Supreme Court Expands The Patent Exhaustion Doctrine

Quanta Computer, Inc., et al. v. LG Electronics,

Inc., No. 06-937, 553 U.S. __ (2008)

In a unanimous decision rendered on June 9, 2008, the U.S.

Supreme Court confirmed the continued vitality of the patent

exhaustion doctrine the principle that limits the

patent rights that survive an initial authorized sale of a

patented item and expanded the doctrine in two key

respects. First, the Supreme Court reversed the Federal Circuit

and held that the doctrine of patent exhaustion applies not

only to patented products, but also patented methods. Second,

the Supreme Court addressed the issue of the extent to which

the components sold must embody a patent in order to trigger

exhaustion and held that provided the components substantially

embody the patent, the initial authorized sale of the

components exhausts the patent. The Court was also careful to

parse out and disclaim any holding with respect to potential

contractual rights of the patent owner, suggesting that while

the patent owner could not seek patent damages after the patent

is exhausted with the first sale, contractual remedies may be

available.

The case concerns several patents directed to more efficient

methods for transmitting digital data in computers and

computers with chipsets, memory and buses capable of practicing

such methods. LG Electronics, Inc. (LGE), the patent owner,

licensed the patents to Intel Corporation (Intel), permitting

Intel to "make, use, sell (directly or indirectly), offer

to sell, import or otherwise dispose of" microprocessors

and chipsets made by Intel that used the technology claimed in

the patents. The license agreement expressly disclaimed any

express or implied license to any third party for a third

party's combination of Intel's licensed products with

any items or components not made by Intel. Additionally, a

master agreement attendant to the license agreement required

Intel to provide notice to its purchasers, including Quanta

Computer, Inc. (Quanta), that the purchase of the licensed

products included a license to LGE's patents, but that the

license did not extend, expressly or by implication, to any

product made by combining an Intel product with any non-Intel

product. LGE sued Quanta for patent infringement when Quanta

combined licensed products purchased from Intel with non-Intel

components in the manufacture of computers.

The District Court determined that while LGE and Intel had

not conveyed an express or implied license to Quanta to use the

licensed products with non-Intel components, the product claims

of LGE's patents were exhausted with the sale of the

licensed products to Quanta. The District Court further

determined that the patent exhaustion doctrine did not apply to

the method claims in LGE's patents. The Federal Circuit

affirmed in part and...