Supreme Court to Consider Exhaustion Doctrine for Separately Licensed Component, System, and Method Patents

Thanks to the The SCOTUS Blog for noting the U.S. Supreme Court's (above) grant of the petition for writ of certiorari in Quanta Computer v. LG Electronics: docket, petition, brief in opposition, reply. The question proposed by the petitioners is

"Whether the Federal Cricuit erred by holding . . . that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license to petitioners."

In the proceedings below, styled LG Electronics, Inc. v. Bizcom Electronics, Inc., et al. (No. 05-1251, July 7, 2006), the Federal Circuit reiterated that the "first sale" exhaustion doctrine does not apply to a conditional license or a patentee's rights in its method claims. According to the opinion by Circuit Judge Mayer,

The patents asserted by LGE do not cover the products licensed to or sold by
Intel; they cover those products when combined with additional components. The
trial court, nevertheless, found that the system claims in all patents except
the ’509 patent were exhausted, but that the exhaustion doctrine did not apply
to the method claims. We reverse the trial court’s holding with respect to the
system claims and affirm with respect to the method claims.

It is axiomatic that the patent exhaustion doctrine, commonly referred to as the first sale doctrine, is triggered by an unconditional sale. See Mitchell v. Hawley, 83 U.S. 544, 547 (1873). "[A]n unconditional sale of a patented device exhausts the patentee's right to control the purchaser’s use of the device thereafter. The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the ‘use’ rights conferred by the patentee." B. Braun Med. Inc. v. Abbott Labs., 124 F.3d 1419, 1426 (Fed. Cir. 1997) (discussing Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992)) (emphasis added and citations omitted).

There are two sales at issue here. First, prior to this litigation, LGE granted Intel a license covering its entire portfolio of patents on computer systems and components. This transaction constitutes a sale for exhaustion purposes. See United States v. Masonite Corp., 316 U.S. 265, 278 (1942). Second, with LGE’s authorization, Intel sold its microprocessors and chipsets to each defendant. Notably, this sale involved a component of the asserted patented invention, not the entire patented system.

The LGE-Intel license expressly disclaims granting a license allowing computer system manufacturers to combine Intel’s licensed parts with other non-Intel
components. Moreover, this conditional agreement required Intel to notify its
customers of the limited scope of the license, which it did. Although Intel was
free to sell its microprocessors and chipsets, those sales were conditional, and
Intel’s customers were expressly prohibited from infringing LGE’s combination patents. Cf. N.Y. U.C.C. Law § 2-202 (allowing contracts to be supplemented by
consistent additional terms unless the writing is intended to becomplete and exclusive). The "exhaustion doctrine . . . does not apply to an expressly conditional sale or license," B. Braun Med. Inc., 124 F.3d at 1426, so LGE’s rights in asserting infringement of its system claims were not exhausted.

Conversely, the trial court declined to find LGE’s asserted method claims exhausted. Several defendants contest this ruling on cross-appeal, and we reject their challenge. Based on the above reasoning, even if the exhaustion doctrine were applicable to method claims, it would not apply here because there was no unconditional sale. However, the sale of a device does not exhaust a patentee’s rights in its method claims. Glass Equip. Dev., Inc. v. Besten, Inc., 174 F.3d1337, 1341 n.1 (Fed. Cir. 1999) (citing Bandag, Inc., 750 F.2d 903, 924 (Fed.Cir. 1984)). The [lower] court was correct.

In advising the Supreme Court that it should grant certiorari, the U.S. Solicitor General stated that

The doctrine of patent exhaustion, also known as the first-sale doctrine, implicates fundamental questions concerning the scope of the exclusive rights conferred under the patent laws. Since this Court last squarely addressed the doctrine in United States v. Univis Lens Co., 316 U.S. 241 (1942), the doctrine has evolved in the Federal Circuit in a manner that appears to conflict with this Court's patent-exhaustion cases, thereby creating uncertainty as to when a patentee may enforce, through federal court actions for patent infringement (as opposed to state-law contract actions), downstream limitations on purchasers following an authorized sale.

Whatever rights a patentee may have to enforce such limitations as a matter of contract, the question whether a patentee may invoke federal patent law to enforce such limitations against authorized purchasers is one of considerable practical importance, and this case presents an adequate vehicle for addressing that question.