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Tomorrow at the Supreme Court: Oral argument in Quanta v. LG
January 15, 2008

Tomorrow the Supreme Court will hear oral argument in Quanta Computer, Inc. v. LG Electronics, Inc. (No. 06-937). The case will determine whether patent owners who sell products embodying their patents conditionally are able to recover damages for patent infringement if the products are subsequently sold beyond the scope permitted by the original sale.

The question presented 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.

The outcome of the case will determine whether patent holders can obtain damages for infringement when they conditionally sell products embodying their patent if the product is subsequently used beyond the scope of those conditions. Under the Federal Circuit's decision, such a conditional sale did not exhaust LG's patent rights, and therefore LG could pursue claims of patent infringement against those downstream purchasers and users of the product, even though the products were purchased from Intel, who was licensed by LG, the patent holder. If the court sides with the petitioners, it could result in some cases that are, in essence, patent cases being heard by the regional circuits or even state courts. This is because that outcome could essentially change the cause of action for the patent holder for these "downstream" sales from one of patent infringement (which carries with it exclusive federal jurisdiction and the Federal Circuit as the exclusive court of appeal), to one of breach of contract, which would not necessary even have to be heard in federal court, let alone by the Federal Circuit on appeal.

It will also have an effect on how license agreements are written and potentially the amount of royalties that patent holders may want to pursue in such license agreements. If the patentee is not able to obtain a royalty for downstream purchasers or use of their patented goods, the royalty that would otherwise have been spread over several levels of the distribution chain may have to be borne by the original purchaser. Patentees may also begin seeking liquidated damages clauses in agreements with licensees to ensure compliance with the conditions of the sale, as the patentee would arguably no longer have a cause of action against the downstream purchaser. The result is likely to be greater risk and investment costs incurred by the party making the original purchase from the patentee.

Our summary of the Federal Circuit decision being appealed may be found in this post, and our other coverage of the case may be found in these three posts.

The ABA has posted all the merits briefs in the case on its site here. SCOTUSBlog has also provided a preview of the case here.

Sometime in the afternoon, the transcript of the oral argument will be available here.

Update (1/16): Some media sources have also now published previews of the arguments:

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