The U.S. Supreme Court handed a big victory to Quanta Computer on Monday when it held that the doctrine of patent exhaustion barred LG Electronics' claims against it.
In doing so, the Supreme Court reversed the U.S. Court of Appeals for the Federal Circuit's previous decision that patent exhaustion did not apply to method claims and extended that doctrine to licenses for products that "substantially embod[y] a patent." This case is likely to substantially change the playing field for patentees seeking to monetize their patents in a vertical industry value chain.
The doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates patent rights to that particular item. What that typically means is that if Company A has a patent covering some gizmo and it sells that gizmo to Company B, Company A cannot sue anyone else for the subsequent use or sale of that particular gizmo. So if I buy the gizmo from Company B, Company A can't sue me for using the gizmo because its patent rights in that gizmo were "exhausted" when it sold that gizmo to Company B.
Patent exhaustion also applies when the patentee licenses another company to make a product. Those are the facts that were at issue in the Quanta case. There, LG had licensed some of its patents related to memory management to Intel. But, according to its terms, the license did not extend to third parties that combined Intel's licensed products with third-party components. The practical effect of this licensing scheme was that Intel was off the hook, but LG could still go after downstream users of Intel products for patent infringement.
Quanta was one of those downsteam users. It purchased licensed microprocessors and chipsets from Intel and used those parts with non-Intel memory and buses. LG sued Quanta and asserted that the combination of the Intel products with non-Intel memory and buses infringed LG's patents. Quanta argued that those patents were exhausted as to the Intel products Quanta was using.
The primary argument against exhaustion was that the Intel products themselves did not practice LG's patents. The patents related to specific processes for managing memory that did not take place until the Intel chipsets were combined with the non-Intel memory and buses.
The Supreme Court rejected that argument holding first that method claims were not immune from the doctrine of patent exhaustion. According to the Supreme Court, a method can be "embodied" in a product that is designed to practice that method. Thus, the authorized sale of the product embodying the method can exhaust patent rights covering the method. The Supreme Court's full opinion is available here (PDF).
The Quanta case has big implications for patentees seeking to make money through vertical licensing schemes, that is, licensing the same patents to multiple parties at different levels in the supply chain. Indeed, the Quanta decision should substantially restrict that practice. Patentees will need to be more mindful about who they license to and the impact of each license on subsequent licensing activities.
On a side note, the Quanta decision continues the Supreme Court's recent trend of reversing the Federal Circuit in unanimous or near-unanimous decisions.