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January 16, 2008

Exhaustion Exasperated

Today's oral arguments before the Supreme Court in Quanta v. LG over patent exhaustion were exasperating, if you thought patents should always be exhausted by first sale. Maureen Mahoney, on behalf of Quanta, attempting to exhaust, was so scripted she could hardly do more than spit case law citations. Thomas Hunger, U.S. Government lapdog, ostensibly arguing for Quanta's position, that a patent exhausts with first sale, regardless of contractual terms, sounded so mixed up that he prompted Chief Justice Roberts to observe: "That would sound like your friend on the other side, the Respondent, had actually won in this case."

The case goes to how patent enforcement may be tied to contract law. The appeals court considered contract law, when a contract exists, to trump patent law: that patent exhaustion could, in some instances, be overcome by contractual terms.

Chief Justice Roberts:

A mere license can prevent the application of the patent-exhaustion doctrine?

That is a very sensible position, particularly as Congress expressly applied exhaustion to copyrights, but not patents. The distinction must be construed as intentional.

Hunger:

Presumably it's because Congress wanted to specify particular limits, which Section 109 of the Copyright Act does. It wanted to specify particular limits to define the scope of the doctrine in the copyright context in a way that it has not sought -- found it necessary to do in the patent area.

I'm not aware of anything in the legislative history of the 1952 codification on the subject of the patent exhaustion doctrine one way or the other; but, obviously, Congress did not express any dissatisfaction with it.

Hunger got hung on authorized versus unauthorized sale, a contractual interpretation, as to whether patent law would apply.

The key distinction is between an authorized sale and an unauthorized sale.

[T]he point is that would be a breach of contract but it would not be patent infringement because the sale was authorized, the patent monopoly ends and only contract principles control thereafter.

In essence, Hunger brought nothing to the bench to argue against the view of the CAFC and LG.

Carter Phillips, cogently arguing for LG, that the matter involved separate patents, one for the apparatus, exhausted, and another for the system of usage, covered under conditional sale with a limited license to prescribe authorized use:

The exhaustion doctrine ought to be retained as a very narrow first sale doctrine, because it doesn't have any congressional support or approval at this point. It is a logical way of proceeding. It protects people against being surprised when they purchase a particular product. But to go beyond that and to say that simply because that sale, that particular product is, quote, an "essential feature" of a separate patent and therefore you have now exhausted the rights to that second patent seems to me a stretch.

Justice Breyer had an irrelevancy going about "equitable servitudes on chattel," which is a lovely legal concept dating to the 15th century, but couldn't seem to grasp the fundamental issue at hand, even admitting: "Now you can clarify this because I may be off on a wrong track." He was.

Justice Scalia, when he decided to motor his mouth, could only be so rude as to wrongly try to finish Phillip's sentences, as well struggle to grasp the actual issue, so overcome by his presumptive misunderstanding.

A highlight of the imbecility on display was smart ass Chief Justice Roberts quipping, as a non-sequitur: "We've had experience with the Patent Office where it tends to grant patents a lot more liberally than we would enforce under the patent law."

Startling was the lack of basic politeness in discourse; regular interruption mid-sentence, the interrupter so senselessly infantile with impatience. Phillips did it to Justice Souter and other Justices, as well as having it done to him.

Straight-laced coverage from the Wall Street Journal.

Posted by Patent Hawk at January 16, 2008 4:38 PM | Exhaustion

Comments

From Hal Wegner:

Today in Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937, the Supreme Court entertained oral argument, the final stage in the dispute over the right of a patentee under the Mallinckrodt, Inc. v. Medipart, Inc., 976 F.3d 700 (Fed. Cir. 1992)(Newman, J.), to include license-based limitations to trump patent "exhaustion." The next step is a formal opinion from the Court, likely in the March-May 2008 time frame (but in any event before the end of the Term at the end of June 2008).

Can Contractual Wording Trump Patent Exhaustion: Through the opening portion of the argument it appeared that the Court was looking to a possible resolution of the patent exhaustion issue to hinge on the manner of the license; indeed, this distinction could well be drawn from the argument of the Solicitor General as amicus curiae in support of the petitioner.

Yet, the matter is not quite that simple.

Patentee Repudiates Mallinckrodt: First of all, the patentee abandoned the 1992 Federal Circuit Mallinckrodt case that has led to the use of licensee restrictions to avoid patent exhaustion.

Asked by the Court (Stevens, J.) whether the Justice was "correct in understanding that [patentee LG] do[es] not defend the Mallinckrodt decision" (p. 34), the patentee’s counsel responded: "I do not defend the Mallinckrodt decision, Justice Stevens, and clearly I don’t believe I have to." (p. 34).
Justice Breyer’s "Bicycle Pedal" Hypothetical: Toward the end of the argument, questioning of patentee’s counsel, Justice Breyer focused upon a hypothetical where a component is used for its intended purpose – the very fact pattern of the Quanta case, and whether the patentee could enforce its patent against the purchaser of the bicycle pedal. Instead of chips and systems using the chips, Justice Breyer presented the more homespun hypothetical of a component – a bicycle pedal – that is purchased by a customer for use in a system – a bicycle. Although the hypothetical was discussed earlier in the argument, the most interesting exchanges occurred beginning at p. 47 in questioning of the patentee’s counsel.

Patentee’s Argument Keyed to Second Patent to the System (Bicycle): The patentee distinguished the "bicycle pedal" hypothetical, pointing to the possibility of a second patent, to the system (the bicycle) where there would (per the patentee) be no exhaustion.

The patentee pointed to the fact that the PTO scrutinizes separate patent grants and noted the presumption of validity of the patents that are granted (p. 48): If the combination (bicycle) is not "fundamentally [ ] different" from the component… the solution to that is a validity challenge." p. 48.

KSR-Keyed Skepticism of the Chief Justice: To the argument that the PTO scrutinizes patentability, the Chief Justice referred to the KSR case (p. 47) and retorted that "we’ve had experience with the Patent Office [in KSR] where it tends to grant patents a lot more liberally than we would enforce under the patent law." p. 49

Justice Scalia’s Commentary: On a different track, Justice Scalia said that "if Intel got an implied license to the system from LGE when it sold those products, it seems to me the exhaustion doctrine would take hold…." p. 50.

No prediction is made as to the outcome of this case.

Regards,
Hal

Posted by: Patent Hawk at January 16, 2008 8:16 PM

WILL THE SUPREME COURT CLARIFY THE EXHAUSTION DOCTRINE?
By Charles R. Macedo, Esq., Joseph Casino, Esq., Michael Kasdan, Esq., and
Howard Wizenfeld, Esq.
(Messrs. Macedo and Casino are partners, and Messrs. Kasdan and Wizenfeld are
associates at Amster, Rothstein & Ebenstein, LLP. They can be reached
at cmacedo@arelaw.com, jcasino@arelaw.com, mkasdan@arelaw.com, and
hwizenfeld@arelaw.com)

Today, for the first time in half a century, the Supreme Court heard oral argument on the
extent to which a patentee can license its patents to different members of the same
sales chain for the same product. In Quanta v. LG Electronics, the High Court heard
arguments on whether a patentee can grant patent rights and at the same time contract
around the exhaustion doctrine. Further, the issue of whether patent exhaustion applies
to method claims was also before the Court. Charley Macedo attended the oral
arguments to get a first hand impression of how the Supreme Court might deal with the
issues related to patent exhaustion.

An interesting aspect of oral argument at the Supreme Court was the focus of the
Justices on whether patent exhaustion is an issue of patent law or contract/antitrust law.
Justice Breyer’s questions appeared to suggest that, under contract law theories, a
patentee should not be able to put a post customer restriction in a license because it
would impose improper "equitable servitudes on chattel". He also suggested that
placing such a restriction could violate antitrust law doctrines. By contrast, Justice
Roberts focused on whether exhaustion is a patent law or contract law doctrine.

In fact, the theory of patent exhaustion probably implicates both patent law and contract
law. It implicates patent law because, once an authorized sale is made, the patentee
should have no further right to limit the sale of that item in commerce. It implicates
contract and antitrust law to the extent the patentee tries to impose an improper
restriction in its license agreement. Either way, the Supreme Court should preclude a
patentee from contracting around the exhaustion doctrine.

The Justices were also interested in knowing why the exhaustion doctrine was codified
in the Copyright Act but not in the 1952 Patent Act. In this regard the Amici were unable
to cite to any useful discussion.

During argument LGE also argued that the notices Intel sent to its customers were valid
techniques of avoiding a defense of implied license. LGE objected to the use of the
exhaustion doctrine as an end-around to the defense of implied license.

The role of patent protection in the U.S. economy continues to remain important and
should not be undermined. However, once a patentee has authorized goods or
services to be sold under its patent, it should not be entitled to obtain a second payment
for the same patent. The Supreme Court has a chance to reestablish this fundamental
principle of U.S. Patent Law. We will have to wait and see if the Court takes advantage
of this opportunity.

Posted by: Patent Hawk at January 16, 2008 8:28 PM

It's obvious that the 9 pinheads want to further destroy patent rights to the benefit of Microsoft, and were searching for a way to do it. Equitable servitudes indeed. Perhaps they need to read the Constitution, the part where it says Congress shall make no law abridging the right to contract...arguably the only individual right in the body of the document. Certainly, that clause trumps anything they've done with patents.

Posted by: bierbelly at January 17, 2008 5:28 AM

Oops, re-read. Art I, sec. 10, no STATE shall make any laws impairing the obligation of contracts. Never mind.

Posted by: bierbelly at January 17, 2008 5:45 AM

My 2 cents on case where I agree with Hal Wegner that predicting the outcome of this case (or even that there'll be one opinion by SCOTUS) is like someone who is nearsighted reading what's in a fuzzy crystal ball:

As brought out by the oral argument, this case is fraught with subtle points and distinctions (enough to make my head hurt), including what are the limits of the "patent exhaustion" doctrine, and what conditions, if any, can a patentee still impose on licensees or others after the first sale of a product covered by one patent where other patents may come into play on how that product sold is to be used, and without running afoul of "patent exhaustion). And like KSR International, we once more have a strange comment from the Breyer Patch on the applicability of the doctrine (which I've never heard of before, at least in the patent area) "that you cannot impose equitable servitude's upon chattel".

But what I find very disturbing is that no one, be they the parties, Amici or SCOTUS, ever discussed or even mentioned whether 35 USC 271(d) may have overruled, either explicitly or implicitly, the "patent exhaustion" doctrine. 271(d) says: No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement; (4) refused to license or use any rights to the patent; or (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

271(d) was enacted primarily in response to misuse issues, such as Mercoid misuse, which grew out of line of cases, which includes Univis Lens, where SCOTUS restricted the ability of the patentee to impose conditions on the licensing its patent rights or on the enforcement of its patent rights. In fact, one or more of the 5 provisions stated in 271(d) that protect the patentee in its ability to enforce its rights could apply, directly or indirectly, to the "patent exhaustion" doctrine, especially since 271(d) was enacted to overturn doctrines (such as misuse) that SCOTUS created to restrict the patentees ability to enforce its patent rights. It is entirely possible that the legislative history to 271(d) might have indicated it didn't apply to "patent exhaustion" but given that 271(d) appears to apply, this should have been discussed and resolved. And why the implications of 271(d) were overlooked by all involved in the Quanta Computer v. LQ Electronics case (other than sheer oversight) remains a mystery to me.

Posted by: EG at January 17, 2008 9:37 AM

Contributory infringement is not "in rem" as is direct infringemet. It requires a number of elements beyond a demonstration of direct infringement, including "knowledge" that the component is "adapted" for infringement. Mere sales of the component alone, even if has no other use but in an infringing combination, is not enough to prove contributory infringement.

While the facts in this case may argue that Intel certainly knew sales of some of its chips could be contributory infringements (sales to Quanta in Taiwan that it knew would be assembled into computers that were then sold to US customers), it would be hard to prove. Even if LG sued Intel for contributory infringement with respect to such Quanta imports, Intel would still have the right to sell the chips to Quanta for sales outside the US.

Moreover, there is case law that says that foreign sales NEVER exhaust US patents. So if Intel were to simply arrange its sales to Quanta to be completed offshore for such Quanta computers that are later imported, Intel would not be liable for contributory infringement at all.

How can it be said, then, that Intel's chip sales were "under the patent," a prerequisite for exhaustion?

Posted by: anon at January 22, 2008 12:07 PM

That was very informative and well written. Below is an excerpt of an article on patent exhaustion in India.

"A patent grants the Patent holder exclusive rights to prevent others from making, using, selling, offering for sale in the territory of patent grant or importing an invention into the territory of patent grant. Once an unrestricted sale of the patented invention is made, the rights of the patent holder with respect to the product are exhausted and this is called as the Doctrine of Exhaustion or First Sale Doctrine......To read more please visit:http://indianipinfo.blogspot.com/2010/10/patent-exhaustion-in-india.html

Posted by: Zubair at October 13, 2010 6:40 AM