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Factual Background Edit
LG Electronics (LGE) owned several patents on methods and systems for processing information. It entered into two contracts with Intel. In the License Agreement, LGE authorized Intel to make and sell microprocessor products using the patented inventions. Moreover, the License Agreement expressly stated that no license was granted to any third party for combining licensed products with other products (for example, for combining Intel microprocessor products with other parts of a computer). The License Agreement also provided, however, “Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”
In the Master Agreement, LGE required Intel to give its customers notice that the patent license does not extend to any product made by combining a licensed Intel microprocessor product with any other product (for example, a computer containing the Intel microprocessor products). The Master Agreement also provided that its breach would have no effect on the License Agreement and would not be grounds for its termination.
Quanta purchased licensed Intel microprocessor products and proceeded to manufacture computers containing them. In doing so, Quanta followed Intel’s specifications, which in turn led to practice of the patented methods and making the patented systems that LGE licensed to Intel — since that was the way Intel had designed its microprocessor products. LGE sued Quanta for patent infringement.
Trial Court Proceedings Edit
Quanta prevailed in the district court under the exhaustion doctrine.
Appellate Court Proceedings Edit
The appellate court held that the sale of the licensed products by Intel did not imply a license with respect to the asserted patents and that "[t]o prevail, defendants were required to establish that the products have no noninfringing uses and that 'the circumstances of the sale . . . 'plainly indicate that the grant of a license should be inferred.'" Because Intel had expressly informed the defendants of the limitations of the agreement there could be no finding of an implied license.
The appellate court reversed the lower court's holding that the system claims were exhausted, affirmed with respect to the method claims, and vacated summary judgment with respect to the doctrine of equivalents.
U.S. Supreme Court Proceedings Edit
Method claims Edit
First, the Court held that the distinction between method and product claims was insupportable. In United States v. Univis Lens Co., the most recent decision of the Court on exhaustion, some of the patents held exhausted were method patents. Earlier, in Ethyl Gasoline Corp. v. United States, some patents covered a method of combusting gasoline in an automobile engine — and the exhaustion doctrine was held applicable. Furthermore, because it is easy to write patent claims for the same invention either in method format or apparatus format, the exhaustion doctrine could easily be evaded if reliance on method claims was sufficient to avoid exhaustion: By “including a method claim for the machine’s patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion.”
The Court then turned to the extent, if any, to which exhaustion of the patent rights on the microprocessor products exhausted patent rights relating to the combination products on which LGE had patents. In the Univis case the sale that exhausted patent rights was a sale of an unpatented, semi-finished lens blank, which subsequent processing turned into a patented finished lens. The Intel microprocessor products were finished commercial articles of commerce, but in this case the trial court had found as a fact that the microprocessor products had no noninfringing use, just as in the Univis case the semi-finished lens blanks had no use but to be finished into the patented finished lens blanks. Therefore, the Court found Univis dispositive. In the Quanta Court’s language, in Univis “exhaustion was triggered by the sale of the lens blanks because their only reasonable and intended use was to practice the patent and because they ‘embodie[d] essential features of [the] patented invention.’”
LGE did not challenge the claim that the intended and reasonable use of the microprocessor products was to incorporate them into computers, but it claimed that some noninfringing uses existed: they could be sold overseas, as repair parts, or by disabling the features that made them patented. The Court dismissed these arguments. As for disablement, the Court asserted that the disabled device aspects (“features”) rather than the device that remained must have a noninfringing use, so that disabling them would cause them to have “no real use.” As for foreign or replacement use, the legal test to be looked to was whether the product would perform the patented method or embody the patented product, not whether the use gave rise to infringement liability.
A further reason why sales of the microprocessor products exhausted LGE’s patent rights was that “everything inventive about each patent is embodied in” the licensed Intel products, which “embody the essential features of the [licensed] patents because they carry out all the inventive processes when combined, according to their design, with standard components.” Any point of novelty — that is, respect in which the claimed invention departs from the prior art — is found in the licensed microprocessor products rather than in the combination product of which they are components.
This last aspect of the Quanta opinion is very similar to the doctrine of the Lincoln Engineering case, a doctrine that the Federal Circuit had previously held to be no longer authoritative. Under the Supreme Court's Lincoln Engineering doctrine, the combination of a newly invented device with a known, conventional device with which the new device cooperates in the conventional and predictable way in which devices of those types have previously cooperated is unpatentable as an “exhausted combination” or “old combination.” Thus, when the Quanta Court said that “everything inventive about each patent is embodied in” the licensed Intel products, which “embody the essential features of the [licensed] patents," the Court was, in effect, saying that the combination of a novel Intel microprocessor in a conventional manner with an old personal computer is an exhausted combination. Accordingly, no weight would be put on the fact that separate patents had issued to LGE on the inventive device and on the old combination that included it.
Licensing a limited field Edit
LGE’s argument for non-exhaustion sought to invoke the doctrine of General Talking Pictures Corp. v. Western Electric Co. In that case, the patentee had granted no license for “commercial” amplifiers. Therefore, when a manufacturer licensed only in the “non-commercial” field of use sold an amplifier to an accused infringer, who knowingly resold it in the commercial market, the manufacturer “could not convey to [the accused infringer] what both knew it was not authorized to sell.” By parity of reasoning, LGE said, it had licensed Intel only in the field of manufacturing microprocessor products for combination with specified products and not with other products. But the Court said that was not how LGE had drafted its license to Intel:
|“|| LGE overlooks important aspects of the structure of the . . . transaction. Nothing in the License Agreement restricts Intel’s right to sell its microprocessors…to purchasers who intend to combine them with non-Intel parts. It broadly permits Intel to make, use, or sell products free of the patent claims. To be sure, LGE did require Intel to give notice to its customers, including Quanta, that LGE had not licensed those customers to practice its patents. But neither party contends that Intel breached the agreement in that respect.
LGE points out that the License Agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components. But the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion. And exhaustion turns only on Intel’s own license to sell products practicing the . . . patents.
The Court appears to be saying that LGE simply licensed Intel to make, use, and sell microprocessor products. LGE expressly stated that no license was granted to any third party for combining the licensed products with other products; and LGE made Intel tell its customers about the absence of a license. But LGE did not say to Intel that LGE licensed Intel to make, use, and sell microprocessor products only in the field of microprocessor products combined with other LGE-licensed products (so-called Intel products). There was no explicit field-of-use limitation on Intel’s manufacturing, using, and selling rights — no “magic words.” LGE came close — it said it was not licensing third parties to combine licensed product with other products, and it required Intel to notify customers of that — but LGE failed to go right to the point and expressly deny Intel any license to make microprocessor products that would be combined with other products. Furthermore, for some inexplicable reason the parties, with fatal effect, red-flagged the fact that there still was an exhaustion doctrine:
|“||Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.||”|
That this was a critical error (for LGE) is confirmed by the Court’s final statements in its opinion:
|“||The License Agreement authorized Intel to sell products that practiced the patents. No conditions limited Intel’s authority to sell products substantially embodying the patents. . . . Intel’s authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta.||”|
Thus, the exhaustion doctrine governed what Quanta could lawfully do with what it bought from Intel. The failure to give third parties a license to combine Intel microprocessor product with other products had no legal significance, because the exhaustion doctrine obviated any need for such a license. Having bought the products from an authorized seller, Quanta did not need any license.
No contract issue Edit
Just before closing, the Court added a final note pointing out that the case did not raise, and the Court did not rule on, whether LGE could have enforced a contractual restriction. In footnote 7, the Court commented:
|“||We note that the authorized nature of the sale to Quanta does not necessarily limit LGE’s other contract rights. LGE’s complaint does not include a breach-of-contract claim, and we express no opinion on whether contract damages might be available even though exhaustion operates to eliminate patent damages.||”|
- ↑ Apparently, LGE was willing to allow Intel’s customers to combine the microprocessor products with products not licensed by LGE, but only upon payment of a further royalty to LGE for the right to do so. This point is not discussed in the court’s opinion, which recites the facts only in very limited terms because the record was under seal to protect trade secrets.
- ↑ The trial court found that the Intel microprocessor products were without any reasonable noninfringing use.
- ↑ 316 U. S. 241 (1942).
- ↑ 309 U. S. 436 (1940).
- ↑ See Radio Steel & Mfg. Co. v. MTD Products, Inc., 731 F.2d 840, 845, 221 U.S.P.Q. (BNA) 657 (Fed. Cir. 1984)(full-text).
- ↑ 304 U.S. 175, 182 (1938)(full-text) (upholding legitimacy of field-of-use limitations on scope of patent licenses to make and sell amplifiers only in “non-commercial” field), aff'd on reh’g, 305 U.S. 124 (1938)(full-text).
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