On January 16, 2008, the U.S. Supreme Court will hear a case which involves defining the boundaries of a fundamental patent doctrine: patent exhaustion (typically when the product is sold, patent rights are "exhausted"). The Court decision may have a significant impact on a wide variety of industries, including the biomedical device industry, which sells products and systems with basic computer components that are the subject of this case.
A patentee has the "right to exclude others from making, using, offering for sale, or selling the invention." 35 U.S.C. §154(a). However, when the patentee sells a product covered by the patent, the patentee's rights are "exhausted" with respect to a patented product when the patented product "passes to the hands of the purchaser." Bloomer v. McQuewan, 55 U.S. (14 How.) 539, 549 (1853). In other words, after a patentee sells a patented product and receives compensation, the patentee may not assert its patent rights against a subsequent user or purchaser of the product he had sold. This doctrine, known as "patent exhaustion" or the "first-sale doctrine," has been uniformly followed by courts. However, questions arise as to whether the patentee may prevent the application of the doctrine by transferring products by arrangements other than outright sales and whether the patentee may improve contractual restrictions on the purchaser.
In the case now before the Supreme Court, Quanta Computer, Inc. v. LG Electronics, Inc. (LG), the patentee, LG, has sought to control downstream sales through a "conditional sale" arrangement whereby LG authorized Intel to sell microchips falling within the scope of LG's patents, but this authorization did not extend to Intel's customers and other downstream consumers. Rather, LG has reserved a right to sue Intel's customers, including Quanta Computer, who have incorporated the microchips into computers sold to end consumers. The Supreme Court has agreed to hear the case to decide whether LG's patent rights were not exhausted by its license agreement with Intel and Intel's subsequent sales of products under the license.
The potential significant impact of the Quanta case on various industries and markets is evident from the numerous amicus curie briefs filed on behalf of 19 corporations, industry groups, and law associations. Of the 14 amicus curie briefs, nine briefs were filed in support of Quanta Computer and argue that the patent exhaustion doctrine should apply to "conditional sales" as well as outright sales. Only one brief, filed by the American Intellectual Property Law Association (AIPLA), squarely supports LG and argues that a conditional sale should not trigger patent exhaustion. The remaining four briefs purport to support neither party, so long as the Supreme Court's decision does alter well-established principles of patent exhaustion that have been relied upon in practices of various industries.
For instance, one industry group in favor of Quanta Computer includes computer manufacturers NCR Corporation, Hewlett-Packard, Cisco Systems, eBay, IBM, and the Computer and Communications Industry Association, all of which are customers or downstream customers of Intel and other microchip manufacturers and are similarly situated to Quanta Computer. If LG ultimately prevails, the computer manufacturing industry could be forced to pay licensing royalties to LG and other patent holders of microchip technology.
Another industry group in favor of Quanta Computer includes the automotive aftermarket, as represented by the Automotive Engine Rebuilders Association and the Automotive Parts Remanufacturing Association. Based on LG's success in the lower courts, equipment manufacturers in the automotive industry have begun applying restrictive post-sale patent notices in an attempt to lock out aftermarket sales and repair of patented devices.
The consumer advocacy groups such as the Consumers Union and the American Antitrust Institute and the United States Department of Justice also have submitted briefs in support of Quanta Computer, stating that downstream competition is impaired by providing patent holders with the ability to extract multiple downstream royalties. Some biotechnology companies such as Gen-Probe also have advocated in support of Quanta Computer on the belief that LG's licensing arrangement, if allowed, would stifle downstream competition and ultimately innovation.
The AIPLA, among the last to file its brief, has come out in support of LG, stating that "[t]here is no per se anti-competitive effect in allowing licensors and licensees the freedom to create such agreements." The AIPLA believes that "a patentee may, with adequate notice, require separate licenses at various stages along the downstream chain of sophisticated purchasers and users of its patented invention."
The plant science industry is among the few groups not taking a position in support of either Quanta Computer or LG, but rather seeking to protect other established principles of patent licensing upon which the plant science industry has come to rely. For instance, in its brief, CropLife International urged the Supreme Court "not to call into question the settled principle that inventors of self-replicating crop plants may rely upon the patent laws to enforce limitations upon making subsequent generations of plants and seeds from the patented originals." Similar briefs also were filed by the American Seed Trade Association and the Biotechnology Industry Organization.
The Quanta case will be heard in January 2008, with a decision likely to come around May 2008. As the medical device industry continues to increase utilization of products and systems with high-technology computer components and enter into complex licensing agreements, Quanta should be followed as it has the potential to greatly impact the industry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
