enforceable if they are “consistent with the patent grant,” like the Federal Circuit did in Mallinckrodt, makes no sense. Under traditional law, NO conditions survived an authorized sale, so trying to enforce post-sale conditions is by definition an attempt to expand the statutory grant by contract. Of course private parties can’t do that. Mark Patterson’s recent article in the William & Mary Law Review explains it all very well.

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  21. I thought I would direct everyone to some well reasoned arguments on exhaustion. SCOTUS may have run across these in their search. (below) I have yet to read the decision, but Prof. Crouch’s summary seems on par with the articles below and my writings on the subject.

    Scott, at least one of these articles addresses 271(d), although it may not be helpful. If I remember correctly, he addresses the relationship between exhaustion and 271 noting that essential features analysis remedies any discrepancies. Not sure though. I do remember there is a decent discussion the topic.

    Writing on the fly, I believe….

    In summary, when analyzing a defense of patent exhaustion the court should first determine if there is an authorized first sale or licensing agreement of the patented technology by the patentee within the United States. The court should next determine if authorized sale was either conditional or is unconditional. If the authorized sale is unconditional the court should continue with a proper analysis of patent exhaustion with respect to the essential features and non-infringing uses test.

    If however, the authorized sale is conditioned, the court should consider whether the conditions are otherwise lawful under the patent grant. If the licensee or purchaser has violated the terms of a lawfully conditioned license, the defense of patent exhaustion is precluded. In fact, in General Talking the Supreme Court specifically recognized that the express licensing restrictions are considered acceptable within the patentee’s rights. Specifically in that case, the patentee conditionally restricted the use licensed components with respect to other combinations described in patents held by the patentee. The court characterized the sales as being unauthorized since the licensee and third party purchaser improperly practiced the combinations that were explicitly prohibited in the license. In this sense, the patentee’s right to place otherwise lawful conditions through sale or licensing agreements is well established in patent law and similarly invokes certain principles of contract law. The courts have signaled the willingness to respect the intent of the parties so long as the patentee does not exceed their scope of patent rights. Under the facts relating to conditional sales, a proper analysis of patent exhaustion should only commence when the court finds the first sale or license to be an authorized sale. It then follows that a sale to a licensee or purchaser, can only be considered authorized when the sale is either unconditional or in compliance with a conditional licensing agreement. Once the court has determined the sale to be authorized, then the doctrine of exhaustion may apply assuming it does not run contrary to the lawful restrictions by the patentee.

    Under this principle the court would essentially conclude that violation of the lawful condition is tantamount to an unauthorized sale and should not be afforded the defense of patent exhaustion. If the licensee or purchaser has complied with the conditions of the license then the court should continue with an analysis of patent exhaustion with respect to the essential features and non-infringing uses test when the patentee continues to allege infringement.

    In continuing with the two prong analysis of patent exhaustion, the court should first determine if the licensed patent technology contains the essential features of the alleged patents in suit. In doing so, the court should consider if the licensed articles include the patentably distinct features (i.e. embodies the essential features) of the infringed patents. Similarly, the court should consider the utility of the licensed articles in relation to the infringed patents. In order to meet the first prong, the court must show that the licensed article contains the patentably distinct features (i.e. essential features) and that its utility or usefulness is predicated upon the alleged patents in suit. Assuming the first prong is met, the court should then consider whether there are any non-infringing uses. In order to meet the second prong, the court must conclude that there are no other non-infringing uses (Bandag/Glass Equip.) of the licensed article. If the court determines both prongs have been met then the court must similarly conclude that the patents in suit are similarly exhausted.

    Therefore, even if the court is able to clear the licensing hurdle and reach the heart of patent exhaustion, the court must clear an additional two prong analysis in order to find exhaustion.

    Essentially, Osbourne argues for a narrow application of PE to authorized sales that are unconditional while preserving the right to apply “lawful” express restrictions in licensing. He points out how the precedent is actually well harmonized between the SC and Federal Circuit. (While admitting the CAFC did not explain itself well in Mallinckrodt)

    The articles address how a sale may be characterized as unauthorized if it violates an otherwise lawful restriction/condition. (Including restrictions on Intel is something LGE could have done when licensing to Intel) He shows how lawful express restrictions are defined as those generally applicable under the patent grant that do not run afoul of misuse or antitrust. However, he argues that a patentee is also outside of the patent grant when attempting to exclude a downstream purchaser from practicing a combination, system or method claim containing subject matter that is NOT patentably distinct. (i.e. when it embodies the essential features) The determination of patentably distinct/not distinct should include both the essential features and noninfringing use analysis as set out in Univis, Cyrix, Bandag, and Glass Equipment. If the product/process/method includes the essential features (or patentably distinct features) AND has no other non-infringing use then the patentee’s rights should be subject to patent exhaustion. To rule otherwise is akin to an impermissible broadening of patent grant beyond the scope of patent law. Essentially, the patentee exceeds the rights afforded by the patent grant and is precluded from asserting patent infringement. In conclusion, an instance where the essential features are present and the product is being used for its sole intended use, the patentee has acquired a single royalty under an essential features analysis and has received due consideration.

    Is this what the SC said? Guess I should read the opinion first…uhhh they wear black robes and sit in chairs…and ask funny questions about bicycles and stuff….

    You guys crack me up,

    John W. Osborne, Justice Breyer’s Bicycle and the Ignored Elephant of Patent Exhaustion: An Avoidable Collision in Quanta v. LGE, 7 J. Marshall Rev. Intell. Prop. L. 245(2008)

    John W. Osborne, A Coherent View of Patent Exhaustion: A Standard Based on Patentable Distinctiveness, 20 Santa Clara Computer & High Tech. L.J. 643(2004).

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  22. Scott wrote, “The real traditional distinction is between ‘authorized’ sales, which exhaust the patent, and unauthorized sales, which do not.”

    So what role does ‘unconditional’ play in the rule that “the right to vend is exhausted by a single, unconditional sale”? Did the previous Court get it wrong and it really meant to say “a single, authorized sale”?

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  23. The Court didn’t address 271(d) because, as the briefs for Quanta and the United States explain, it can’t possibly have been intended to modify exhaustion. It’s a misuse statute, designed to overrule Mercoid, and that’s it. If you read the language so literally that it could affect exhaustion, it would mean that you could grant a license to a party that would otherwise be a contributory infringer and still turn around and sue them for infringement despite the fact that they are licensed.

    Trying to salvage the Federal Circuit’s distinction between “conditional” and “unconditional” sales after this decision will just lead you into mistakes. The real traditional distinction is between “authorized” sales, which exhaust the patent, and unauthorized sales, which do not. The way you know if a sale was unauthorized is if the seller can be sued for infringement. The key to the Court’s opinion is its recognition that Intel had a complete license to sell, and no one contended it was an infringer. Contrast General Talking Pictures, where the seller exceeded its license and both the seller and purchaser could therefore be sued for infringement.

    And Mr. Hutz: I think it’s a safe bet that Mallickrodt v. Medipart is now overruled, and the “not for resale” or “single use only” restrictions it authorized are no longer viable–unless, of course, the patentee retains title to the product (so there is never any sale), or structures its manufacturing licenses such that (as in General Talking Pictures) the manufacturer is just flat prohibited from selling to certain kinds of customers and commits infringement if it does.

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  24. “Does that mean that a signal claim can “embody” an associated method of a same patent application (ie a method of operating a computing machine)?”

    Sorry, stepback, I don’t think this makes any sense. You have to have a “body,” i.e., a corporeal structure, to “embody” something. A signal claim is certainly intangible. According to the Federal Circuit, a signal is intangible. Thus, neither can “embody” a method. I don’t think you’ve discovered a new angle for 101 analysis.

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  25. Does anyone have thoughts on SCOTUS’ choice of the word “embodies” when they say the product “embodies” the patented method?

    Does that mean that a signal claim can “embody” an associated method of a same patent application (ie a method of operating a computing machine)? And if so, what does that do for arguing against 101 rejections where the PTO says that a signal is “disembodied” energy? Has SCOTUS given new meaning to the word, “embodies”?

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  26. Guru,

    Thanks for pointing us to Osborne’s article. But my point is that SCOTUS didn’t address the 35 USC 271(d) issue at all in Quantum. Nor does the express wording of 35 USC 271(d) compel the reading taken by Osborne that it doesn’t apply at all to patent exhaustion, legislative history or not. Also, SCOTUS doesn’t always consider (or follow) the legislative history anyway, as witness it’s take in the Microsoft v. AT&T case on what the meaning of 35 USC 271(f) and whether Congress intended an “extraterritorial effect” (given that 35 USC 271(f) was enacted in response to SCOTUS’s call to do so in Deepsouth Packing if Congress so chose).

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  27. Anon,

    The poster’s name is at the bottom of the post, not the top.

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  28. 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.

    I’m not sure this is all that harmful to patent owners. Patent owners have never had an economical way to “control downstream users and purchasers.” That’s what the patent licensees like Intel are in the best position to do.

    To the extent that the opinion forces patent owners and patent licensees to work these issues out by contract rather than dragging the whole rest of an industry into the fight with them, I think this decision will eventually redound to the benefit of patent owners. It’s a shame that LGE had to be sacrificed at the altar of establishing new bright-line rules.

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  29. BigGuy: You are missing a very important point. You think you’re making some sort of meaningful observation by stating “They quite clearly conclude that it was an authorized, unconditional sale.” If you really want to understand this decision and patent exhaustion, think about what “it” is. No, I’m not Bubba, but I do understand patent exhaustion and what the decision says. I did not say that the patentable distinctiveness analysis is necessary to determine whether a sale is authorized and I did not say that it is immaterial whether a sale is conditional or unconditional. Read the opinion carefully and you will understand.

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  30. Grammer police,

    Even though my previous post was riddled with errors, I feel I should be the spelling police here and point out that the word is grammar.

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  31. Anon,

    read pages 17 and 18 of the opinion. The court expressly distinguishes cases where the contract between the licensee/purchaser and licensor/seller includes restrictions. That is not to say they ruled decisively that such restrictions would be allowable, but that that was not the facts before the Court that day. LGE gave Intel and unrestricted right to make, use, or sell which the Court apparently deemed important enough to point out.

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  32. anon, that was me, not Hutz. And I didn’t miss the point of the opinion. I did not make a mistake, I used only what the Sup Ct put in its opinion.

    You may have missed my point, on the other hand.

    If the sale is an authorized, unconditional one, then there is no infringement. (“[T]he right to vend is exhausted by a single, unconditional sale…” — p.7.]

    They quite clearly conclude that it was an authorized, unconditional sale. (If you don’t believe me, revisit IV.) They need not decide more.

    If you think the analysis about whether the article “embodies” the patent is necessary to determine whether the sale was authorized or not, that was never even an issue at the CAFC. It was understood by everyone that the sale was authorized. And if the article didn’t “embody” the patent, then we’re not having this discussion.

    And if you think that it is immaterial whether the sale is conditional or unconditional, then you need to take another look. I won’t have my head handed to me, because I don’t do exhaustion analyses. Courts do exhaustion analyses. I might, however, do licensing deals. And for that, I will need to know whether it is important that a sale is conditional or not.

    “The Court in fact did a patentability/prior art analysis…”

    There is not even a hint of what the actual claim language was, or a discussion of the closest prior art, in this opinion. There is nothing more than conclusory statements.

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  33. “That’s helpful. You know, the more you comment, the more you remind me of Paula Abdul on “American Idol.” You might want to add some comments about the justices’ outfits, while you’re at it.”

    Black, very black.

    What help do you need? The case was open/closed in the beginning, people asserting such horse sht as their additional patents following their products downstream to consumers when such wasn’t explicit in the contract is outrageous on its face. It’s a patent and first sale exists for a reason. “Exhaustion doesn’t apply to methods”, wtf put that idea in their heads?

    The opinion is instructive and clear, stop pulling bullsht with your patent right to exclude. Half of this mess results from allowing claims to the wrong kinds of things, i.e. methods of managing data in a computer. Man, I tell you what, if they hadn’t have told me that since reads process faster than writes then maybe we should have the computer wait on the reads until any writes scheduled for that data block go in are processed why I’m not sure if I could have ever figured such a thing out on my own! And if I couldn’t figure it out PHOSITA wouldn’t have in a million years. This is why we need a heavy handed 101 where processes are concerned. This doesn’t even get into issues with being able to patent things that are inoperative or lack utility until plugged into something else. But, at least this decision helps people out of that problem in a different way.

    Also quite funny is the argument by LGE that, and I quote “because method patents are linked NOT to a tangible article but to a process, they can never be exhausted through a sale”. That’s interesting, we’re having a ruling right over in the CAFC about method claims that aren’t linked to a tangible article in some way. It seems such claims are invalid.

    There, on topic commentary, you happy?

    Reply
  34. Grammer Police: See the attached article at pp. 281-83 for an explanation regarding inapplicability of 35 USC 271(d) to the patent exhaustion question.
    link to morganfinnegan.com

    This article also proposed the “essential, inventive, feature” analysis adopted by the Court.

    Reply
  35. You can’t sell your car and keep it.

    You can’t have your cake and eat it, either!

    Isn’t this in substance what the case was about? Or am I misunderstanding something?

    Reply
  36. Barclay: “Your” a person with no idea what’s going on in the decision and thus what I meant. You should refrain from posting unless you have some idea what point you’re trying to make.

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  37. That SCOTUS reaffirmed the doctrine of patent exhaustion I can live with. But the failure of SCOTUS to even mention 35 USC 271(d), much less address its impact on this doctrine, after it was cited not only by LG Electronics, but also by all except one Amici in support of LG electronics as potentially modifying and even overruling the patent exhaustion doctrine, is inexplicable and inexcusable. So much for SCOTUS paying attention to federal statutes in the patent area, even when explicitly pointed out to them.

    Reply
  38. >>”Conditional” vs. “unconditional” begs the question: what was sold and did it embody the patent asserted to be exhausted?

    –raises– the question

    Your misusing your idioms.

    Reply
  39. “Chalk up another good one from the SC.”

    That’s helpful. You know, the more you comment, the more you remind me of Paula Abdul on “American Idol.” You might want to add some comments about the justices’ outfits, while you’re at it.

    Reply
  40. Hutz: You entirely miss the the meaning of the opinion. You make the same mistake people have been making for years which led to the CAFC mistake in the first place. “Conditional” vs. “unconditional” begs the question: what was sold and did it embody the patent asserted to be exhausted? Good luck doing an exhaustion analysis based on classifying as either conditional or unconditional. You’ll have your head handed to you.

    III.B is clearly not “dicta.” It explains in great detail how Univis was based on the patentable distinctiveness of the component and that the Intel component likewise included “everything inventive” about each patent. The Court in fact did a patentability/prior art analysis, adopting the lower court determinations, when it ruled out the final step as having any inventive character.

    Reply
  41. “I think whatever Malcolm Mooney thinks. He is infallible.”

    I think you have a problem focusing on the topic at hand.

    Reply
  42. I did not read all the way through Dennis’s summary immediately, nor did I read Footnote 7. I edited some restricted sale contracts recently to tie breach of contract to the unauthorized use or sale of the items we were selling in addition to limiting the license itself.

    I believed those were limited only by whether our limits were reasonable vertical restraints on trade.

    Now it seems that may be in question given the SC’s statement that they were not ruling on that issue.

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  43. anon: “The most important aspect of this holding was the conclusion that the essential features standard is controlling and that these features are the “inventive,” i.e., patentably distinctive features.”

    In one sense you may be right. However, wouldn’t that mean that a rigorous analysis of the claim as compared to the closest prior art is called for? The Supremes clearly didn’t do that here…although they may have taken a shortcut based on the parties’ arguments.

    But in another sense, wouldn’t it be the case that the whole of II.B. is dicta, given that they classified the sale as an (authorized) “unconditional” one? That effectively ends the inquiry. If the sale is unconditional, then either both Intel and Quanta are infringers for an unauthorized sale (which was apparently never asserted, for obvious reasons) or neither is. Since Intel is not an infringer, and Intel made an unconditional sale according to S.Ct., then Quanta cannot be an infringer. It all hinges on whether the sale is unconditional (S.Ct. view) or conditional (CAFC view), and really has nothing to do with the extent to which the device has to embody the method patent.

    Reply
  44. Alan,

    I do not have any statistical evidence to back this claim up, but I believe that when most circuit courts a reconfirmed, another circuit court’s jurisprudence, or another seemingly conflicting case, were overturned.

    Because all patent appeals cases go to the CAFC, there are no competing circuits. I would expect there would be no reason for the SC to take cases from the CAFC unless at least 4 judges thought the CAFC was wrong from the outset.

    Reply
  45. TJ and Big Guy, Hinck was a tax case. The Supreme Court granted that one because the CAFC split with the CA5. Where there’s a split the Court wants to settle, it’s equally useful to grant cert in a case the court wants to affirm as it is to grant cert in a case it wants to reverse.

    If the Supreme Court likes what the CAFC does in a particular patent case, 99 times out of 100 it’ll deny cert rather than grant + affirm. The Supreme Court cert grant to affirm and tell the Federal Circuit “good job” is a waste of time.

    In Markman, it’s arguable that the Supreme Court had something to add to the majority’s analysis, or that its discussion of the Seventh Amendment right to a jury trial in civil cases might be useful to other courts in cases beyond patent law. Similarly, in John R. Sand & Gravel, the Supreme Court granted cert to affirm, but the opinion discussed larger issues relating to whether or not statutes of limitations are jurisdictional or waivable.

    In cases where the substantive issues don’t extend much (or at all) beyond the CAFC’s exclusive jurisdiction, there’s pretty much no point in granting cert if the Supremes think the CAFC got it right.

    Reply
  46. “Alan, see Hinck v. United States, No. 06-376 (May 21, 2007). That was a 9-0 affirmance of the Federal Circuit.”

    Yes, but that was a tax case! Does that really count?

    Reply
  47. Alan, see Hinck v. United States, No. 06-376 (May 21, 2007). That was a 9-0 affirmance of the Federal Circuit.

    Reply
  48. While I agree that reversals are more likely than not, when is the last time the CAFC won one? Even the 9th Circuit gets affirmed on occasion.

    There’s also a difference between a close (5-4 or 6-3) decision and a 9-0 what were you thinking decision.

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  49. The most important aspect of this holding was the conclusion that the essential features standard is controlling and that these features are the “inventive,” i.e., patentably distinctive features.

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  50. I think whatever Malcolm Mooney thinks. He is infallible.

    MM, please chime in soon so I have “talking points” for discussing this case with colleagues.

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  51. I like this decision from a law and economics perspective.

    1. It puts the burden of assessing non-infringement and invalidity on the upstream manufacturer. The upstream manufacturer is in a better position to develop good information on non-infringement and invalidity than a downstream implementor.

    2. It prevents an upstream manufacturer with monopoly power from merely passing along its license cost to the downstream implementors without performing due-diligence non-infringement or invalidity research.

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  52. Actually, I was worried that the SC may apply patent exhaustion to any sale. For my purposes and concerns, the paragraphs beginning on page 17 suggest taht restricted sales are still acceptable. LGE granted a license to make, use, or sell generally, with the caveat that certain downstream uses may infringe. However, I have been involved in contracts where we are selling items for particular uses (outside our core uses) and that other uses and any resale are verboten and not licensed under our portfolio.

    Anyone read those paragraphs differently?

    ———————-

    Lionel,

    No, I think you’re right. I noted with glee that SCOTUS, while citing and distinguishing General Talking Pictures, did not overrule it. Draft the license carefully, and you’re still in the post-sale game.

    Reply
  53. 2/3 of SC cases are reversals

    If you eliminate existing circuit court splits from the remainder, that fraction increases appreciably.

    Reply
  54. As I’ve said before, there’s likely to be a selection bias in Supreme Court patent cases. There’s almost no point in granting cert in a patent case to affirm. There are, however, good reasons to grant cert in a patent case to reverse. As such, most Supreme Court patent cases are likely to result in what Mr. McDonald calls “beatdown[s].”

    Once the Supreme Court grants cert in a patent case from the CAFC, regardless of what the case is about specifically, smart money is on reversal. And that doesn’t reflect badly on the CAFC.

    In this case, though, I get the impression that the Supreme Court thinks the Federal Circuit misread the Supreme Court cases on patent exhaustion.

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  55. I think the Supremes knocked the teeth out of this decision by limiting the decision to the facts of the case – specifically, that the license failed to explicitly prohibit or limit the sale of the Intel Products.

    Move along, nothing to see here.

    Mr. McDonald does make a good point though – large manufacturers are unlikely to accept licenses that limit sales in the fashion that would be required after this decision.

    It may also be worth considering how much (if any) effect this has on clickwrap/shrinkwrap licenses, “not for resale”, “single-use only”, etc.

    Reply
  56. Actually, I was worried that the SC may apply patent exhaustion to any sale. For my purposes and concerns, the paragraphs beginning on page 17 suggest taht restricted sales are still acceptable. LGE granted a license to make, use, or sell generally, with the caveat that certain downstream uses may infringe. However, I have been involved in contracts where we are selling items for particular uses (outside our core uses) and that other uses and any resale are verboten and not licensed under our portfolio.

    Anyone read those paragraphs differently?

    Reply
  57. Nothing like a 9-0 beatdown for the CAFC.

    If anybody thinks that an Intel or other component producer would take a license that says, “you can make the components, but you can’t sell them to anyone who isn’t paying me a separate royalty for the finished product” or that a finished goods producer would accept such a scheme after Quanta I have a bridge in Brooklyn to sell you.

    Reply

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