Quanta Computer, Inc. v. LG Electronics, Inc. (JWB)

Reading Notes

• CAFC held that doctrine of patent exhaustion does not apply to method patents at all, and that it does not apply here because the sales were not authorized by the license agreement
• Supreme Court disagreed on both counts; “Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents.”

Case

• LG made License Agreement with Intel, which authorizes Intel to “ ‘make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of’ ” its own products practicing the LGE Patents
• Quanta manufactured computers using Intel parts in combination with non-Intel memory and buses in ways that practice the LGE Patents
• LGE filed a complaint against Quanta, asserting that the combination of the Intel Products with non-Intel memory and buses infringed the LGE Patent

Lower Courts

• District Court granted summary judgment to Quanta
  • for purposes of the patent exhaustion doctrine, the license LGE granted to Intel resulted in forfeiture of any potential infringement actions against legitimate purchasers of the Intel Products
  • Intel products have no reasonable noninfringing use and therefore their authorized sale exhausted patent rights in the completed computers
• CAFC concluded that exhaustion did not apply because LGE did not license Intel to sell the Intel Products to Quanta for use in combination with non-Intel product

Doctrine of Patent Exhaustion

• doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item
• “[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly” Bloomer v. Millinger (1864)
• “the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.” Motion Picture Patents Co. v. Universal Film Mfg. Co. (1917)

Supreme Court

Patent Embodiment

• Nothing in this Court's approach to patent exhaustion supports LGE's argument that method patents cannot be exhausted
  • methods nonetheless may be “embodied” in a product, the sale of which exhausts patent rights
• As the Court explained [in Univis], 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.”
  • Like the Univis lens blanks, the Intel Products constitute a material part of the patented invention and all but completely practice the patent
  • the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts
  • Quanta had no alternative but to follow Intel's specifications in incorporating the Intel Products into its computers because it did not know their internal structure

Exhaustion of Patent

• Exhaustion is triggered only by a sale authorized by the patent holder
  • LGE argues that there was no authorized sale here because the License Agreement does not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE Patents
  • The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel's authority to sell products substantially embodying the patents.
• The authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holder from invoking patent law to control postsale use of the article.

Class Notes

• LG Electronics had 3 patents, involving computer memory items
• had 2 contracts with Intel (the manufacturer): a license of patent rights, Intel could not sell it without notice of restrictions of use
• Intel sold the processors to Quanta (provided the notice), who combined Intel processors with non-Intel products
• District Court: summary judgment for Quanta based on patent exhaustion
• CAFC: method does not warrant doctrine
  • not linked to anything tangible
• Supreme Court: exhaustion applies to method
  • if method does not warrant doctrine, lawyers can get around exhaustion by claiming everything is a method claim
  • Intel’s processors could only be reasonably used to fulfill claims in patent (no non-infringing use)