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.
- “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.”