"Substantially Embodied" Method Claims Exhausted by Licensed Sale of Product

In Quanta Computer, Inc. v. LG Electronics, Inc. (June 9, 2008), the U.S. Supreme Court held that because the License Agreement authorized the sale of components that substantially embody the patents in suit, the exhaustion doctrine prevented LGE from further asserting its patent rights with respect to the method patents substantially embodied by those products.

LGE was unable to distinguish the Court’s most recent discussion of the exhaustion doctrine, United States v. Univis Lens Co., 316 U. S. 241, where patents for finished eyeglass lenses that were held by the respondent (Univis) did not survive the sale of lens blanks by the licensed manufacturer to wholesalers and finishing retailers who ground the blanks into patented finished lenses. In that decision, the Court assumed that Univis’ patents were practiced in part by the wholesalers and finishing retailers, concluding that the traditional bar on patent restrictions following an item’s sale 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 patent’s terms.

In the Univis decision, 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," 316 U. S., at 249–251. Each of those attributes was also shared by the microprocessors and chipsets Intel sold to Quanta under the License Agreement. First, LGE has suggested no reasonable use for the Intel Products other than incorporating them into computer systems that practice the LGE Patents: A microprocessor or chipset cannot function until it is connected to buses and memory. And as in Univis, the only apparent object of Intel’s sales was to permit Quanta to incorporate the Intel Products into computers that would practice the patents. Second, like the Univis lens blanks, the Intel Products constituted a material part of the patented invention and all but completely practiced the patent. The only step necessary to practice the method patent was the application of common processes or the addition of standard parts. Everything inventive about each patent was embodied in the licensed Intel Products.

According to the opinion by Justice Thomas,

“With regard to LGE’s argument that exhaustion does not 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 under patent 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 thanone 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.”

However, in footnote 7, the Court did not rule out a possible breach of contract claim as a way around the problem for LGE:

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 hometo 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 an effect of the patent laws").

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