MINNESOTA LAWYER IN-HOUSE COUNSEL QUARTERLY SPECIAL …€“sale-doctrine... · the first-sale...

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Patent attorneys are anxiously awaiting the Supreme Court’s decision in ‘LG Electronics v. Quan- ta’, which is expected to clarify the scope of the first-sale doctrine. By Rachel C. Hughey P atent geeks are waiting with bated breath for the U.S. Supreme Court’s decision in LG Electronics v. Quanta , where justices will decide the extent to which a patent holder can restrict the activi- ties of its licensee’s cus- tomers. The case — dealing with complex and frighteningly named legal issues such as the first-sale doctrine, patent exhaustion and implied licenses — should be impor- tant to anyone who enters into patent licenses or purchases patented prod- ucts. In LG, the Supreme Court will clarify a long-standing concept in patent law called the “first-sale doctrine.” The doctrine (also known as patent exhaus- tion) is a judicially created rule that allows the purchaser of a patented product to subsequently use or sell that product free of control or conditions imposed by the patent owner. The broad issue in LG is whether the first-sale doctrine is an absolute bar, or whether parties can contract around it — and if so, to what extent. The facts are undisputed. LG owns method and apparatus patents pertain- ing to computer technology, and grant- ed Intel a license to make, use and sell microprocessors and chipsets covered by LG’s patents. The license stated that it did not grant permission for Intel’s customers to combine the micro- processors and chipsets with other non-Intel parts into configura- tions that infringed LG’s patents. The license also required Intel to notify its cus- tomers of the relevant terms, and stated that nothing in the agreement “shall in any way limit or alter the effect of patent exhaustion that would otherwise apply” when Intel sells its components. Intel sent a letter to its customers, including Quanta, informing them that its license with LG did not extend “to any product that you may make by combining an Intel product with any non-Intel product.” However, Quanta disregarded the letter and purchased microprocessors and chipsets from Intel, installing them into computers with non-Intel parts. Then the court battles began. LG sued Quanta, alleging that Quan- ta’s combination of Intel components with other non-Intel parts constituted infringement of LG’s patents. Quanta moved for summary judgment on the basis that LG’s claim was precluded by the first-sale doctrine because of Intel’s sale of the licensed components to Quanta. LG opposed the motion, argu- ing that the first-sale doctrine did not apply because Intel’s sale to Quanta was conditional. In Round 1, each side took blows but Quanta seemingly prevailed. The U.S. District Court for Northern California rejected LG’s argument with respect to its claims for infringement of the appa- ratus claims, finding that Intel’s sale to Quanta was unconditional because it was not conditioned on Quanta’s agree- ment not to combine the Intel compo- S-6 June 2008 MINNESOTA LAWYER I N- H OUSE C OUNSEL QUARTERLY SPECIAL FOCUS With more than 700 labor and employment attorneys located in 45 offices, Littler offers today’s employers more options than ever. We have a practice that extends into every area of workplace law and can provide rapid, integrated solutions to matters ranging from traditional labor negotiations to workplace safety. Littler has been named: • #1 in Employment Litigation* • #1 in Wage and Hour Litigation* A Top ALM Go-To Law Firm ® for Labor and Employment chosen by Fortune 500 Companies** 1300 IDS Center, 80 South 8th Street, Minneapolis, MN 55402 PH: 612.630.1000 FX: 612.630.9626 * Employment Law 360, 2006–2007 Rankings. ** 2008 Corporate Counsel In-House Law Departments at the Top 500 Companies Guide. First-sale doctrine: absolute or conditional? Rachel Hughey LG l Page S-10

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Transcript of MINNESOTA LAWYER IN-HOUSE COUNSEL QUARTERLY SPECIAL …€“sale-doctrine... · the first-sale...

  • Patent attorneys are anxiously

    awaiting the Supreme Court’s

    decision in ‘LG Electronics v. Quan-

    ta’, which is expected to clarify the

    scope of the first-sale doctrine.

    By Rachel C. Hughey

    Patent geeks are waiting withbated breath for the U.S.Supreme Court’s decision inLG Electronics v. Quanta,

    where justices will decidethe extent to which a patentholder can restrict the activi-ties of its licensee’s cus-tomers.

    The case — dealing withcomplex and frighteninglynamed legal issues such asthe first-sale doctrine, patentexhaust ion and impl iedlicenses — should be impor-tant to anyone who enters into patentlicenses or purchases patented prod-ucts.

    In LG, the Supreme Court will clarifya long-standing concept in patent lawcalled the “first-sale doctrine.” Thedoctrine (also known as patent exhaus-tion) is a judicially created rule thatallows the purchaser of a patentedproduct to subsequently use or sell thatproduct free of control or conditionsimposed by the patent owner.

    The broad issue in LG is whether thefirst-sale doctrine is an absolute bar, orwhether parties can contract around it— and if so, to what extent.

    The facts are undisputed. LG ownsmethod and apparatus patents pertain-ing to computer technology, and grant-ed Intel a license to make, use and sellmicroprocessors and chipsets coveredby LG’s patents. The license stated thatit did not grant permission for Intel’scustomers to combine the micro-processors and chipsets with other

    non-Intel parts into configura-tions that infringed LG’spatents. The license alsorequired Intel to notify its cus-tomers of the relevant terms,and stated that nothing in theagreement “shall in any waylimit or alter the effect ofpatent exhaustion that wouldotherwise apply” when Intelsells its components.

    Intel sent a letter to its customers,including Quanta, informing them thatits license with LG did not extend “toany product that you may make bycombining an Intel product with anynon-Intel product.” However, Quantadisregarded the letter and purchasedmicroprocessors and chipsets fromIntel, installing them into computerswith non-Intel parts.

    Then the court battles began.LG sued Quanta, alleging that Quan-

    ta’s combination of Intel componentswith other non-Intel parts constitutedinfringement of LG’s patents. Quantamoved for summary judgment on thebasis that LG’s claim was precluded bythe first-sale doctrine because of Intel’ssale of the licensed components toQuanta. LG opposed the motion, argu-ing that the first-sale doctrine did notapply because Intel’s sale to Quantawas conditional.

    In Round 1, each side took blows butQuanta seemingly prevailed. The U.S.District Court for Northern Californiarejected LG’s argument with respect toits claims for infringement of the appa-ratus claims, finding that Intel’s sale toQuanta was unconditional because itwas not conditioned on Quanta’s agree-ment not to combine the Intel compo-

    S-6 ■ June 2008 MINNESOTA LAWYER

    IN-HOUSECOUNSEL QUARTERLY SPECIAL FOCUS

    With more than 700 labor and employment attorneys located in 45 offices, Littler offers today’s employers more options than ever. We have a practice that extends into every area of workplace law and can provide rapid, integrated solutions to matters ranging from traditional labor negotiations to workplace safety. Littler has been named:

    • #1 in Employment Litigation*

    • #1 in Wage and Hour Litigation*

    • A Top ALM Go-To Law Firm® for Labor and Employment chosen by Fortune 500 Companies**

    1300 IDS Center, 80 South 8th Street, Minneapolis, MN 55402 • PH: 612.630.1000 • FX: 612.630.9626

    * Employment Law 360, 2006–2007 Rankings.

    ** 2008 Corporate Counsel In-House Law Departments at the Top 500 Companies Guide.

    First-sale doctrine: absolute or conditional?

    Rachel Hughey

    LG l Page S-10

  • S-10 ■ June 2008 MINNESOTA LAWYER

    IN-HOUSECOUNSEL QUARTERLY SPECIAL FOCUS

    nents with other non-Intel parts.However, the court agreed with LGthat the first-sale doctrine did notpreclude it from asserting infringe-ment of its method claims. The courtadditionally found that a separatedefense — implied license — did notapply to the method claims becauseIntel informed Quanta that the licensegranted by LG did not extend to prod-ucts combining an Intel product witha non-Intel product.

    Round 2 went to LG. In a blow to thefirst-sale doctrine, the U.S. Court ofAppeals for the Federal Circuitaffirmed the District Court’s decisionthat the first-sale doctrine did notapply to LG’s method claims, butreversed the decision that the first-sale doctrine applied to the apparatusclaims. The Federal Circuit held thatthe District Court’s conclusion — thatthe sale from Intel to Quanta wasunconditional — was incorrect. TheFederal Circuit held that two provi-sions in the LG-Intel license renderedIntel’s sales to Quanta conditional: (1)the provision that disclaimed granti-ng a license and (2) the provision thatrequired Intel to notify its customersof the limited scope of the license.Although Intel was free to sell itslicensed components, the FederalCircuit held that those sales wereconditional, and accordingly, Intel’scustomers were expressly prohibitedfrom infringing LG’s combinationpatents.

    In its appeal to the Supreme Court,Quanta argued that an authorizedf i rs t sa le of a patented ar t ic leexhausts the patent owner’s rights

    and nullifies any conditions that thepatent owner has tried to attach to itsuse or resale. Specifically, Quantaargued that the Federal Circuit’srecent decisions on the first-sale doc-trine confl ictedw i t h S u p r e m eCourt precedent.Q u a n t a f u r t h e rargued that thesale from Intel toQ u a n t a w a sunconditional andI n t e l n e v e rbreached any obli-gation to LG. TheU . S . S o l i c i t o rGeneral filed anamicus brief insupport of Quan-ta, as did 10 othergroups — many ofthem computermanufacturers.

    L G r e s p o n d e dt h a t Q u a n t a ’ spos i t ion wouldu n r e a s o n a b l yexpand the first-sale doctrine. Fourteen amicus organ-izations filed briefs in support of LG— mostly licensing companies andcompanies that develop their ownpatent portfolios.

    In early 2008, the Supreme Courtheard oral arguments. Questionsposed by the justices demonstrated aclear concern with respect to the lan-guage of the specific license agree-ment between LG and Intel. Interest-ingly, as amicus, the Solicitor Generalproposed that the problem was how

    the parties structured the license. TheSolicitor General argued that if LGhad given Intel a license that restrict-ed Intel’s right to sell, and if Intel hadsold in violation of that license, both

    I n t e l a n d t h eIntel’s customerswould be liablef o r p a t e n ti n f r i n g e m e n tbecause the salef rom In te l wasnot an authorizedsale. But in thissituation, becauseIntel was author-i z e d t o s e l l t oQuanta, the first-s a l e d o c t r i n eapplied. Thus, theSolicitor Generalproposed that if apatentee wantedto restrict down-stream users, itc o u l d c o n t r a c twith the licenseeto limit its sales tothose customers

    that gave contractual promises.The main issue before the Supreme

    Court is whether the first-sale doc-trine always provides an absolute barwith respect to subsequent use orresale. The rule proposed by theSolicitor General — that the first-saledoctrine is an absolute bar whenthere is an unconditional sale, butthat the parties can carefully drafttheir licenses to avoid an uncondi-tional sale — appears to be the bestoption for two reasons. First, existing

    Supreme Court precedent recognizesthat a patentee has the right toimpose at least some restrictions onits licensees. While the Federal Cir-cuit may have expanded this right toofar, that court also agrees that patent-ees have the right to impose restric-tions on its licensees and on down-stream users. Second, from a policystandpoint, there may be some situa-tions where downstream restrictionson use may be necessary to preventthe patent from becoming worthless.

    In all likelihood, if LG had followedthe rule proposed by the SolicitorGeneral (and required Intel to furtherenter into licenses with the down-stream users prohibiting the pur-chasers from combining the Intelcomponents with non-Intel parts) thisc a s e w o u l d n o t b e b e f o r e t h eSupreme Court. So the problem is notthat LG attempted to restrict down-stream purchasers, but instead theway that LG chose to do so.

    While a first unconditional saleshould be an absolute bar to laterrestrictions, parties should be able toconstruct licenses to be conditionalsuch that the first-sale doctrine doesnot apply. The court’s decision in LGwill shape the power of patent hold-ers to control their patented prod-ucts, and will certainly have an affecton patent licensing contracts. For LG,though, it may come too late.

    Rachel C. Hughey is an intellectual propertyattorney with Carlson, Caspers, Vandenburgh& Lindquist in Minneapolis. She recentlyreceived a 2008 Up & Coming Attorneys awardfrom Minnesota Lawyer.

    The rule proposed by the

    Solicitor General — that the

    first-sale doctrine is an

    absolute bar when there is an

    unconditional sale, but that

    the parties can carefully draft

    their licenses to avoid an

    unconditional sale — appears

    to be the best option.

    Solicitor general proposes new ruleLLGG l From Page S-6

    Energy Act that calls for, amongmany other goals, statewide green-house gas reductions of 15 percentby 2015, 30 percent by 2025 and 80percent by 2050. The legislation alsorequires utilities to provide 25 per-cent of their electricity from renew-able sources by 2025.

    In addition 10 governors, includingPawlenty, recently signed the Mid-western Regional Greenhouse GasReduction Accord in Milwaukee. Theagreement will develop a market-based and multisector cap-and-trademechanism to help achieve green-house gas reduction targets.

    Pawlenty last year also appointed aMinnesota Climate Change AdvisoryGroup charged with developing acomprehensive plan for reducing thestate’s greenhouse gas emissions.The group released a report on April

    11 with recommendations that couldgo before state lawmakers in the not-too-distant future.

    There are pros and cons to a region-al approach for tackling global warm-i n g v e r s u s a u n i f i e d , n a t i o n a lapproach. Knudsen said it’s very dif-ficult for national or internationalbusinesses to tailor their operationsto multiple states or regions. On theother hand, Davis said that stateefforts and regional accords canserve as experiments for lawmakersto study until the best approach canbe found.

    Advice for

    counsel

    Hefner has this advice for in-housecounsel: “Stay tuned.” Sustainabilityhas caused some anxiety in the busi-ness world because it’s hard for com-

    panies to engage inlong-term strategicplanning, he said.You can’t erase thatanxiety entirely, butyou can ease someminds by staying ontop of the issue.

    That means tack-ling the science, too,and there’s definite-ly a learning curve,Knudsen said. “The

    more familiar-i t y t h a t i n -house counselcan have withjust the basicconcepts, theeasier it willb e f o r t h e ma n d t h e i rc l i e n t s t odigest it, andu n d e r s t a n dw h e r e t h eopportunitiesare, once theframework isp a s s e d w i t hsome sort ofconcrete legis-l a t i o n , ” s h esaid.

    Maternowski said virtually every-one could be affected by environ-mental laws, from power plants toany building with a boiler, such asschools and hospitals. “I think in-house would be wise to be seekingadvice from outside counsel poten-tially, because it’s such a tricky area.There’s so little predictability, andpeople need to assess their risks,” hesaid.

    “But also, there are opportunitiesfor businesses that are looking at theneed to regulate greenhouse gasesand carbon emissions as an opportu-nity for new growth and expansion,”Maternowski said.

    For the time being, in-house coun-

    sel should document their company’scurrent sustainability efforts, Davissaid, and determine how to commu-nicate those efforts to shareholders.

    Sustainability reports typically startout brief, but companies then buildon them every year, Davis said. And agreat benefit to such reporting is thatit sparks creative thought. When areport contains a success story fromone plant, others learn from that andare challenged to try their own inno-vations to reduce costs, and improveprocesses, while conserving naturalresources, Davis said.

    Jane Pribek is a regular contributor to Min-nesota Lawyer.

    Everyone is affectedGreen l From Page S-5

    “”

    “The green movement has

    gone from years ago being on

    the fringe, to now where it’s

    definitely in the mainstream.”

    — Joseph G. Maternowski, a partner with Moss &

    Barnett law firm in Minneapolis

    “The more familiarity that in-house

    counsel can have with just the basic

    concepts, the easier it will be for

    them and their clients to digest it,

    and understand where the opportunities are, once

    the framework is passed with some sort of con-

    crete legislation.”

    — Sanne H. Knudsen, an associate with Faegre & Benson

    law firm in Minneapolis

    Sanne Knudsen

    JosephMaternowski