Many — myself included — thought the Supreme Court may have had its fill of patent law. But yesterday, the Supreme Court granted cert in Quanta Computer Inc. v. LG Electronics Inc., 06-937, to consider whether parties can contract around patent exhaustion. The patent exhaustion doctrine, also known as the first sale doctrine, holds that a royalty can only be charged once per product. Once one link in the supply chain has paid a royalty for a patented product, or a key component, the patent is exhausted and no other link in the chain must pay a royalty for the same patent. LG Electronics attempted to contract around patent exhaustion.
LG Electronics owned a group of patents claiming microprocessors used in personal computers. They licensed the patents to Intel, but expressly excluded from the license any Intel customer that combined a licensed Intel microprocessor with non-Intel components. As part of the license, Intel sent letters to its customers warning of this license exclusion. LG Electronics sued Intel’s post-license customers that were allegedly combining the licensed Intel chips with non-Intel products.
The district court held that Intel’s license exhausted LG Electronics’ downstream patent royalty rights. But the Federal Circuit reversed, holding that when parties expressly restrict a license a court should infer that the parties also negotiated a more limited royalty to reflect the limited rights given in the license. As a result, patent exhaustion should not apply to restricted licenses. Quanta argues that the Federal Circuit’s decision contradicts a long history of both Federal Circuit and Supreme Court precedent requiring that patent licenses cannot be restricted to one link in the supply chain.
This is another case that has major implications for the business of patent law. If the Supreme Court overturns the Federal Circuit it could dramatically change the model of many patent licensing programs.
For more about the Supreme Court’s decision to grant cert, check out: