Originally published June 30, 2008
In a unanimous opinion, the United States Supreme Court held that "[t]he authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article." Quanta Computer, Inc. v. LG Elecs., Inc., No. 06-937, 2008 WL 239719, at *13 (June 9, 2008).
LG Electronics, Inc. ("LG") owns a set of patents related to the internal operation of a personal computer. LG's patents teach a more efficient method of operating a microprocessor (CPU) and a bus (a set of wires that connect the CPU to the computer's chipset and other devices including the keyboard, mouse, monitor, hard drive, memory, and disk drives). See id. at *3.
LG licensed its patents to Intel Corporation ("Intel"). The License Agreement authorizes Intel to "make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of" Intel products practicing the LG patents. Id. at *4 (internal quotations omitted). The License Agreement also states that no license "is granted by either party hereto . . . to any third party for the combination by a third party of Licensed Products of either party with items, components, or the like acquired . . . from sources other than a party hereto, or for use, import, offer for sale or sale of such combination." Id. (internal quotations omitted). In a separate Master Agreement, Intel agreed to provide its customers with written notice that, while Intel had obtained a broad license ensuring that any Intel product it sells is licensed by LG and thus does not infringe any patent held by LG, Intel's license "does not extend, expressly or by implication, to any product that [the Intel customer makes] by combining an Intel product with any non-Intel product." Id. (internal quotations omitted). The Master Agreement also provides that "a breach of this Agreement shall have no effect on and shall not be grounds for termination of the [License Agreement]." Id.
Quanta Computer, Inc. ("Quanta") purchased microprocessors and chipsets from Intel and received the notice required by the Master Agreement. Nevertheless, Quanta manufactured computers using non-Intel memory and buses that practice the LG patents. Quanta did this without modifying the Intel products simply by following Intel's specifications to incorporate the parts into its own computer systems.
LG sued Quanta alleging infringement of its patents due to Quanta's combination of non-Intel and Intel parts in its systems. Generally, the patent holder's right to control its invention is exhausted after the first unrestricted, authorized sale of the invention. The district court granted summary judgment for Quanta because it found that, although the Intel products do not fully practice any of the LG patents at issue, the products have no other reasonable noninfringing use and therefore their authorized sale by Intel exhausted the patent rights that LG possessed in the completed computers. Id. at *5. Subsequently, the district court narrowed this ruling and determined that patent exhaustion did not apply to the method claims contained in each of the LG patents. Id. On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed in part and reversed in part. The Federal Circuit agreed that the doctrine of patent exhaustion did not apply to the method claims. The appeals court also found that, alternatively, exhaustion did not apply because LG "did not license Intel to sell the Intel [p]roducts to Quanta for use in combination with non-Intel products." Id.
The Supreme Court disagreed. The Court explained that the authorized sale of a product that substantially embodies essential features of the patented invention and whose only reasonable and intended use is to practice the patent will exhaust a patent holder's right to control the article after sale. See id. at *7. In other words, " 'where one has sold an uncompleted article which, because it embodies essential features of his patented invention, is within the protection of his patent, and has destined the article to be finished by the purchaser in conformity to the patent, he has sold his invention so far as it is or may be embodied in that particular article.' " Id. (quoting United States v. Univis Lens Co., 316 U.S. 241, 250–51 (1942)).
Turning to the facts of this case, first the Court found it immaterial that LG's invention was embodied in a method claim. Rather, the Court held that although a "patented method may not be sold in the same way as an article or device, [ ] methods nonetheless may be 'embodied' in a product, the sale of which exhausts patent rights." Id. The Court found that "[e]liminating exhaustion for method patents would seriously undermine the exhaustion doctrine" because "a patent drafter could shield practically any patented item from exhaustion" simply by drafting the patent claims to describe a method rather than an apparatus. Id. at *8.
Second, the Court found that the only reasonable use that Quanta could make of the Intel products was to incorporate them into computer systems that practice the LG patent. "Here . . . the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the Intel [p]roducts." Id. at *10. In fact, "Quanta had no alternative but to follow Intel's specifications in incorporating the Intel [p]roducts into its computers because it did not know their internal structure . . . ." Id.
Third, the Court considered whether Intel's sale of products to Quanta triggered exhaustion. "Exhaustion is triggered only by a sale authorized by the patent holder." Id. at *12 (citing Univis, 316 U.S. at 249). Looking to the License Agreement, the Court found that LG granted Intel rights to "make, use, [or] sell" products free of LG's patent claims. Id. The Court also found that Intel's "authority to sell its products embodying the [LG patents] was not conditioned on the notice [required by the Master Agreement] or on Quanta's decision to abide by [LG's] directions in that notice." Id. In any event, the Court remarked that no party alleged that Intel breached the License Agreement, thus potentially making Intel's sales unauthorized. Id.1 The Court therefore found that Intel's sales were authorized and as such the doctrine of patent exhaustion applied to prevent LG from further asserting its patent rights with respect to the patents substantially embodied by the Intel products. Id.
Prior to concluding, the Court specifically noted "that the authorized nature of the sale to Quanta does not necessarily limit [LG's] other contract rights." Id. at *12 n.7. However, LG's complaint included no breach-of-contract claim and the Court declined to comment on "whether contract damages might be available even though exhaustion operates to eliminate patent damages." Id.
© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
