Exhaustion after Quanta

Patent Law – Prof. Merges

12.2.2010

Three basic themes

• Review the Quanta case

• Examine exhaustion principles announced in Quanta

• Review licensing strategies in the wake of Quanta

LG Electronics (Patent Owner)

Intel (Licensee)

End Users

LG Electronics (Patentee)

Intel (Licensee)

Master License (required non-coverage notice to Intel Customers)

Specific product license (no customer restrictions)

Intel (Licensee)

End Users

License?+

End Users

LG Electronics (Patentee)

Intel

LG Sued End Users – Bizcom, Quanta, etc.

• End Users defended by claiming that they were protected against suit by virtue of the LG-Intel license agreement, and Intel’s sale of chips to them

District Court

• LG argued that end users were not protected by exhaustion, since the chips sold by Intel did not completely embody any claims in the asserted patents

• District Court disagreed: held, sales of chips by Intel exhausted LG’s rights vis-à-vis end users

Federal Circuit

• Partial reversal

• No exhaustion: LG did not authorize Intel to authorize end-users to combine Intel products with non-Intel products

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

• 128 S.Ct. 2109 (2008)

• Held: licensee's sale of component computer parts that substantially embodied method patents held by patentee was “authorized” by patent holder, and had effect of exhausting patent holder's patents.

Supreme Court: Holdings

1. Method claims are subject to exhaustion

2. Embodiments substantially containing claimed technology exhaust a patent

3. Sales in this case were “authorized sales” under the licensing arrangement in this case: so patents were exhausted

Exhaustion of method claims

• The CAFC had previoiusly held that method claims are not subject to the patent exhaustion doctrine. See, e.g., Glass Equip. Dev., Inc. v. Besten, Inc., 174 F.3d 1337, 1341 n.1 (Fed. Cir. 1999) (citing Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903, 924 (Fed. Cir. 1984)).

128 S.Ct. 2109, 2020[I]f [a] 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.

Third holding: most important for drafting/counseling

• We can learn from the LG – Intel – End User arrangement

• Drafting tips

Basic exhaustion principles

• “Exhaustion is triggered only by a sale authorized by the patent holder.” –> 128 S.Ct. 2109, 2121

Two elements here

• [1] SALE only

–> Licensing is outside this holding–> Creative licensing arrangements

are still permissible

• [2] Authorized by the patent holder

–> Principles of implied licensing come into play

LG Electronics (Patentee)

Intel (Licensee)

Master License (required non-coeverage notice to Intel Customers)

Specific product license (no customer restrictions)

No restriction on customers’ use of patented technology

“[T]he provision requiring notice to Quanta appeared only in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a breach of the License Agreement. Hence, Intel's authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta's decision to abide by LGE's directions in that notice.” -- 128 S.Ct. 2109, 2121-2122

Patentee

Licensee

Quanta strongly suggests that effective restrictions/not-ice in license agreement might bind downstream users End users

LG Electronics (Patentee)

Intel (Licensee)

Specific product license WITH requirement to restrict customers; to give notice of no license

Remedies in licensing agreement

“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.” – 128 S.Ct. at 2122

Important issues post-Quanta

• Contractual remedies for Licensee’s breach of license, including unauthorized infringement by Licensee’s customers

• Indemnification provisions; bargaining licensing during negotiations

Patentee

Licensee

End users