US Supreme Court Expands Rights of Patent Licensees by Extending “Patent Exhaustion” Doctrine

This week the U.S. Supreme Court once again took action in the field of patent law.  This time, the Court addressed the “patent exhaustion” doctrine, which limits a patent owner’s right to restrict subsequent sales of a patented item after an initial, authorized sale occurs.  The Court’s decision has been the topic of much attention in the legal media this week.  However, it leaves at least two questions unanswered, and patent holders should consider those questions when drafting license agreements or filing patents in the future.

In the June 2008 decision, Quanta Computers Inc. v. LG Electronics Inc., the Court held that the patent exhaustion doctrine covers not only patented articles, but also patented methods.  As a bit of background:  the patent exhaustion doctrine first arose in 19th-century Court opinions which held that “when a [patented] machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly.”  (Bloomer v. Millinger, 1 Wall 340, 351 1864.)  Over the years, the Court has stated several reasons for this doctrine, including the desire to “promote the progress of science” rather than “the creation of private fortunes for the owners of patents”, and also to give downstream purchasers certainty as to their right to purchase, sell and resell a used (or re-distributed) item. 

In Quanta, the Court extended the patent exhaustion doctrine to patented methods.  In Quanta, LG licensed to Intel several patents relating to data processing and data traffic management methods.  The license agreement permitted Intel to make, use, and sell microprocessors and chipsets that used the LG patents.  However, the license agreement stated that it granted no license that would permit third parties to use the licensed microprocessors and chipsets with non-LG harware.   After Quanta and other computer manufacturers purchased the microprocessors and chipsets from Intel, LG sued Quanta and the others for patent infringement, asserting that Quanta et al. infringed the LG’s patented methods.

The Court held that LG could not enforce its method claims against Quanta et al. because the defendants purchased the microprocessors from a licensed manufacturer (Intel).  Although the method claims also required use of a bus and cache memory not present in the Intel products, the Court stated that the Intel products “constitute a material part of the invention and all but completely practice the [method claims of the] patent.”  Because the Intel products carried out all of the inventive methods when combined with standard components, the Court held that the Intel’s license to sell patented products barred LG from limiting how Intel’s customers could use those products.

As noted above, the Court’s decision has received much attention this week.  However, two small statements in the Court’s opinion have the potential for wider impact as other courts apply and interpret the case. 

First, in a footnote the Court mentioned that the patent exhaustion doctrine does not necessarily preclude breach of contract claims.  In other words, patent licensors may not be able to pursue infringement actions against downstream purchasers, but if a license agreement imposes conditions on resale, then licensor may be able to pursue a breach of contract claim if the resale does not comply with those conditions.  Licensors may wish to take advantage of this opportunity when drafting license agreements.

Second, the Court noted that, while in general the patent exhaustion doctrine is limited to the licensed patent, the patent exhaustion doctrine may, in some cases, apply across multiple patents.  The Court did not establish standards for when this could occur.  However, the possibility may create a concern for companies that have multiple patents that are closely related.  Depending on how it is applied in the future, it also may cause companies to re-think a common strategy of patenting a product, and later patenting a new method of making or using the product.