Summary and Practical Considerations of Quanta v. LG Electronics(2)

II. Practical Considerations of Quanta v. LG Electronics

1. Patent owners, licensees, and downstream purchasers should review their business strategies and license agreements in view of the Supreme Court’s holding that method patents can be exhausted.

The Supreme Court’s Quanta decision significantly impacts business strategies and license agreements that once relied on the now-overruled Federal Circuit precedent that method patents cannot be exhausted. The Supreme Court clearly stated that method patents can be exhausted. Patent owners, licensees and downstream purchasers should thus review their business strategies and license agreements to determine whether the Quanta decision triggers exhaustion in what would have previously been interpreted as no exhaustion under the Federal Circuit’s precedent. In conducting such a review, patent owners may find for example that patent rights in some of their method patents are now exhausted. Similarly, licensees and/or downstream purchasers or users may find for example that they can now manufacture, sell, and use systems embodying method patents free of liability for patent infringement.

2. What constitutes a “reasonable alternative use,” what constitutes “essential features” of an invention, and whether an inventive concept lies in an “element or a combination,” are all likely to be subjects of contention.

The first part of the Supreme Court’s two-part test turns on whether there are any reasonable uses for the article other than to practice the patented method. If, in the Quanta case for example, the incomplete article (Intel microprocessors and chipsets) had reasonable uses other than in practicing the patented method, then the two-part test would not have been satisfied, the exhaustion doctrine would not have applied, LGE’s patents would not have been exhausted, and LGE would have been able to assert its patent rights against Quanta. This, of course, invites the question of what constitutes a “reasonable alternative use”. In answering this question, patent owners, licensees, and downstream purchasers should monitor developments in the patent exhaustion doctrine. One can probably expect that an alternative use that has some utility and is economically feasible would likely be deemed a reasonable alternative use. However, an alternative use that is impractical and/or commercially insignificant would likely not constitute a reasonable alternative use.

The second part of the test turns on whether the article embodies the essential features of the patented invention. In the Quanta case the Supreme Court found the incomplete article (Intel microprocessors and chipsets) embodied the essential features of LGE’s patented invention (computer system method) because the only remaining step was the application of a common process and the addition of standard parts (memory and buses). One can imagine less straightforward scenarios. For example, what would be the result if the patented computer system method required a slight modification to the otherwise standard memory and buses? On the one hand, a patent owner may argue, for example, that the slight modification was described in the patent specification and was essential in order for the microprocessors and chipsets to function; and accordingly that the second part of the test is not met and the exhaustion doctrine does not apply. On the other hand, a downstream purchaser may argue, for example, that such a slight modification, when taken in view of the incomplete article (microprocessors and chipsets), would have been obvious to the ordinary skilled artisan; and accordingly that the second part of the test is met and the exhaustion doctrine applies. Patent owners, licensees, and downstream purchasers should monitor developments in the patent exhaustion doctrine in order to devise similar arguments and/or strategies for determining what constitutes “essential features.”

The Court noted that the two-part test applies only in cases where a single element (here, the incomplete article) could be viewed as the inventive aspect of the invention; not in cases where the inventive aspect is in the combination of the elements. In the method patents at issue in the Quanta case, this issue was easily dispensed with by the Court finding the inventive aspect in the microprocessors and chipsets, and more specifically the way in which the microprocessors and chipsets accessed the memory or buses. However, the inquiry may be more complicated for method patents in which for example the inventive aspect is not wholly or so easily attributable to a single component, or where several components together achieve the inventive aspect via several interrelated method steps. Patent owners, licensees, and downstream purchasers should thus monitor developments in patent exhaustion doctrine to determine what constitutes an “essential features” type method patent versus a “combination of known elements” type method patent.

3. The Federal Circuit’s Mallinckrodt decision was not addressed by the Supreme Court in Quanta, leaving open the extent to which a patent owner can place conditions upon the sale of a patented article.

Supreme Court precedent has held that patent owners may grant licenses that limit use of the patented good to a defined field. For example, in General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175 (1938), the Supreme Court upheld the validity of a license that restricted a licensee-manufacturer’s selling of patented amplifiers to home-use downstream purchasers. Because the licensee sold to a commercial-use downstream purchaser, the Court found the sale was outside the scope of the license and not under the patent, and thus not subject to the exhaustion doctrine. The licensee had no authority to sell the amplifiers for commercial use, and the downstream purchaser had no authority to commercially use the amplifiers, and thus both were found to infringe the patent.

Other Supreme Court cases have established that resale price-fixing and tie-in restrictions accompanying the sale of patented goods are generally prohibited under the laws of antitrust and patent misuse, while other conditions are generally recognized as within the patent grant.

In Mallinckrodt, Inc. v. Medipart, Inc. (Fed. Cir. 1992), the Federal Circuit reviewed Supreme Court precedent, and concluded that patent owners may grant, and enforce under the patent law, licenses with any type of condition, so long as the condition is within the scope of the patent grant and does not violate the laws of antitrust or patent misuse (for example, resale price-fixing and tie-in restrictions).

The Federal Circuit’s view of what types of conditions are valid in a license agreement (i.e. per se valid unless in violation of antitrust or patent misuse law) is thus broader than that of the Supreme Court’s view (which has never held that the laws of antitrust and patent misuse are the only limiters on conditions). Over the years, this has called into question the scope of the exhaustion doctrine and the extent to which patent owners can validly restrict a licensee’s or downstream purchaser’s use or sale of patented goods.

In Quanta, the Supreme Court did not address this question because it found that “no conditions limited Intel’s authority to sell products substantially embodying the patents.”

Thus, it remains unclear the extent to which a patent owner can enforce use restrictions on licensees or downstream-purchasers.