Supreme Court asks for Government's view on yet another patent case
April 16, 2007

In its order list released today, the Supreme Court has indicated that it may accept yet another appeal in a patent-related case, as it has invited the Office of the Solicitor General to file a brief stating the position of the United States on the case. The case is Quanta Computer, Inc. v. LG Electronics, Inc., and deals with the first sale doctrine in patent law. Specifically, the question presented in the petition for writ of certiorari is:

Whether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of the product under the license to petitioners.

Typically if the Solicitor General believes a case should be heard by the Court, the Court, in turn, agrees to hear the case, so it will be interesting to see what the Solicitor General's views are on the subject. There is no specific deadline for the Solicitor General's office to provide its views, but it is reasonable to expect them with sufficient time for the Court to review the SG's filing and to take appropriate action before the end of the Court's current term in June.

Update (5/8): According to SCOTUS Blog, because the request for the SG's views was not made until April, the SG's brief may not be filed until the Court's next term this fall.

More details about the case and the Federal Circuit's decision after the jump.

LG Electronics ("LGE") sued BizCom Electronics and other defendants (including the new "lead" party, Quantum Computer, Inc., collectively referred to as "BizCom" in this description), alleging patent infringement of its patents relating to personal computers. BizCom purchases microprocessors and chipsets to install into computers from distributors such as Intel. Intel is licensed by LGE to sell the product under an agreement where purchasers are informed that they are unauthorized to combine the products with non-Intel products. The lawsuit alleges that the combination of the products with other manufacturers' computer parts infringe LGE's patents for combination products.

The trial court granted summary judgment in favor of BizCom, finding noninfringement of all patents. The Federal Circuit affirmed, reversed, and vacated-in-part, and remanded to the trial court. In addition to a fairly typical discussion of claim interpretation and the application of the doctrine of equivalents to determine if patent infringement has taken place, the Court discussed implied licenses and the exhaustion doctrine.

BizCom asserted that it had an implied license to practice LGE's patents based on the nature of its purchases from Intel. In order to prove an implied license, a defendant must show two things: (1) the products have no noninfringing uses, and (2) the circumstances of the sale "plainly indicate that the grant of a license should be inferred." Since Intel informed all purchasers that they were not authorized to combine Intel products with any other products, the Court determined that any subsequent combinations could not be considered impliedly licensed.

Next, the Court turned the BizCom's argument that LGE's patent rights had been exhausted by LGE's sales to Intel. The patent exhaustion doctrine is commonly called the "first sale doctrine," and is triggered by an unconditional sale of a patented product. By definition, an unconditional sale completely exhausts a patentee's right to control the use of the product after the sale in exchange for a bargained payment that equals the full value of the goods. Under Federal Circuit law, this doctrine does not apply to sales or licenses with express conditions. In these transactions, the parties negotiated a price that represents only the value of the "use" rights that the patentee conferred on the licensee.

The two sales at issue in the case involved the system claims and the method claims. The Court determined there was no exhaustion for the system claims because of the express condition prohibiting the purchasers from combining Intel's licensed products with non-Intel products. Thus, the sale was not "unconditional," and the exhaustion doctrine did not apply. The Court then affirmed the trial court's ruling that the method claims were not exhausted, because the sale of a device does not exhaust the patentee's rights in method claims.

Essentially, the petitioners are arguing that notwithstanding any conditions that LGE placed on the sale to Intel or Intel to the petitioners, any violation of those conditions leads to an action for breach of contract, not patent infringement. (See petition for certiorari, p. 20). The logic is essentially that if LGE can license the patented invention via sales to Intel, it cannot then extract a second patent license from Intel's customers because the contract between LGE and Intel had certain restrictions on how the products would be used. This case therefore presents a potentially interesting issue from a licensing perspective, as depending on the outcome of the case, the remedy for noncompliance with license terms may change.

The Federal Circuit's decision is here.

SCOTUS blog coverage of the request for the SG's views is here. Copies of the petition for certiorari, brief in opposition, and reply briefs are also available there.

AP coverage here.

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