The United States Supreme Court has curtailed the ability of patent owners to extract patent royalties or win patent damages from purchasers of proprietary technology. The Court's decision in Quanta Computer benefits those who purchase a product embodying patented technology, such as a computer component, and then use the product in a way that infringes the claims of the patent, such as by combining the component with other elements to produce a finished computer. Invoking the doctrine of patent exhaustion, the Court ruled that the authorized sale of a product that "substantially embodies" a patent exhausts the patent monopoly and permits the purchaser to use the product in a way that would otherwise infringe the patent.
The Supreme Court's decision rested squarely on the rationale underlying the doctrine of patent exhaustion, namely, the notion that the legitimate purchaser of a product should not be sued for patent infringement for using the product in the ordinary and predictable way. To apply this rationale, however, the Court was required to overcome two technical objections to the application of the doctrine of patent exhaustion. First, the Supreme Court held that the doctrine of patent exhaustion applied to method patents, overruling the United States Court of Appeals for the Federal Circuit. Thus, patent exhaustion protects not only purchasers who use a product as a component in a device that infringes the seller's apparatus patent, but also purchasers who use a product in a process that infringes the seller's method patent.
Second, the Court rejected the argument that the sale of a product does not exhaust a patent unless it contains each and every element required to infringe the patent. The Court was concerned that a patent owner might circumvent the exhaustion doctrine by patenting the logical and predictable use of a novel product, selling the product to an unsuspecting purchaser, and then suing the purchaser for patent infringement after the purchaser used the product in the logical and predictable way. The Court therefore held that, if the product contains all of the inventive aspects of the invention and has no reasonable noninfringing use, then it "substantially embodies" the patent and its authorized sale exhausts the patent monopoly.
The Supreme Court's decision in Quanta Computer provides some measure of protection to a purchaser who intends to make a mundane or predictable use of a product that embodies proprietary technology. However, the Court's decision provides far less protection where the seller of the product is not the patent owner, but a licensee. The Court's decision suggests that the sale of a product must be authorized by the patent owner, not just the licensee, in order to exhaust the patent with respect to the product sold. Unfortunately, the Court declined to decide this issue because it found that LG had authorized the sale of proprietary components by its licensee Intel. Consequently, it remains unclear whether a patent can be exhausted by a sale that violates a license agreement between the seller and the patent owner. In light of this ambiguity, prudent purchasers may wish to obtain a warranty from the seller that their purchase of the product will not violate the terms of any agreement between the seller and a patent owner, or to insist that the seller indemnify it against patent infringement suits. On the other hand, patent owners that wish to extract royalties directly from downstream purchasers that use proprietary products in predictable ways may wish to craft license agreements that restrict the sale of products to such users. For their part, licensees may wish to avoid such restrictions in license agreements, since their own potential customers may dislike being the premeditated target of a patent infringement suit.
Liability for patent infringement is not, of course, the only legal pitfall facing purchasers of proprietary technology. The Court's decision in Quanta Computer did not limit a patent owner's ability to impose restrictions on a purchaser through contract. For example, a sales agreement may require a purchaser to pay royalties if the purchaser uses an unpatented product in a way that infringes the patent of the seller or its licensor. Nevertheless, purchasers will find such contractual restrictions more palatable than liability for patent infringement because, as a rule, the purchaser will be aware of its contractual obligations before it purchases the product. The Quanta Computer decision therefore provides a small measure of additional certainty to purchasers of proprietary technology.
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