Summary and Practical Considerations of Quanta v. LG Electronics

I. Summary of Quanta v. LG Electronics

The patent exhaustion doctrine (also referred to as the first-sale doctrine) provides that the initial authorized sale of a patented article terminates all patent rights to that article.

Issue:
The question in this case was whether LGE’s patent rights in computer system methods were exhausted by its License Agreement with Intel, and Intel’s subsequent sale of an incomplete article that substantially embodied LGE’s patents. 

Facts:
LGE licensed a patent portfolio to Intel (i.e. License Agreement) permitting Intel to manufacture and sell microprocessors and chipsets that use the LGE patents. LGE’s patents do not cover the microprocessors or the chipsets themselves, but rather computer system methods that use the microprocessors and chipsets in combination with memory and buses in a computer system. The License Agreement stipulated that no license was granted “to any third party for the combination” of Intel products (microprocessors and chipsets) with non-Intel products (memory and buses). In a separate agreement between LGE and Intel (i.e. a Master Agreement), Intel agreed to give notice to Intel’s customers that the LGE-Intel License Agreement did not authorize Intel’s customers to combine Intel products with non-Intel products. Quanta, an Intel customer, purchased Intel products and received the notice required under the Master Agreement, but nonetheless manufactured computer systems combining the Intel products with non-Intel products in ways that practiced method claims of the LGE patents. LGE sued Quanta, asserting that the combination of the Intel products with the non-Intel products infringed method claims contained in each of the LGE patents. Quanta raised the patent exhaustion doctrine as a defense, arguing that Intel’s sale of the Intel products exhausted LGE’s patent rights. 

The Federal Circuit’s Holding:
The Federal Circuit held that the patent exhaustion doctrine applies to apparatus claims but not to method claims, so LGE’s rights in asserting infringement of its method claims were not exhausted. In the alternative, the Federal Circuit concluded that even if the patent exhaustion doctrine was applicable to method claims, it would not apply here because LGE did not authorize Intel to sell the Intel products to Quanta to combine with non-Intel products.

The Supreme Court’s Holding:
The Supreme Court unanimously reversed the Federal Circuit’s holding and the Federal Circuit’s alternative conclusion. The Supreme Court held that “because the doctrine of patent exhaustion applies to method patents, and because the License Agreement authorizes the sale of components that substantially embody the patents in suit, the exhaustion doctrine prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.”

1. Method claims can be exhausted.

The Supreme Court held that method claims can be exhausted. Relying on its earlier decision of United States v. Univis Lens Co. (1942), the Court noted that although a patented method may not be sold in the same way as a product, methods nonetheless may be “embodied” in a product. And the sale of a product that embodies a patented method exhausts the rights in the patent. The Court reasoned that the categorical exemption of method claims from the exhaustion doctrine would seriously undermine the exhaustion doctrine, as patentees could shield practically any patented item from exhaustion by simply drafting method claims corresponding to their apparatus claims. The Court pointed out that categorical exemption of method claims from the exhaustion doctrine would present a danger to downstream purchasers. In this case, for example, although Intel is authorized to sell a completed computer system that practices the LGE patents, any downstream purchasers of the system could nonetheless be liable for patent infringement. The Court therefore rejected LGE’s argument that method claims can never be exhausted.

2. Patent exhaustion is triggered by the authorized sale of an incomplete article if the only reasonable use of the incomplete article is to practice the patent and the incomplete article substantially embodies the patent.

LGE argued that the exhaustion doctrine could not be triggered in this case because the article sold by Intel (microprocessors and chipsets) was not the complete article needed to practice the patents (i.e. computer system methods that use the microprocessors and chipsets in combination with memory and buses). The Court rejected LGE’s argument, and held that exhaustion is triggered by the authorized sale of an incomplete article if:

a. the “only reasonable and intended use” of the incomplete article “was to practice the patent;” and

b. the incomplete article “substantially embodies the patent” by embodying “the essential features of the patented invention.”

Applying the first part of the test, the Court discerned that the only reasonable use of the Intel products (microprocessors and chipsets)(here, the “incomplete article”) was to incorporate them into computer systems that practice the LGE patents, since a microprocessor or chipset cannot function until it is connected to memory and buses. The Court also found that the only apparent intention for Intel selling its products to Quanta was to permit Quanta to incorporate the Intel products into computer systems that would practice the LGE patents. Accordingly, the first part of the test was met.

The Court emphasized that the first part of the test queries whether the only use of the incomplete article is in “practicing the patent,” not whether the only use is in infringing the patent. Thus, the Court explained, even if Intel’s products (incomplete article) were sold overseas or used as replacement parts, they would still be practicing the patent, even if not infringing it. In other words, in order to avoid the exhaustion doctrine, the features that partially practice the patent are what must have an alternative use.

With respect to the second part of the test, the Court found that the Intel products (incomplete article) substantially embodied the LGE patents because the only remaining step necessary to practice the LGE patents was “the application of common processes or the addition of standard parts.” The Court reasoned that although the Intel products (incomplete article) could not practice the patents unless they were attached to memory and buses, the memory and buses were merely standard parts and their attachment to the Intel products was not inventive. Everything inventive about each patent was embodied in the Intel products. Accordingly, the second part of the test was also met.

The Court distinguished its earlier patent exhaustion decision of Aro Mfg. Co. v. Convertible Top Replacement Co. (1961), which concerned the issue of whether the replacement of a part of a patented combination constituted a permissible “repair” or an infringing “reconstruction”. In “repair/reconstruction” patent exhaustion cases such as Aro, the combination itself is the only inventive aspect of the patent, whereas in patent exhaustion cases such as the present case, the inquiry is whether a single element (incomplete article) could be viewed as essential to the invention. Thus, in this case, the Court found the inventive aspect of the patent is not the fact that memory and buses are combined with a microprocessor or chipset; rather, the inventive aspect is in the design of the Intel products themselves and the way the Intel products access the memory and buses.

3. In this case, the sale was authorized and thus triggered exhaustion.

Patent exhaustion can be triggered only by a sale that is authorized by the patent holder. LGE argued that Intel’s sale to Quanta was not authorized because the License Agreement did not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE patents.

The Court rejected LGE’s argument. The Court found the License Agreement placed no restrictions on Intel’s right to sell its products to customers who intend to combine them with non-Intel products. In addition, the Court gave no effect to LGE’s requirement that Intel give notice to its customers, including Quanta, that LGE had not licensed those customers to practice LGE’s patents. The Court noted that there was no evidence presented that Intel failed to give such notice. Moreover, the Court pointed out that the notice requirement appeared only in the Master Agreement, and there was no evidence presented suggesting that the License Agreement was conditioned on the Master 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.

The Court also dismissed LGE’s argument that the License Agreement disclaimed any license to third parties to combine Intel products with non-Intel products as irrelevant because Quanta asserted its right based not on implied license but on patent exhaustion. And, the Court said, patent exhaustion turns only on Intel’s own license to sell products practicing the LGE patents.

The Court concluded that Intel’s sale to Quanta was authorized and thus triggered the patent exhaustion doctrine. The patent exhaustion doctrine prevents LGE from further asserting its patent rights in the LGE patents.

II. Practical Considerations of Quanta v. LG Electronics (contineued)