Oral argument in Quanta v. LG - some highlights
January 18, 2008

On Wednesday, the Supreme Court heard oral argument in Quanta Computer, Inc. v. LG Electronics, Inc. (No. 06-937), a case regarding the scope of the concept of patent exhaustion, also known as the first sale doctrine. While the entirety of the arguments is worth a read (the transcript is available here), click below for our impressions of the arguments.

A bit of background is necessary in order to best understand the parties' arguments. LG holds the following patents at issue in the suit:

  • 4,918,645 (disclosing systems and methods that increase the bandwidth efficiency of a computer’s system bus)
  • 4,939,641 (claiming, in relevant part, a system for ensuring that outdated data is not retrieved from memory)
  • 5,077,733 (claiming, in relevant part, a method that controls the access of a device to a bus shared by multiple devices)
  • 5,379,379 (claiming a system and method for ensuring that outdated data is not retrieved from memory)
  • 5,892,509 (claiming networked computers capable of sharing certain video images)

For purposes of the argument, the relevant point is that some of the claims are system claims, and some are method claims. LG licensed Intel to produce and sell the claimed systems and practice the claimed methods, but Intel generally only sells its processors and chipsets. Intel has a license to make such sales, but only to the extent they are combined with other Intel products to produce the complete system which practices the claimed methods. The defendants purchased Intel processors and chipsets and combined them with non-Intel products to produce the claimed systems. It isn't reasonably disputed by the parties that at least the primary use of the Intel products purchased by the petitioners is to form part of the claimed systems that practice the claimed methods.

Quanta and LG frame the argument in fundamentally different ways. According to Quanta, the issue is that it is undisputed that the sale from Intel to the petitioners was an authorized sale. As noted above, Intel's purchasers are licensed under the patents as long as they combine the purchased Intel chipsets and processors only with other Intel products. However, the petitioners did not do so—instead, they combined the Intel products with other components from less expensive sources. As such, the petitioners could not seek refuge in Intel's license.

Nevertheless, they argued that the patent exhaustion doctrine should apply (and they should therefore not be liable for infringement) becuase of two main facts: (1) the only reasonable use of these chipsets is in the claimed systems and to practice the claimed methods, and (2) the sales by Intel were authorized sales, meaning Intel would not be liable for contributory infringement based on the sales. According to petitioners, because the only reasonable use of the chipsets is to practice the patents, it acts as an authorized sale of a patented item, and therefore exhausts the patent owner's rights upon the sale. This position is illustrated in the transcript on pages 14-15:

MS. MAHONEY: Well, I think that it just means that once you have that transaction any sales that occur for those articles under that license are going to be exhausted by definition. But, you know, we have certainly focused on the sale of the articles to Quanta from Intel, and I think, you know, it makes sense to look at it that way.And, as indicated, there really is -- there have been arguments that somehow this deprives the patentowner of the right to collect its full royalty, but that doesn't make any sense. Because if you -- if you look at the rights that are afforded under contributory infringement, what Congress has done in Section 271(c) and what this Court had done before was to say that if you are the owner of a system patent or a method patent, you can go ahead and collect your royalty when someone sells a product that will contributorily infringe.In other words, your -- your product is sufficiently -- your patent is sufficiently embodied in those contributorily infringing products that it's appropriate for you to collect your royalty there. That's exactly what happened in this case. LGE did get its royalty from Intel, did give them authority to sell products which would otherwise contributorily infringe, and now what it's seeking to do is to say, despite the authorized sale, despite the fact it would contributorily infringe, we want to collect another royalty from the buyer of the product that can't use it for any other purpose. Why? Well, because we have -we had them sent a notice that said we wanted to do that.Under this Court's cases, that is completely impermissible. In two cases in particular, Motion Picture Patents, they tried to do the exact same thing. And in the Millinger case the patent owner said that it had never gotten paid for the extension rights under its patent. And this Court said: Nope; once you've sold the article, that's the royalty you get.

As some of the Justices pointed out, however, this seems to leave a loophole in the exhaustion doctrine. If the license agreement is crafted correctly, exhaustion may be avoidable. For example, if the license is worded such that (in this case) Intel could only sell its components to other companies that were also licensed under the patents, the sales from Intel to the petitioners become unauthorized, and therefore no exhaustion has occurred. Thomas Hungar, arguing on behalf of the United States supporting petitioners, also agreed with this point, as illustrated on page 20 of the transcript:

MR. HUNGAR: Well, only at the -- only at the level of the licensee. That is, if it is true, as Ms. Mahoney said, if the -- if LG here had given a restricted license that restricted the right to sell, that said you can only sell in these instances, and if Intel then sold outside those permitted instances, that would be patent infringement.CHIEF JUSTICE ROBERTS: And it would be patent infringement by the use of the product by the people that Intel sold to?MR. HUNGAR: Yes, because it was an unauthorized sale.CHIEF JUSTICE ROBERTS: That would sound like your friend on the other side, the Respondent, had actually won in this case.MR. HUNGAR: Well, that's right. If this had been an authorized sale -- I mean an unauthorized sale, they would win. But, of course, it's been accepted throughout the case, and the court of appeals explicitly said at page 5A, and it's been undisputed, that Intel had the right to sell these items to these Petitioners.

The respondent, on the other hand, framed the issue as one of implied license. According to the respondent, there can be no exhaustion, because the product sold was not the subject of the patents: at best, it was a portion of the patented systems, and capable (with other components) of performing the claimed methods. However, according to the respondent, only a sale of the system as a whole (or the method) can trigger exhaustion, even if the primary use of the product is as a part of the system. This is illustrated in the beginning of the respondent's argument, on pages 27-28 of the transcript:

[T]he question is, what was sold here? And the only sale that was involved here was the chipsets. And there is a completely separate patent that deals with the rest of the system and that deals with the method. And nothing -- and this is the key point of this. The exhaustion doctrine only goes as far as the sale.CHIEF JUSTICE ROBERTS: Well, but there's nothing to do with these chipsets other than use them in the computers. I mean, you don't put them on your shelf. They're not good for anything other than using in the computer. So saying there's a separate patent for how you use them with the other systems doesn't seem to be very significant.MR. PHILLIPS: It would be -- and that's why you would ordinarily -- you don't deal with this as an exhaustion issue. That's why you would deal with this as an implied licensing issue.The assumption would be, in the absence of clear evidence to the contrary, that if I'm selling you something that only has a single use and that's in a separate patent, that you in fact are being licensed to go and use it that way. But what's absolutely critical in this case is that both the district court and the court of appeals specifically rejected the notion that there was any implied license. And it's important to realize this.Even as we approach this case, we didn't sue for any of the activities that predated when the other side received its notice. We sued only for the activities post notice. Why? Because at that stage it was absolutely clear that there was no implied license any longer and there's no basis for expanding the exhaustion doctrine to try to fill that void.

The Justices seemed somewhat torn between the two positions. On one hand, the Court seemed to dislike the relative ease that a patentee could contract around (by making the sale to unlicensed parties unauthorized) a holding like the one suggested by the petitioners and the government. On the other hand, the Court also seemed unconfortable with the respondent's argument that the issue is essentially one of implied license, making the exhaustion doctrine inapplicable to sales of components of a system that realistically have no purpose other than use in the patented system.

It will be interesting to see how the Court comes out. Unlike with other patent cases in recent Terms, however, it is more difficult to predict the outcome based on the oral arguments. Given the Court's recent history, though, reversal still seems like the more likely outcome, although how far the Court will go in defining the scope of patent exhaustion is the key question.

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