Quanta Computers, Inc. v. LG Electronics, Inc.: Supreme Court Reinvigorates Patent Exhaustion

Quanta Computers, Inc. v. LG Electronics, Inc.

Supreme Court of the United States, June 9, 2008, No. 2006-937
Slip Opinion

The Supreme Court reversed the Federal Circuit, which had held that patent holders could seek infringement damages from subsequent purchasers further "downstream" provided that the initial transfer had imposed some type of restriction on the initial purchaser. The Federal Circuit's ruling, had it been upheld, would have effectively extinguished the doctrine of patent exhaustion and allowed patent holders the ability to control the use of their patents far beyond traditional limits.

Justice Thomas delivered the unanimous decision, holding that the 155-year-old doctrine of patent exhaustion limits the patentee's power to dictate the terms of use through the first level of sales only. In an opinion steeped in tradition, the Court held that the reasoning of United States v. Univis Lens Co. 316 U.S. 241 (1942) controlled the case. The Univis Court held that a patentee's rights were extinguished because the finished product (cut eyeglass lenses) embodied essential features of the patented product (unfinished eyeglass lens blanks). While this has long been the standard for process patents, the Court for the first time here extended that same logic to method patents. The Court also stated that a use "substantially embodying" the patent, rather than fully practicing it, was sufficient to exhaust the patent-holder's rights.

Overviews of the case are available at Patently-O, the SCOTUS Blog and Law.com.

The full transcript of the oral argument is available here.

Professor Mark R. Patterson of Fordham University authored an article last November advocating a broad overruling of the Federal Circuit decision on Patently-O, which outlined the negative implications of allowing the lower court's decision to stand.

The facts of the case are fairly straightforward - LG Electronics ("LGE") purchased patents describing techniques for efficient communication between computer components and then licensed them to Intel Corporation to use in the manufacture and resale of microprocessors. Included in the license was a restriction that prohibited third parties from combining LGE patents with non-licensed items. Quanta, among others, purchased microchips from Intel under a license restricting them from breaching the Intel/LGE agreement and combined them with other parts in order to produce computers. LGE then sued Quanta, alleging the combination infringed their patents and breached the terms of the licensing agreement.

The Court concluded the original license did not restrict Intel's right to sell their microprocessors at all, but instead "broadly permit[ted] Intel to ‘make, use, [or] sell' products free of LGE's patent claims." Applying Univis, the Court reasoned that chipsets and microprocessors substantially embody LGE's patents, concluding that Intel's products "had no reasonable noninfringing use and included all the inventive aspects of the patented methods." Given both this and the fact that Intel was authorized to sell to whomever it pleased, "the doctrine of patent exhaustion prevents LGE from asserting its patent rights with respect to the patents substantially embodied by those products."

Of note is the fact that Justice Thomas's opinion explicitly raised the possibility that Quanta might have been susceptible to contract-based theories of liability had they been advanced. This leaves open the possibility that parties might be able to recover under contract even where patent exhaustion has eliminated their patent damages.