Patent owners beware — no downstream royalties for you.
In Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937 (U.S. June 9, 2008), the Court extended the doctrine of patent exhaustion to "method" patents. It also held that the doctrine barred collection of royalties from a downstream user of products in which the patent holder’s licensee embodied key aspects of the patents in suit.
LG Electronics licensed its portfolio of patents to Intel, which practiced the patents in manufacturing microprocessors and chipsets. The license agreement reserved LG’s right to sue purchasers of Intel products for combining them with other products — such as putting the microprocessors or chipsets into a computer. Quanta and other computer makers bought stuff from Intel and, with notice of the limits on Intel’s license from LG, plopped them into — you guessed it — computers. LG sued the downstream buyers. The Federal Circuit concluded that the patent exhaustion doctrine doesn’t apply to method patents, which describe a way to make a product, and that regardless the LG-Intel license prevented exhaustion via the "sale" of the right to practice the patents to Intel.
The unanimous Court reversed. Justice Thomas wrote that limiting exhaustion to apparatus patents would kill the doctrine, enabling clever inventors to get around it by including method claims along with apparatus ones. Nor did the fact that downstream buyers had to combine Intel products with other components before LG could sue for infringement matter. The Intel chips included essential characteristics of the LG patents and had no use other than in combination. Finally, the LG-Intel license couldn’t defeat exhaustion. No matter what the license said, the exhaustion doctrine overcomes efforts to impose conditions on the first sale of a product. The first sale exhausts patent rights; period.
