Opinion Recap: Quanta v. LG

The following entry is by Christopher Pudelski, of Akin Gump’s DC office.  He worked on amicus brief in the case on behalf of the Biotechnology Industry Organization in support of neither party.

In Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937, the Court unanimously extended the longstanding doctrine of patent exhaustion to method patents, and removed the ability of patentees to rely on patent law to restrict authorized sales of products embodying their inventions.  The Court’s narrow holding declined to address the related questions of whether and how the same patentees may contractually limit the sales of such products.

Respondent LGE purchased several computer technology method patents concerning the processing and managing of data.  LGE licensed those patents to Intel Corporation, which was permitted under the licensing agreement to make, use and sell microprocessors and chipsets using LGE’s patents.  Petitioner Quanta (and other computer manufacturers) purchased these items from Intel, and combined them with non-Intel parts to produce computers.  LGE sued Quanta for patent infringement on the ground that the combination infringed LGE’s patents.

The patent exhaustion doctrine generally holds that the first authorized sale of a patented item exhausts the patentee’s rights to that item.  The Quanta Court applied the doctrine to the authorized sale of those products sufficiently embodying the patent.  Writing for the Court, Justice Thomas explained that the holding of United States v. Univis Lens Co. (1942) controlled the facts of the case.  Univis held that a patentee’s rights in finished eyeglass lenses did not survive a licensee-purchaser’s sale of lens blanks to downstream wholesalers and retailers who ground the lenses into finished products.  The Univis Court concluded that the patentee’s rights were exhausted because the finished lenses sufficiently embodied the patented lenses such that their only and intended use was to be a finished product.  Applying Univis, the Quanta Court concluded that the microprocessors and chipsets Intel sold to Quanta embodied the essential features of LGE’s method patents.  The Intel products “constitute a material part of the patented invention and all but completely practice the patent.”  The Court noted LGE did not offer any reason to doubt the conclusion that the only “reasonable use” for the Intel products was to practice LGE’s patents.

The Court then addressed whether the sale of Intel’s products was “authorized” by LGE such that its patent rights were extinguished.  The Court concluded that the LGE-Intel license agreement was “broadly” crafted, permitting Intel to make, use or sell its products free of LGE’s patent claims.  Although a separate agreement required Intel to notify its customers (like Quanta) that LGE did not permit them to practice LGE’s patents, Intel’s authority to sell its products was not conditioned on that agreement or on the customers’ acceptance of it.  Thus, the Court concluded that Intel’s sales were authorized by LGE.

Notably, the Court’s opinion declined the invitation of several amici to determine the type and scope of restrictions that may be placed on sellers and purchasers.  Instead, the narrow holding left open the possibility that patentees may impose conditions on the resale of their patented products or may contract separately with customers to accept resale conditions.

The Court also held that the patent exhaustion doctrine applies to method claims.  Recognizing that a method may not be sold in the same way as an article or device, the Court nevertheless concluded that the doctrine applies to the sale of products embodying a method.  To hold otherwise would encourage patent drafters to avoid exhaustion principles by drafting their claims to describe a method rather than a device.