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

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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 LG

will 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