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June 9, 2008

Exhausted

Justice Thomas, delivering the 9-0 opinion in Quanta v. LG Electronics:

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. In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods. The Court of Appeals for the Federal Circuit held that the doctrine does not apply to method patents at all and, in the alternative, that it does not apply here because the sales were not authorized by the license agreement. We disagree on both scores. Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents.

Quanta Computer v. LG Electronics (SCOTUS 06-937)

LG bought a portfolio of computer chip patents in 1999, which it licensed to Intel: 4,939,641; 5,077,733; 5,379,379. A separate agreement required Intel to inform its customers that combining a non-Intel product with the licensed Intel products was taboo. Quanta did so, and so LG sued Quanta.

The district court opted for Quanta, that the patents had been exhausted by the Intel sale, then changed its mind with regard to the method claims. The CAFC agreed that method claims differ from system claims with regard to exhaustion, but, given the license terms of conditional sale, thought the patent not exhausted. Hence the appeal to the Supreme Court.

The Supreme Court ruled, refreshingly simply and clearly, that patent exhaustion applies with an authorized sale that "sufficiently embodies the patent." There is no distinction between claim types, notably method claims, with regard to exhaustion.

The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item. This Court first applied the doctrine in 19th-century cases addressing patent extensions on the Woodworth planing machine. Purchasers of licenses to sell and use the machine for the duration of the original patent term sought to continue using the licenses through the extended term. The Court held that the extension of the patent term did not affect the rights already secured by purchasers who bought the item for use "in the ordinary pursuits of life." Bloomer v. McQuewan, 14 How. 539, 549 (1853); see also ibid. ("[W]hen the machine passes to the hands of the purchaser, it is nolonger within the limits of the monopoly"); Bloomer v. Millinger, 1 Wall. 340, 351 (1864). In Adams v. Burke, 17 Wall. 453 (1873), the Court affirmed the dismissal of a patent holder's suit alleging that a licensee had violated postsale restrictions on where patented coffin-lids could be used. "[W]here a person ha[s] purchased a patented machine of the patentee or his assignee," the Court held, "this purchase carrie[s] with it the right to the use of that machine so long as it [is] capable of use." Id., at 455.

Although the Court permitted postsale restrictions on the use of a patented article in Henry v. A. B. Dick Co., 224 U. S. 1 (1912), that decision was short lived. In 1913, the Court refused to apply A. B. Dick to uphold price-fixing provisions in a patent license. See Bauer & Cie v. O'Donnell, 229 U. S. 1, 14-17 (1913). Shortly thereafter, in Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502, 518 (1917), the Court explicitly overruled A. B. Dick.

This Court most recently discussed patent exhaustion in Univis, 316 U. S. 241, on which the District Court relied.

In sum, the Court concluded that the traditional bar on patent restrictions following the sale of an item applies when the item sufficiently embodies the patent--even if it does not completely practice the patent--such that its only and intended use is to be finished under the terms of the patent.

Nothing in this Court's approach to patent exhaustion supports LGE's argument that method patents cannot be exhausted. It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be "embodied" in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions
involving embodiments of patented methods or processes from those involving patented apparatuses or materials. To the contrary, this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method.

SCOTUS logically closes the CAFC-allowed loophole for method claims, snuffing "the danger of allowing such an end-run around exhaustion."

Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Patentees seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus. Apparatus and method claims "may approach each other so nearly that it will be difficult to distinguish the process from the function of the apparatus." United States ex rel. Steinmetz v. Allen, 192 U. S. 543, 559 (1904). By characterizing their claims as method instead of apparatus claims, or including a method claim for the machine's patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion.

On "the extent to which a product must embody a patent in order to trigger exhaustion" -

We agree with Quanta that Univis governs this case. As the Court there explained, exhaustion was triggered by the sale of the lens blanks because their only reasonable and intended use was to practice the patent and because they "embodie[d] essential features of [the] patented invention."

First, Univis held that "the authorized sale of an article which is capable of use only in practicing the patent is arelinquishment of the patent monopoly with respect to the article sold." Id., at 249. The lens blanks in Univis met this standard because they were "without utility until [they were] ground and polished as the finished lens of the patent." Ibid. Accordingly, "the only object of the sale[was] to enable the [finishing retailer] to grind and polish it for use as a lens by the prospective wearer." Ibid.

Second, the lens blanks in Univis "embodie[d] essential features of [the] patented invention." Id., at 250-251.

Exhaustion, in principle, does not apply across patents.

With regard to LGE's argument that exhaustion doesnot apply across patents, we agree on the general principle: The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B. For example, if the Univis lens blanks had been composed of shatter-resistant glass underpatent A, the blanks would nonetheless have substantially embodied, and therefore exhausted, patent B for the finished lenses. This case is no different. While each Intel microprocessor and chipset practices thousands of individual patents, including some LGE patents not at issue in this case, the exhaustion analysis is not altered by the fact that more than one patent is practiced by the same product. The relevant consideration is whether the Intel Products that partially practice a patent--by, for example,embodying its essential features--exhaust that patent.

What triggers exhaustion -

Exhaustion is triggered only by a sale authorized by the patent holder. Univis, 316 U. S., at 249.

Nothing in the License Agreement restricts Intel's right to sell its microprocessors and chip-sets to purchasers who intend to combine them with non-Intel parts. It broadly permits Intel to "'make, use, [or]sell'" products free of LGE's patent claims... Hence, Intel's authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in that notice.

[T]he question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion. And exhaustion turns only on Intel's own license to sell products practicing the LGE Patents.

The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel's authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.7


7 We note that the authorized nature of the sale to Quanta does not necessarily limit LGE's other contract rights. LGE's complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages. See Keeler v. Standard Folding Bed Co., 157 U. S. 659, 666 (1895) ("Whether a patentee may protect himself and his assignees by special contracts brought home to the purchasers is not a question before us, and upon which we express no opinion. It is, however, obvious that such a question would arise as a question of contract, and not as one under the inherent meaning and effect of the patent laws").


The wrap-up -

The 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. Here, LGE licensed Intel to practice any of its patents and to sell products practicing those patents. Intel's microprocessors and chipsets substantially embodied the LGE Patents because they had no reasonable noninfringing use and included all the inventive aspects of the patented methods. Nothing in the License Agreement limited Intel's ability to sell its products practicing the LGE Patents. Intel's authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta. Accordingly, the judgment of the Court of Appeals is reversed.

The Supreme Court gets one right. Completely. Any alternative would have created a morass.

Posted by Patent Hawk at June 9, 2008 3:22 PM | Exhaustion