09 Jul LG Electronics: Return to a dark period of patent law?
With its recent ruling that the doctrine of patent exhaustion protects Quanta Computer from a suit filed by LG Electronics (LG), the Supreme Court has put a big “W” into the win column for Quanta, while posting an even bigger “L” in the loss column for LGE and other companies by limiting a patent holder’s ability to demand royalties on products after they are sold.
Patent exhaustion provides that patent rights end when the authorized sale of a patented device starts. For example, if Acme Widget patents a new widget, then sells it to Universal Widget, Acme loses the right to sue anyone found using the new widget.
The same holds true should Acme decide to license Universal to manufacture the new widget, rather than make them and sell them to Universal.
That was the case in Quanta Computer, Inc. v. LG Electronics. Substitute computer technology for the widgets and you get the general idea. In this instance, LG had been licensing patents to Intel. Intel used the patents to make computer chips, which it then sold to computer manufacturers. LG demanded the computer makers either pony up royalties or stop installing the chips in computers. Quanta, a Taiwanese computer maker, refused, and LG sued. A district court ruled against LG, which appealed. The Supreme Court sided, unanimously, with Quanta.
The ruling could have far-reaching impact on companies hoping to profit from their patents in vertical markets such as within the computer manufacturing industry, where the parts are generally used only by the industry itself. Other examples of vertical markets: plastic manufacturing equipment (used only by companies making plastic parts); the printing industry (presses, plates and inks used only by printers); and so forth.
The high court ruled the computer chips had no use other than to be put into computers (or possibly used as lapel pins for technology buffs). And since no one with any sense would buy something without the right to use it, Quanta was within its rights to buy the chips and use them to make computers without paying royalties.
The ruling has big implications for technology companies thinking of licensing patents at different levels in the supply chain. Because products often consist of parts made by many manufacturers, you make much more money if you can get everyone in the manufacturing queue to send you royalties. The Quanta decision is likely to put a damper on that practice.
An analysis of the Supreme Court’s decision forecasts even greater problems:
• The Court’s numerous positive references to “the patent monopoly” and variations thereof from the cases analyzed, especially Univis Lens (1942), evidences a view of the patent right i.e., equating it to an economic monopoly, that is contrary to both academic and judicial analyses. Walker Process, (1965).
• In LG Electronics (2008) the Court uses terms like “inventive part of the patent,” “essential features” of the patent and “distinguishing features of the invention” where it appears to mean the claims of the patent or the claimed invention. The use of such indefinite terms is not helpful to the audiences trying to understand the Court’s analysis.
• The Court’s rejection of the concept that method claims are never exhaustible seems to ignore the existence of both method-of-making and method-of-use claims. For example, buying a patented product, without more, would by no means provide rights to the purchaser to make the product.
• In stating as it did that Univis Lens(1942) and Ethyl Gasoline(1940) “rest on sound footing[s],” the Court has ratified the philosophy and analysis of two decisions made during a dark period of patent law for patent owners just before a very dark period of patent law for patent owners, viz, the Mercoid (1942) Supreme Court decision. All three of those decisions were reached under the Patent Act of 1870 and prior to enactment of the 1952 Patent Act. The 1952 Patent Act, among other things, legislatively overruled Mercoid (1942) by adding § 271 to the Patent Statute in which contributory infringement and patent misuse were defined. Dawson Chemical (1980). It has also been argued that adding § 271 to the Patent Statute in 1952 impliedly overturned Univis Lens (1942), 76 Patent Trademark and Copyright J. 5-2-08.
• The “dark period of patent law” referred to above starts with the enactment of the Clayton Act in 1914 and the nearly contemporaneous Supreme Court Motion Picture Patents (1917) decision and continues to the 1952 Patent Act. During that period, the contributory infringement doctrine originating with the landmark Wallace (CC Con. 1871) decision was eroded until it was “limit[ed] substantially” in Mercoid (1942). As the Court itself stated much later in Dawson Chemical (1980), the contributory infringement doctrine “exists to protect patent rights from subversion by those who, without directly infringing the patent themselves, engage in acts designed to facilitate infringement by others.”
• It can be persuasively argued that the Doctrine is a non-sequitur. The Patent Statute gives the patent owner “the right to exclude others from making, using, offering for sale or selling the invention throughout the United States” 35 USC s. 154(a)(1), not the affirmative grant of those rights precedent to their exhaustion. A complete treatment of that argument is a topic for another day.
• The unanimity of the LG Electronics (2008) decision (and for that matter the Court’s other recent decisions in KSR (2007), eBay (2006) and Medimmune (2007)) suggest that we are heading toward another dark period of patent law for patent owners that, as with the last era, will require a Congressional course correction. Prepare for a lengthy ride. The last Congressional course correction took about 40 years peak-to-peak and 10 years from trough to peak.
Please visit www.whdlaw.com for complete citations and short summaries of the authorities noted in italics above.
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