Patent Law Updates | New Judicial Opinions

June 16, 2008

Supreme Court Reverses Federal Circuit’s Ruling, Finds in Favor of Quanta in LG’s Computer Technology Patent Suit

Quanta Computer, Inc., et al. v. LG Electronics, Inc.
No. 06-937, U.S. Supreme Court, 6/9/2008

Supreme Court Reverses Federal Circuit’s Ruling, Finds in Favor of Quanta in LG’s Computer Technology Patent Suit

Holding:

The U.S. Supreme Court reversed a judgment of the Court of Appeals for the Federal Circuit in an infringement suit involving respondent LG Electronics’ computer technology patents. Specifically, the Supreme Court held that first, method claims can be subject to patent exhaustion, and second, sales of products that do not fully practice the invention can still trigger exhaustion when the products include essential features of the patent and the “reasonable and intended use” of the product is to practice the patent. Here, LGE earlier licensed the patents to Intel with an authority to sell computer parts containing the patents. Intel then sold the products to petitioner Quanta, which would manufacture computers using these products in combination with non-Intel products. According to the Supreme Court, the authorized sale of an article that substantially embodies a patent exhausts the patent holder’s rights and prevents the patent holder from invoking patent law to control post-sale use of the article. 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.

Detailed Summary:

There were three patents at issue in this case, all of which referred to computer technology. The ’641 patent discloses a system for ensuring that the most current (computer) data are retrieved from main memory by monitoring data requests and updating the random access memory, also called the main memory, from the cache memory when stale data are requested.  Opinion, p. 2, citing LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F. 3d 1364, 1377 (CA Fed. 2006).

The ’379 patent relates to the coordination of requests to read from, and write to, main memory. Opinion, p. 2 citing id., at 1378.The ’379 patent discloses an efficient method of organizing read and write requests while maintaining accuracy by allowing the computer to execute only read requests until it needs data for which there is an outstanding write request. Opinion, p. 3, citing LG Electronics, Inc. v. Asustek Computer, Inc., No. C 01–02187 CW et al., Order Construing Disputed Terms and Phrases, p. 42 (ND Cal., Aug. 20, 2002).

The ’733 patent addresses the problem of managing the data traffic on a bus connecting two computer components, so that no one device monopolizes the bus. It allows multiple devices to share the bus, giving heavy users greater access. This patent describes methods that establish a rotating priority system under which each device alternately has priority access to the bus for a preset number of cycles and heavier users can maintain priority for more cycles without “hogging” the device indefinitely. Id., at 37–38.

Respondent LG Electronics, Inc. (“LGE”), which purchased an array of patents that included the ones at issue, licensed the patents to Intel Corporation (Intel), in an agreement (License Agreement).  This License Agreement authorized Intel to manufacture and sell microprocessors and chipsets using the LGE Patents (Intel Products) and but did not purport to alter patent exhaustion rules. A separate agreement (Master Agreement) required Intel to give its customers written notice that the license did not extend to a product made by combining an Intel Product with a non-Intel product, and provided that a breach of the agreement would not affect the License Agreement.

Petitioner computer manufacturer Quanta Computer, Inc. (“Quanta”) purchased microprocessors and chipsets from Intel. Quanta then manufactured computers using Intel parts in combination with non-Intel parts, but did not modify the Intel components. LGE filed suit, asserting that this combination infringed the LGE Patents.

The district court granted summary judgment to Quanta, holding that, for purposes of the patent exhaustion doctrine, the license LGE granted to Intel resulted in forfeiture of any potential infringement actions against legitimate purchasers of the Intel Products. Opinion, p. 5, citing LG Electronics, Inc. v. Asustek Computer, Inc., 65 USPQ 2d 1589, 1593, 1600 (ND Cal.2002). The district court found that, although the Intel Products did not fully practice any of the patents at issue, they had no reasonable noninfringing use and therefore their authorized sale exhausted patent rights in the completed computers under United States v. Univis Lens Co., 316 U. S. 241 (1942). Id., citing Asustek, supra, at 1598–1600.

In a subsequent order limiting its summary judgment ruling, the district court held that patent exhaustion applies only to apparatus or composition-of-matter claims that describe a physical object, and does not apply to process, or method, claims that describe operations to make or use a product. Id., citing LG Electronics, Inc. v. Asustek Computer, Inc., 248 F. Supp. 2d 912, 918 (ND Cal. 2003).

On appeal, the Court of Appeals for the Federal Circuit affirmed in part and reversed in part. It agreed that the doctrine of patent exhaustion does not apply to method claims. In the alternative, it concluded that exhaustion did not apply because LGE did not license Intel to sell the Intel Products to Quanta for use in combination with non-Intel products. Id., citing 453 F. 3d, at 1370. Hence, this petition for certiorari.

In this petition, the Supreme Court decided the issue of whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods.

In this petition, LGE argued that the exhaustion doctrine is inapplicable here because it does not apply to method claims, which are contained in each of the LGE Patents. LGE asserted that, because method patents are linked not to a tangible article but to a process, they can never be exhausted through a sale.  But the Supreme Court rejected this argument, and instead sustained Quanta’s argument there was no reason to preclude exhaustion of method claims.  Opinion, p. 9. It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be “embodied” in a product, the sale of which exhausts patent rights. Id. Further Supreme Court precedents did not differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials.

To the contrary, the Supreme Court has repeatedly held in previous cases that method patents were exhausted by the sale of an item that embodied the method.  Id., citing the example of Ethyl Gasoline Corp. v. United States, 309 U. S. 436, 446, 457 (1940). Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Patentees seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus. Id., p. 10. On this basis, the Supreme Court held that method claims, as a category, are exhaustible.

The Supreme Court next considered the extent to which a product must embody a patent in order to trigger exhaustion. Quanta argued that, although sales of an incomplete article do not necessarily exhaust the patent in that article, the sale of the microprocessors and chipsets exhausted LGE’s patents in the same way the sale of the lens blanks exhausted the patents in United States v. Univis Lens Co., 316 U. S. 241. Opinion, p. 11. The Supreme Court sustained this argument, stating that Univis should govern this case. As shown 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.” Opinion, p. 12, citing Univis, 316 U. S., at 249–251. Here, each of those attributes was shared by the microprocessors and chipsets Intel sold to Quanta under the License Agreement.

Like the Univis lens blanks, the Intel Products constituted a material part of the patented invention and all but completely practice the patent. Here, as in Univis, the incomplete article substantially embodied the patent because the only step necessary to practice the patent was the application of common processes or the addition of standard parts. Everything inventive about each patent was embodied in the Intel Products. Opinion, p. 14. The nature of the final steps, rather than whether it consists of adding or deleting material, is the relevant characteristic. In each case, the final step to practice the patent is common and non-inventive: grinding a lens to the customer’s prescription, or connecting a microprocessor or chipset to buses or memory.  In this case, the Intel Products embody the essential features of the LGE Patents because they carry out all the inventive processes when combined, according to their design, with standard components. Intel all but practiced the patent itself by designing its products to practice the patents, lacking only the addition of standard parts. Id., p. 15.

With regard to LGE’s argument that exhaustion does not apply across patents, the Supreme Court agreed on the general princi­ple: The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embody­ing patent B, its relationship to patent A does not prevent exhaustion of patent B.  Here, while each Intel microprocessor and chipset practices thousands of individual patents, including some LGE patents not at issue in this case, the exhaustion analysis is not altered by the fact that more than one patent is practiced by the same product. The relevant consideration is whether the Intel Products that partially practice a patent—by, for example, embodying its essential features—exhaust that patent.

The Supreme Court similarly rejected LGE’s reliance on Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U. S. 336, 344–345 (1961) for being misplaced.  The Supreme Court explained that Aro dealt only with the question whether replacement of one part of a patented combination infringes the patent.  In the instant case, the inventive part of the patent is not the fact that memory and buses are combined with a microprocessor or chipset; rather, it is included in the design of theIntel Products themselves and the way these products access the memory or bus. Opinion, p. 16.

Having concluded that the Intel Products embodied the patents, the Supreme Court then considered the issue whether their sale to Quanta exhausted LGE’s patent rights. Exhaustion is triggered only by a sale authorized by the patent holder. Opinion, p. 16, citing Univis, 316 U. S., at 249. Citing General Talking Pictures Corp. v. Western Elec. Co., 304 U. S. 175 (1938), and General Talking Pictures Corp. v. Western Elec. Co., 305 U. S. 124 (1938), LGE argued that there was no authorized sale here because the License Agreement does not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE Patents.

The Supreme Court however rejected this argument, stating that nothing in the License Agreement restricted Intel’s right to sell its microprocessors and chip-sets to purchasers who intended to combine them with non-Intel parts. It broadly permitted Intel to “‘make, use, [or] sell’” products free of LGE’s patent claims. Opinion, p. 18, citing Brief for Peti­tioners 8 (quoting App. 154).

LGE further argued out that the License Agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other compo­nents. Id., citing Brief for Petitioners 8. But the Supreme Court rejected likewise this contention, stating that “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 LGE Patents.” Id.

The License Agreement authorized Intel to sell products that practiced the LGE Patents. No conditions limited Intel’s authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.

On the basis of the foregoing, the Supreme Court reversed the Federal Circuit‘s judgment.

View a PDF of the judicial opinion

Companies Mentioned

LG Electronics, Inc.

Quanta Computer, Inc.

Also See:

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