EXHAUSTION
QUANTA EXHAUSTION AND ITS EFFECT ON LICENSING
In June 2008, the Supreme Court decided Quanta Computer Inc v LG Electronics Inc, strengthening the doctrine of patent exhaustion and affecting licensing strategies. Michael Mutter considers the implications.
In Quanta Computer Inc v LG Electronics Inc, the court unanimously ruled that the authorised sale of an article that substantially embodies a patent exhausts the monopoly originally granted to the patent holder, preventing the patent holder from claiming infringement against unauthorised post- sale use of the article.
In the case, LG Electronics licensed a patent portfolio to Intel Corporation, authorising Intel to manufacture and sell microprocessors and chipsets that used the LG patents. In a separate agreement (the associated ‘Master Agreement’) with LG, Intel agreed to give notice to its customers that the Intel licence did not extend to “any product that you make by combining an Intel product with any non-Intel product”. Quanta, which purchased the Intel microprocessors and chipsets, combined those products with non-Intel memory and buses in ways that practised the LG patents. While the Intel products sold to Quanta didn’t fully practise the LG patents on their own, since LG suggested no reasonable use for the Intel products other than incorporating them into computer systems— the combination of which practised the LG patents—the Intel items were seen as substantially embodying the LG patent.
As LG had authorised Intel to sell the products in the licensing agreement, the doctrine of exhaustion applied and LG lost its post-sale enforcement right to claim infringement against Quanta. T e Quanta holding applied exhaustion to any authorised fi rst sale of method as well as apparatus inventions, and restricted or even eliminated a patent owner’s control subsequent to an authorised sale.
“THE TESSERA DECISION STRONGLY IMPLIES THAT EXPLICIT LIMITATIONS TO THE GRANT TO RENDER UNAUTHORISED CERTAIN SALES ARE A VIABLE MEANS FOR PATENT OWNERS TO RETAIN CONTROL OF DOWNSTREAM USE.”
interpreted the LG-Intel licence agreement to have no limitations that would cause the sale of the components to Quanta to be unauthorised.
Specifi cally, the court stated that the agreement “broadly permits Intel to ‘make, use, or sell’ products free of LGE’s patent claims [emphasis added]”. T us, while the agreement attempted to control post- sale use, it did not clearly make the sale for such use unauthorised. As the doctrine of exhaustion applies only to authorised sales, if a particular sale is unauthorised, eg, not licensed, infringement by the purchaser would occur.
Express fi eld of use limitations on the scope of the licence grant are enforceable as upheld in General Talking Pictures Corp v Western Electric Co in 1938, in which a patent owner had granted a non-exclusive licence to sell a patented product singularly for home use, and thus a commercial use was not authorised. In Quanta, an express limitation in the licence agreement similar to that in the LG Master Agreement, but clearly excluding the sale of Intel microprocessors and chipsets to those who would combine the products with unsanctioned equipment from the licence grant, would have made the sale to Quanta unauthorised, thus avoiding exhaustion.
In Quanta, the court did not prohibit post-sale control in licensing agreements; such controls, however, must not be applied subsequent to an authorised sale of an article substantially embodying the patent. The Quanta court
T e Federal Circuit’s 2011 decision in Tessera, Inc v International Trade Commission (ITC) suggests the eff ectiveness of express limitations in the licence grant to allow post-sale control. Tessera licensed semiconductor technology to more than 60 semiconductor technology companies, with standardised licensing language: “Subject to the
36 World Intellectual Property Review March/April 2012
www.worldipreview.com
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