20 May Supreme Court reviews patent case
On January 16, 2008, the United States Supreme Court heard oral arguments in the case captioned Quanta Computer, Inc. v. LG Electronics, Inc. LG Electronics involves a long standing doctrine of patent law referred to as the “first sale doctrine” or the “patent exhaustion doctrine.”
As applied, the doctrine serves to limit the control a patent owner (or licensee of the patent owner) can exert upon a patented product once it has been sold. In short, an unrestricted sale of a patented product by the patent owner (or its licensee) ends or “exhausts” the patent rights and terminates any downstream restraint on the use or resale of the product.
LG Electronics is significant because it is likely that the decision will either affirm a narrowing of the “patent exhaustion doctrine” developing in the jurisprudence of the Federal Circuit, and thereby broaden the rights of patent owners; or limit the rights that patent owners/licensees can assert in their patented products in the hands of their purchasers, by application of 1942 Supreme Court precedent viz., United States v. Univis Lens Co. (Univis Lens).
Understanding the relationship between the parties in LG Electronics is critically important. The case includes an apparently absent interested party – Intel, Inc., the well-known microprocessor chip and chipset manufacturer. Intel was a licensee of LG Electronics, Inc. (LGE) through a broad cross-license arrangement. LGE’s five asserted patents related to personal computer systems, methods of using such systems and components thereof. Intel manufactured microprocessors and chipsets pursuant to its license with LGE and sold them to Quanta.
By separate letter sent to the entire industry, Intel gave notice to Quanta that the microprocessors and chipsets purchased from Intel could only be used in Intel products. Quanta used the microprocessor and chipsets purchased from Intel in non-Intel systems. LGE sued Quanta for patent infringement. At the U.S. District Court, defenses of implied license, patent exhaustion/first sale and non-infringement/invalidity were asserted.
The District Court for the Northern District of California on summary judgment motion and cross motion found: 1) no implied license; 2) with respect to the so-called system patents, that LGE’s patent rights were exhausted either in the license agreement between LGE and Intel or the sale of components by Intel to the Defendants; 3) no exhaustion/first sale defense applicable to the method patent licensed from LGE by Intel; and 4) various claim interpretations and findings of validity/infringement.
Both parties appealed. In a dramatic victory on appeal, the Federal Circuit ruled in favor of all points raised by LGE and ruled against the Defendants on all points they raised. On the exhaustion of monopoly/first sale doctrine, the Federal Circuit construed the unilateral notice of Intel to Quanta as being an adequate condition of the license.
Thus, in accordance with developing Federal Circuit precedent, the sale of microprocessors and chipsets to the Defendants by Intel was not an unrestricted sale but was conditioned upon the Intel notice. With respect to the system patents, no exhaustion of monopoly/first sale was found, resulting in dismissal of the alleged-infringer’s defense.
Of significance, Univis Lens, which was heavily relied upon by the District Court, was not even cited by the Federal Circuit for purpose of its analysis. The Federal Circuit also affirmed the District Court’s finding of no exhaustion of monopoly with respect to the single method claim patent asserted in the court below.
Lastly, the Federal Circuit affirmed a finding of no implied license and reversed essentially all of the District Court’s summary judgment rulings with respect to infringement/invalidity in favor of Quanta and remanded to the District Court.
The possible outcomes in the United States Supreme Court are as follows:
• The path of least resistance would be for the Supreme Court to find that the industry letter indicating that licensed Intel microprocessors and chipsets were not to be used in non-Intel systems was ineffective. The Supreme Court could simply instruct the Federal Circuit to adopt the District Court’s factual finding that Intel’s industry notice letter was inadequate.
This approach would be jurisprudentially useful to the extent that direction was given as to how conditional patent license notice should be given. This resolution is the path of least resistance because it would leave the precedent of the Federal Circuit regarding conditional patent licenses essentially intact.
• The Supreme Court could decide that Univis Lens is to be affirmed and expanded in its application. Univis Lens involved an attempt to use a conditional license to justify what is called a resale price maintenance agreement. A resale price maintenance agreement involves, for example, the sale of a patented product by the patent owner/licensee to a buyer with a stipulation that the buyer will resell the patented product or sublicense the method at a price determined by the seller/licensor.
No issue of resale price maintenance is found in LG Electronics. Were the Supreme Court to adopt this approach, substantial existing license relationships would be called into question because the jurisprudence of conditional sales of patented products of the Federal Circuit would appear to be severely undermined.
• Presuming the Supreme Court finds the sales of products by Intel to Quanta were conditioned by the industry letter, and presuming the Supreme Court agrees with the Federal Circuit that Univis Lens is inapplicable, the buyer/seller, licensor/licensee relationship between the patent owner and its vertically-related parties comes into focus. From the record, it is not clear why the “Intel-only” downstream restraint was imposed. For example, there is no indication that Intel-only components were even for sale. If no such components were for sale, then the Intel-only restraint would appear to render the purchase of microprocessors and chipsets from Intel with the “Intel-only” condition a nullity.
Presuming other Intel components were available, then a possible tying situation exists in that, it could be argued, Intel was using its licensed intellectual property rights in the systems and microprocessor/chipset patents to require purchase to buy other Intel products from Intel. That situation would likely be analyzed under 35 U.S.C. § 271(d), which sets forth the conditions under which so-called tying arrangements are permitted. No issue of § 271(d) was raised by either party or either of the lower courts.
• The District Court found no implied license in the system patents obtained by Quanta’s purchase of licensed products from Intel. Relying upon Intel’s industry letter as providing notice to the industry (including Defendants), the Federal Circuit affirmed grant of summary judgment to LGE that no license could reasonably be implied. The significance of LG Electronics is, of course, most apparent in the semiconductor chip industry. There is, however, at least one other industry in which the broad conditioned license jurisprudence of the Federal Circuit has been extensively adopted and, it would be safe to say, extensively applied, i.e., the biotechnology industry, including the genetically-modified seed industry.
Biotechnology patent licenses are often granted “for research use only,” even though the claimed inventions have extensive diagnostic, clinical, or therapeutic applications. The Nobel-prize winning polymerase chain reaction (PCR) innovation has an extensive, multi-level licensing program presumably based upon Federal Circuit precedent, e.g., Mallinckrodt v. Medipart, in which a “single use only” label license restriction was enforced despite the outright sale of the patented invention to the defendants customer.
• Moreover, the Federal Circuit’s recently decided Monsanto Co. v. David decision affirming a single commercial crop use condition in a technology agreement relating to patented soy beans could be severely undermined were the Court to rein in such conditioned sales.
Time will tell.
Previous article by Grady Frenchick
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The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of the Wisconsin Technology Network, LLC. Footnotes are available on the Whyte Hirschboeck Dudek website.
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