Patent Exhaustion

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Tomorrow, the Supreme Court hears arguments in Quanta Computer Inc. v. LG Electronics Inc., 06-937 — click here for a collection of the many briefs filed in the case at Patently-O. The Court will be deciding 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. I will keep you posted both on what occurs during the argument and the Court’s ultimate decision.
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Continue Reading Supreme Court Hears Patent Exhaustion Case Tomorrow

ExcelStor Tech., Inc. v. Papst Licensing GMBH & Co. KG, No. 07 C 2467, 2007 WL 3145013 (N.D. Ill. Oct. 24, 2007) (Der-Yeghiayan, J.).
Judge Der-Yeghiayan granted defendant Papst Licensing’s (“Papst”) Fed. R. Civ. P. 12(b)(1) motion to dismiss for lack of subject matter jurisdiction. Plaintiffs, various related ExcelStor Technology entities (collectively “ExcelStor”) licensed Papst’s patent portfolio (the “Agreement”) related to hard disk drives (“HDD”). ExcelStor alleged that when the Agreement was signed, Papst had already given third party Hitachi a license covering the same HDDs. Furthermore, ExcelStor alleged that Papst concealed the Hitachi license from ExcelStor.
Based upon the alleged double royalties, ExcelStor filed this action seeking declaratory judgments that both Papst and the Agreement violated the patent exhaustion doctrine* by extracting two licensing fees for the same product based upon the same patent portfolio. But the Court held that patent exhaustion is a defense to patent infringement, not a cause of action. Because patent exhaustion does not entitle ExcelStor to relief, it does not create federal question jurisdiction. Similarly, ExcelStor’s state law claims for fraud and breach of contract claim do not create federal question jurisdiction because they relate to patent exhaustion – they are questions of state law for which the Court lacked jurisdiction. The Court also noted that it did not consider whether diversity jurisdiction existed because neither party raised it.
* For more on patent exhaustion, specifically the Supreme Court’s patent exhaustion case this term, click here.
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Continue Reading Patent Exhaustion Alone Does Not Make Federal Question Jurisdiction

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:
Patently-O
271 Patent Blog
Patent Troll Tracker
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Continue Reading Supreme Court to Tackle Patent Exhaustion