Communications - November 2008

Vviewpoints
DOI: 10.1145/1400214.1400224
Legally speaking
Quantafying the value
of Patent Exhaustion

Should patents confer power to restrict reuses and redistributions of products embodying the whole or essential parts of inventions?

OWnErs oF PAtEnts and copyrights have the right to control the manufacture and sale of products embodying their creations, and that is as it should be. But do they have the right to control all downstream uses, reuses, and transactions as to products embodying their intellectual property (IP)?

Common sense tells us that when we buy a patented machine or a copyrighted book, we have the right to use it for whatever purposes we choose and to resell it. The law backs up this expectation by providing that the first authorized sale of products in the marketplace “exhausts” IP rights in those products.

Quantifying the full value to society of IP exhaustion rules is not easy, but exhaustion clearly makes commerce flow more freely, reduces transaction costs, facilitates follow-on innovation, and promotes competition in primary and secondary markets.

In June 2008 the U.S. Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc. unanimously affirmed the continuing vitality of the exhaustion doctrine, reversing as erroneous a decision by the Court of Appeals for the Federal Circuit (CAFC) that had eroded this rule’s application.

Quanta held ( 1) that the exhaustion rule applies to method as well as apparatus claims and ( 2) because LGE’s license with Intel authorized the latter to sell components to customers such as Quanta, exhaustion shielded Quan-

ta from patent liability even though LGE’s license with Intel sought to limit uses that Intel’s customers could make of products purchased from Intel.

Quanta was an important victory for the IT industry, as it thwarts efforts to claim royalties from all downstream users of patented inventions. In this column I will explain LGE’s theory about the exhaustion doctrine and why the Supreme Court rejected LGE’s analysis. I will also consider some implications of Quanta for contractual restrictions on uses, reuses, and redistributions of products embodying patented inventions.

the LGE v. Quanta Dispute

Intel and LGE entered into cross-licensing agreements as to their patent portfolios. The LGE license allowed Intel to manufacture and sell microprocessors and chipsets that, when combined with other components, implemented some of LGE’s inventions. LGE’s license allowed Intel to pass on the benefits of the LGE license to customers who purchased Intel-made components, but not to those who mixed Intel and non-Intel components in their systems. LGE’s license obliged Intel to notify its customers about this license limitation. After Quanta purchased Intel products and combined them with non-Intel components, LGE sued Quanta for patent infringement.

The LGE patents in Quanta involved: a method for ensuring that only the most current data would be retrieved

from main memory; a method for coordinating read and write requests within computer systems; and a method for managing data traffic on a bus connecting computer components so that no one device could monopolize the bus.

The microprocessors and chipsets that Quanta bought from Intel did not fully embody or practice LGE’s patented inventions for the obvious reason that the methods could not be practiced without combining the Intel products with other components (for example, main memory) capable of carrying out the processes.

LGE claimed that because the Intel products did not and could not embody the patented inventions, the patent exhaustion doctrine did not apply. In its view, patent rights are only exhausted when the patentee has authorized the making and selling of a product that fully embodies the invention.

The CAFC agreed with LGE that the Intel products were only components designed for use in the patented processes, not implementations of those processes. More generally, the CAFC opined that method claims, by their very nature, were not subject to the exhaustion rule. The CAFC thus gave LGE a green light to sue all of Intel’s microprocessor customers for patent infringement unless they purchased Intel-only components for their systems.