Quanta Computer Inc. v. LG Electronics

The Supreme Court has agreed to settle a controversial issue in patent law, namely whether one who holds a patent can seek royalties from several companies as its product works its way through the manufacturing process.

The case, Quanta Computer, Inc. v. LG Electronics, Inc., 2007 WL 2768020 (U.S. Sept. 25, 2007), has created a great deal of uncertainty among patent lawyers as it calls into question when a patent holder may sue for patent infringement against downstream purchasers following the sale of a patent to an initial purchaser.

Petitioners argue that their secondary purchases are protected by the doctrine of patent exhaustion whereby royalties cannot be perpetually collected for each buyer in the supply chain. However, Respondents seek to distinguish this case on the basis that they did not ”sell” their patent, but created a “manufacturers’ license” wherein they could still control their product as it traveled through the supply chain.

In the case, Respondent LG Electronics owned a group of patents, including microprocessor chips used in personal computers. It licensed the patents to Intel, but in a separate agreement excluded from the license any Intel customer that combined a licensed Intel microprocessor chip with non-Intel components. As part of the license, Intel sent letters to its customers warning of this license exclusion.

One of the Petitioners, Quanta, purchased the microprocessor chips from Intel and used the chips to make computers under contract for Dell, Hewlett-Packard, and Gateway. LG Electronics sued Quanta and other Intel post-license customers on the basis that they violated the ‘condition’ of Intel’s license and sale by not paying patent royalties to LG Electronics.

Quanta’s attorneys countered that the license purchased by Intel from LG Electronics for the microprocessor chips was unrestricted and, therefore, royalties could not be collected again when the chips were incorporated into downstream components built by Quanta. Furthermore, because there was no reasonable use for the chips other than to be integrated into devices such as Quanta’s computers, it is counterintuitive, and more important, contrary to existing case law, to claim patent infringement against downstream purchasers who purchased Intel’s product for its sole purported use.

The district court held that Intel's license exhausted LG Electronics' downstream patent royalty rights. After one link in the supply chain has paid a royalty for a patented product the patent is exhausted and no other link in the chain must pay a royalty for the same patent.

The U.S. Court of Appeals for the Federal Circuit reversed, primarily on the basis that although an unconditional sale does warrant patent exhaustion, in this case, the sale was expressly conditional. B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997) (discussing Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992)) (emphasis added and citations omitted). In other words, LG Electronics successfully reserved its right to seek subsequent royalties from downstream purchasers.

Petitioners contend that the Federal Circuit’s reversal is one more example of its steady erosion of the doctrine of patent exhaustion, and that cert is necessary in order to prevent a dangerously expansive patent monopoly

The Supreme Court settled a controversial issue in patent law when it held that one who holds a patent may not seek royalties from several companies as its product works its way through the manufacturing process.

The case, Quanta Computer, Inc. v. LG Electronics, Inc., 2007 WL 2768020 (U.S. Sept. 25, 2007), has created a great deal of uncertainty among patent lawyers as it calls into question when a patent holder may sue for patent infringement against downstream purchasers following the sale of a patent to an initial purchaser.

Petitioners argue that their secondary purchases are protected by the doctrine of patent exhaustion whereby royalties cannot be perpetually collected for each buyer in the supply chain. However, Respondents seek to distinguish this case on the basis that they did not ”sell” their patent, but created a “manufacturers’ license” wherein they could still control their product as it traveled through the supply chain.

In the case, Respondent LG Electronics owned a group of patents, including microprocessor chips used in personal computers. It licensed the patents to Intel, but in a separate agreement excluded from the license any Intel customer that combined a licensed Intel microprocessor chip with non-Intel components. As part of the license, Intel sent letters to its customers warning of this license exclusion.

One of the Petitioners, Quanta, purchased the microprocessor chips from Intel and used the chips to make computers under contract for Dell, Hewlett-Packard, and Gateway. LG Electronics sued Quanta and other Intel post-license customers on the basis that they violated the ‘condition’ of Intel’s license and sale by not paying patent royalties to LG Electronics.

Quanta’s attorneys countered that the license purchased by Intel from LG Electronics for the microprocessor chips was unrestricted and, therefore, royalties could not be collected again when the chips were incorporated into downstream components built by Quanta. Furthermore, because there was no reasonable use for the chips other than to be integrated into devices such as Quanta’s computers, it is counterintuitive, and more important, contrary to existing case law, to claim patent infringement against downstream purchasers who purchased Intel’s product for its sole purported use.

The district court held that Intel's license exhausted LG Electronics' downstream patent royalty rights. After one link in the supply chain has paid a royalty for a patented product the patent is exhausted and no other link in the chain must pay a royalty for the same patent.

The U.S. Court of Appeals for the Federal Circuit reversed, primarily on the basis that although an unconditional sale does warrant patent exhaustion, in this case, the sale was expressly conditional. B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997) (discussing Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992)) (emphasis added and citations omitted). In other words, LG Electronics successfully reserved its right to seek subsequent royalties from downstream purchasers.

Petitioners contend that the Federal Circuit’s reversal is one more example of its steady erosion of the doctrine of patent exhaustion, and that cert is necessary in order to prevent a dangerously expansive patent monopoly

On June 9, a unanimous Supreme Court reversed the lower court's decision.

"For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item," Justice Clarence Thomas wrote for the court.