Guest Blog: Quanta Computers, Inc. v. LG Electronics, Inc.: The Supreme Court Sets the Law on Patent Exhaustion Back On Track

By Charles R. Macedo, Joseph M. Casino,  and Marion P. Metelski Charles R. Macedo and Joseph M. Casino are Partners and Marion P. Metelski is Senior Counsel at Amster, Rothstein & Ebenstein LLP. Their practices specialize in intellectual property issues, including litigating patent, trademark, and other intellectual property disputes; prosecuting patents before the U.S. Patent and Trademark Office and other patent offices throughout the world; registering trademarks and service marks with U.S. Patent and Trademark Office, and other trademark offices throughout the world; and drafting and negotiating intellectual property agreements.  They may be reached at cmacedo@arelaw.com, jcasino@arelaw.com, and mmetelski@arelaw.com.  This article is not intended to express the views of the firm or its clients.

 

 

For the first time in over fifty years, and certainly since the U.S. Court of Appeals for the Federal Circuit was formed, the Supreme Court has directly addressed the law of patent exhaustion this week in Quanta Computers, Inc. v. LG Electronics, Inc., Slip Op. (Sup. Ct. Jun. 9, 2008).  

 

In Quanta, a unanimous Supreme Court recognized that “[f]or over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item.”  (Slip op. at 1).  The Court disagreed with the Federal Circuit on both issues raised on certiorari and found, “[b]ecause the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausts the patents.”  (Slip op. at 1).

 

In particular, the Supreme Court has confirmed that “[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.”  (Slip op. at 5).  The Supreme Court has also confirmed that “the exhaustion doctrine applies to method patents” (Slip op. at 1, 9-11) and when a “license authorizes the sale of components that substantially embody the patents in suit, the sale exhaust[s] the patents.”  (Slip op. at 1, 11-16).  This week’s Supreme Court decision promises to provide customers of a patent licensee with greater certainty as to the rights they receive incident to their purchases of patented items.

 

Unfortunately, the Supreme Court has not addressed all of the issues concerning the patent exhaustion doctrine:

• The Supreme Court did not address the Federal Circuit’s precedent that the sale of patented components outside the U.S. by a patentee or its licensee does not exhaust a U.S. patent.  See Fuji Photo Film Co., Ltd. v. Jazz Photo Corp.,394 F.3d 1368 (Fed. Cir. 2005); Jazz Photo Corp. v. U.S. ITC, 264 F.3d 1094 (Fed. Cir. 2001). 
• In Footnote 7 of the Quanta Opinion, the Supreme Court raised a new issue for consideration, viz., whether a patentee has any available remedies under contract law if patent exhaustion precludes damages under patent law.  This issue may lead to a host of new theories of contract law.  Whether the patent exhaustion doctrine is an issue of patent law or contract law was heavily discussed during oral argument. 
• The Court’s discussion as to what constitutes a “reasonable use” of a patented product and what are the “essential features” of a patent claim is helpful.  However, it is likely that these standards will need to be further fleshed out by the lower courts in the future. 
• Finally, the Court's analysis in Quanta has left open the possibility that, under a different contractual scheme, such as where a conditional license is granted and the condition is not fulfilled, the exhaustion doctrine may not come into play.

 

This Guest Blog has briefly addressed the Supreme Court’s Quanta decision.  For a more complete discussion of the Court’s Opinion, please see our IPLAW360 Guest Column, “Quanta Computers, Inc. v. LG Electronics, Inc.: The Supreme Court Sets the Law on Patent Exhaustion Back On Track,” which is available at the IPLAW360 website or will be available shortly at our firm’s website (www.arelaw.com/articles) along with our prior writings on this case.