Quanta Computer, Inc. v. LG Elecs., Inc., No. 06-937 (Jan. 16, 2008).

The Supreme Court heard argument yesterday regarding the bounds of patent exhaustion, as explained in my previous posts on the case — click here to read them.  The transcript was posted late yesterday and is an interesting read, although not one of the Supreme Court’s most entertaining arguments.  I was thrilled to see Justice Breyer use a cycling hypothetical (regular readers will remember that I am a huge fan of cycling). Justice Breyer, apparently not 100% at ease with chipsets, used the hypothetical of selling patented bicycle pedals either as part of a bicycle or to be used with a bicycle. Here are Justice Breyer’s hypos and a few of the responses from G. Carter Phillips, arguing on behalf of LG:

JUSTICE BREYER: But you couldn’t put in –you are authorized to sell the bicycle pedals that I have patented only if you impose a restriction that will tell the bicycle user that he must send me a check for $15 in addition to whatever he pays you. That sounds unlawful under contract law.

* * *

JUSTICE BREYER: Well, there’s a reason, I guess, that would be so. Imagine that I want to buy some bicycle pedals, so I go to the bicycle shop. These are fabulous pedals. The inventor has licensed somebody to make them, and he sold them to the shop, make and sell them. He sold them to the shop. I go buy the pedals. I put it in my bicycle. I start pedaling down the road.

Now, we don’t want 19 patent inspectors chasing me or all of the other companies and there are many doctrines in the law designed to stop that. One is the equitable servitudes on chattel. Another is the exhaustion of a patent. And now you talk about implied license.

I would say, why does it make that much difference? What we’re talking about here is whether after those pedals are sold to me under an agreement that the patent — you know, you have a right to sell them to me — why can’t I look at this as saying that patent is exhausted, the patent on the pedals and the patent for those bicycles insofar as that patent for the bicycles says I have a patent on inserting the pedal into a bicycle.

Call it exhaustion, call it implied license. Who cares?

MR. PHILLIPS: I don’t have any problem with your hypothetical because it’s not this case. Your hypothetical deals with the situation of what would have happened if you had bought the chip. Would we be in a position to say, even though you bought the chip, we nevertheless want to retain some right to come out — to come after you claiming we still have a patent in that chip? And the answer is no. We exhausted — that was exhausted by the sale of the chip.

The question is if you buy a pedal, can you then take that pedal that was designed for a bicycle, put it into a Stair Master —

* * *

JUSTICE BREYER: All right, now if it should be protected — and here I’m not sure I’m understanding it, so correct me. Let’s suppose we have this contract. So everything is identical except we’ve got my bicycle example in here because I’m more comfortable with that. I know how to ride a bicycle and I don’t know how to work the chips. So what I do —


JUSTICE BREYER: But you see the analogy I’m making.


JUSTICE BREYER: So what I do I go to the shop and I buy this, this mechanism with the pedals on it, and then I insert it in my bicycle. Now, actually I need help in doing that, but I do it. Okay. Now I start pedaling off, and now what is it for all these things here that would stop that original inventor from catching me and hauling me into court, and say, what you’ve done, Breyer, is you’ve put my — my mechanism here in this bicycle and I happen to have a patent on the system. And now you start talking to me about, well, the patent was exhausted on the bicycle —


JUSTICE BREYER: — pedals, but not on the system.


JUSTICE BREYER: And you agree that shouldn’t happen.


JUSTICE BREYER: But if I follow you and I write an opinion just for you, what stops it from happening?

MR. PHILLIPS: Well, in that — in that particular context, in the absence of relatively clear notice, I think it would be quite reasonable to potentially find that there was an implied license to use it under those circumstances.

* * *

JUSTICE BREYER: Then explain — now this you might know because it’s just following up on what Justice Souter said better than I did. I think from these briefs I’ve gotten the impression that at least some people think that where you invent a component, say, like the bicycle pedals, and it really has only one use, which is to go into a bicycle, it’s the easiest thing in the world to get a patent not just on that component but to also get a patent on the system, which is called handlebars, body, and pedals.

And since that’s just a drafting question, all that we would do by finding in your favor is to destroy the exhaustion doctrine, because all that would happen, if it hasn’t happened already, is these brilliant patent lawyers, and they don’t even — they can be great patent lawyers, not just fine lawyers, and just draft it the way I said and that’s the end of the exhaustion doctrine. And that’s why it is preferable to say it is exhausted. What is exhausted? One, the patent on this component and, two, the patent on any system involving this component where that system is the only reasonable use of the component, rather than using the terminology "implied license."

Now, I think that’s an argument that’s being made in some of these briefs, and if so I’d like to you reply.

MR. PHILLIPS: Well, I think that clearly understates the role of the PTO in granting a separate patent. I mean, this is not — these are not things you pick up at the corner drugstore. You have to justify them. And if you look at Section 282, "a patent shall be presumed valid," each claim shall be presumed valid independently of the validity of other claims. And there’s an independence that’s embedded in this entire scheme. If it’s true that the PTO has in fact granted patent rights on something that’s fundamentally not different from the other — from some other patent, the solution to that is a validity challenge. And candidly, I think that’s exactly what all of those arguments are


MR. PHILLIPS: — is patent validity challenges.