Quanta Computer, Inc. v. LG Electronics, Inc. , 553 U.S. ___ (2008) is a decision of the U.S. Supreme Court in which the Court reaffirmed the validity of the patent exhaustion doctrine, and in doing so made uncertain the continuing precedential value of a line of decisions in the Federal Circuit that had sought to limit Supreme Court exhaustion doctrine decisions to their facts and to require a so-called “rule of reason” analysis of all post-sale restrictions other than tie-ins and price fixes. In the course of restating the patent exhaustion doctrine, the Court held that the exhaustion doctrine is triggered by, among other things, an authorized sale of a component when the only reasonable and intended use of the component is to practice the patent and the component substantially embodies the patented invention by embodying its essential features. The Court also overturned, in passing, the part of decision below that held that the exhaustion doctrine was limited to product claims and did not apply to method claims.
Factual background
LG Electronics (LGE) owned several patents on methods and systems for processing information. It entered into two contracts with Intel. In the License Agreement, LGE authorized Intel to make and sell microprocessor products using the patented inventions. Moreover, the License Agreement expressly stated that no license was granted to any third party for combining licensed products with other products (for example, for combining Intel microprocessor products with other parts of a computer). The License Agreement also provided, however, “Notwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”
In the Master Agreement, LGE required Intel to give its customers notice that the patent license does not extend to any product made by combining a licensed Intel microprocessor product with any other product (for example, a computer containing the Intel microprocessor products). The Master Agreement also provided that its breach would have no effect on the License Agreement and would not be grounds for its termination. Apparently, LGE was willing to allow Intel’s customers to combine the microprocessor products with products not licensed by LGE, but only upon payment of a further royalty to LGE for the right to do so. This point is not discussed in the Court’s opinion, which recites the facts only in very limited terms because the record was under seal to protect trade secrets.
Quanta purchased licensed Intel microprocessor products and proceeded to manufacture computers containing them. In doing so, Quanta followed Intel’s specifications, which in turn led to practice of the patented methods and making the patented systems that LGE licensed to Intel––since that was the way Intel had designed its microprocessor products. (The trial court found that the Intel microprocessor products were without any reasonable noninfringing use.) LGE then sued Quanta for patent infringement.
Quanta prevailed in the district court under the exhaustion doctrine, but on appeal the Federal Circuit held that the exhaustion doctrine did not apply because of the statement in the Master Agreement that combination products were not licensed, given the Federal Circuit's 1992 ruling in Mallinckrodt, Inc. v. Medipart, Inc. that a seller of patented goods could by notice impose a post-sale restraint on its customer's use of the goods. Additionally, the Federal Circuit held that the exhaustion doctrine did not apply, in any event, to method patents.
Mallinckrodt background
In Mallinckrodt, Inc. v. Medipart, Inc. , the Federal Circuit had held that patent owners could condition the sale of patented goods with a restrictive notice and thereby restrict the disposition of the goods by the purchasers, with the exception of antitrust law violations, such as price-fixing and tie-in restrictions , or violations of "some other law or policy." More specifically, the Mallinckrodt court had said that, “nless the condition violates some other law or policy (in the patent field, notably the misuse or antitrust law),” patent owners, licensees and downstream purchasers "retain the freedom to contract concerning conditions of sale." The Federal Circuit went on to say that "The appropriate criterion” in determining whether "a restriction or condition... placed upon the sale of a patented article" is valid "is whether restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.” According to the court, the tests for restrictions and misuse were alike, outside the tie-in and price fixing area: “To sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market.”
But this Federal Circuit test is contrary to many decisions of both the Supreme Court and other courts of appeals. For example, in Zenith Radio Corp. v. Hazeltine Research, Inc. , the Supreme Court addressed the legality of licenses under which royalties were paid on total sales of all products, irrespective of whether the licensor’s patents covered all products. The Court held that such licensing was permissible when the licensor and licensee adopted it for mutual convenience to simplify administration of the license, but it was impermissible for the licensor to insist upon it over the licensee’s opposition. Such conduct was misuse, the Court held, but not an antitrust violation unless the other elements of an antitrust violation were also shown, such as market power. Earlier, in Brulotte v. Thys Co. , the Supreme Court held that it was patent misuse if, without more, a patentee charged royalties that extended beyond the statutory term of the patent. In National Lockwasher Co. v. George K. Garrett Co. , the United States Court of Appeals for the Third Circuit held that a patentee misused its patent by requiring licensees to agree not to deal in the technology of the patentee’s competitors. Thus, in these cases, among many others, the Supreme Court and other federal courts had found misuse in cases not involving price fixing or tie-ins, and had not required any rule-of-reason or relevant-market analysis.
Other Federal Circuit decisions followed the Mallinckrodt approach, which was, at the very least, divergent from Supreme Court decisions. Accordingly, when certiorari was granted in Quanta , it was widely surmised that the Supreme Court would overturn Mallinckrodt , which many (including the U.S. Solicitor General, viewed as inconsistent with Supreme Court precedent.
Supreme Court opinion
The Supreme Court unanimously reversed, in an opinion by Justice Thomas.
Method claims
First, the distinction between method and product claims is insupportable. In United States v. Univis Lens Co. , the most recent decision of the Court on exhaustion, some of the patents held exhausted were method patents. Earlier, in Ethyl Gasoline Corp. v. United States , some patents covered a method of combusting gasoline in an automobile engine––and the exhaustion doctrine was held applicable. Furthermore, because it is easy to write patent claims for the same invention either in method format or apparatus format, the exhaustion doctrine could easily be evaded if reliance on method claims was sufficient to avoid exhaustion: By “including a method claim for the machine’s patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion.”
Exhaustion and related patents
The Court then turned to the extent, if any, to which exhaustion of the patent rights on the microprocessor products exhausted patent rights relating to the combination products on which LGE had patents. In the Univis case the sale that exhausted patent rights was a sale of an unpatented semifinished lens blank, which subsequent processing turned into a patented finished lens. The Intel microprocessor products were finished commercial articles of commerce, but in this case the trial court had found as a fact that the microprocessor products had no noninfringing use, just as in the Univis case the semifinished lens blanks had no use but to be finished into the patented finished lens blanks. Therefore, the Court found Univis dispositive. In the Quanta Court’s language, 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 essential features of patented invention.’”
LGE did not challenge the claim that the intended and reasonable use of the microprocessor products was to incorporate them into computers, but it claimed that some noninfringing uses existed: they could be sold overseas, as repair parts, or by disabling the features that made them patented. The Court dismissed these arguments. As for disablement, the Court asserted that the disabled device aspects (“features”) rather than the device that remained must have a noninfringing use, so that disabling them would cause them to have “no real use.” As for foreign or r
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