Quanta Computer, Inc. v. LG Electronics, Inc.

Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) is a decision of
the U.S. Supre 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 Computer 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. ,[4] 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 [5], or
violations of "some other law or policy." [6] More specifically, the Mallinckrodt
court had said that, “[u]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." [7] 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 [the patente's or licensor's] 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.”[8] 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 United States 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.,[19] 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,[20] 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[d] essential
features of [the] 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
replacement use, the legal test to be looked to was whether the product would
perform the patented method or embody the patented product, not whether the use
gave rise to infringement liability.

A further reason why sales of the microprocessor products exhausted LGE’s patent
rights was that “everything inventive about each patent is embodied in” the
licensed Intel products, which “embody the essential features of the [licensed]
patents because they carry out all the inventive processes when combined,
according to their design, with standard components.” Any point of novelty—that
is, respect in which the claimed invention departs from the prior art—is found in
the licensed microprocessor products rather than in the combination product of
which they are components.

This last aspect of the Quanta opinion is very similar to the doctrine of the Lincoln
Engineering case, a doctrine that the Federal Circuit had previously held to be no
longer authoritative. Under the Supreme Court's Lincoln Engineering doctrine, the
combination of a newly invented device with a known, conventional device with
which the new device cooperates in the conventional and predictable way in which
devices of those types have previously cooperated is unpatentable as an “exhausted
combination” or “old combination.” Thus, when the Quanta Court said that
“everything inventive about each patent is embodied in” the licensed Intel
products, which “embody the essential features of the [licensed] patents," the Court
was, in effect, saying that the combination of a novel Intel microprocessor in a
conventional manner with an old personal computer is an exhausted combination.
Accordingly, no weight would be put on the fact that separate patents had issued to
LGE on the inventive device and on the old combination that included it.

Licensing a limited field

LGE’s argument for non-exhaustion sought to invoke the doctrine of General
Talking Pictures Corp. v. Western Electric Co.[22] In that case, the patentee had
granted no license for “commercial” amplifiers. Therefore, when a manufacturer
licensed only in the “non-commercial” field of use sold an amplifier to an accused
infringer, who knowingly resold it in the commercial market, the manufacturer
“could not convey to [the accused infringer] what both knew it was not authorized
to sell.” By parity of reasoning, LGE said, it had licensed Intel only in the field of
manufacturing microprocessor products for combination with specified products
and not with other products. But the Court said that was not how LGE had drafted
its license to Intel:

LGE overlooks important aspects of the structure of the…transaction. Nothing in

the License Agreement restricts Intel’s right to sell its microprocessors…to
purchasers who intend to combine them with non-Intel parts. It broadly permits
Intel to make, use, or sell products free of the patent claims. To be sure, LGE did
require Intel to give notice to its customers, including Quanta, that LGE had not
licensed those customers to practice its patents. But neither party contends that
Intel breached the agreement in that respect. LGE points out that the License
Agreement specifically disclaimed any license to third parties to practice the
patents by combining licensed products with other components. But the question
whether third parties received implied licenses is irrelevant because Quanta asserts
its right to practice the patents based not on implied license but on exhaustion. And
exhaustion turns only on Intel’s own license to sell products practicing the…
patents.

The Court appears to be saying that LGE simply licensed Intel to make, use, and
sell microprocessor products. LGE expressly stated that no license was granted to
any third party for combining licensed products with other products; and LGE
made Intel tell its customers about the absence of a license. But LGE did not say to
Intel that LGE licensed Intel to make, use, and sell microprocessor products only in
the field of microprocessor products combined with other LGE-licensed products
(so-called Intel products). There was no explicit field-of-use limitation on Intel’s
manufacturing, using, and selling rights––no “magic words.” LGE came close––it
said it was not licensing third parties to combine licensed product with other
products, and it required Intel to notify customers of that––but LGE failed to go
right to the point and expressly deny Intel any license to make microprocessor
products that would be combined with other products. Furthermore, for some
inexplicable reason the parties, with fatal effect, red-flagged the fact that there still
was an exhaustion doctrine: “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.”

That this was a critical error (for LGE) is confirmed by the Court’s final statements
in its opinion:

The License Agreement authorized Intel to sell products that practiced the patents.
No conditions limited Intel’s authority to sell products substantially embodying the
patents. …Intel’s authorized sale to Quanta thus took its products outside the scope
of the patent monopoly, and as a result, LGE can no longer assert its patent rights
against Quanta.

Thus, the exhaustion doctrine governed what Quanta could lawfully do with what
it bought from Intel. The failure to give third parties a license to combine Intel
microprocessor product with other products had no legal significance, because the
exhaustion doctrine obviated any need for such a license. Having bought the
products from an authorized seller, Quanta didn't need any license.
No contract issue
Just before closing, the Court added a final note pointing out that the case did not raise, and the
Court did not rule on, whether LGE could have enforced a contractual restriction. In footnote 7,
the Court commented:

We note that the authorized nature of the sale to Quanta does not necessarily limit LGE’s other
contract rights. LGE’s complaint does not include a breach-of-contract claim, and we express no
opinion on whether contract damages might be available even though exhaustion operates to
eliminate patent damages.

By the same token, the Court said nothing as to specific performance or whether contract rights,
if any, could be enforced against Quanta.
Cases of biopiracy in India – Turmeric patent
controversy
The turmeric patent had been granted in March 1995 to two non-resident Indians associated with
the University of Mississippi Medical Centre, Jackson, USA for “"Use of Turmeric in Wound
Healing." Turmeric is scientifically Curcuma longa.
It was revoked on the grounds of lacking the novelty requirement.

Revocation of so many patents makes you wonder if the US Patent Office always had its head in
the clouds and always
needed a giant flash of lightning to make it come out of them.

Its no surprise that this patent came to be revoked – what’s surprising is that it was even
accepted. Let us list the many uses of turmeric shall we?
• When applied to an open wounds, functions a painless antiseptic – there you go, their patent
goes down the drain
• Used as kumkum in all Hindu temples and as a sign of matrimony
• We use it in so many foods – rarely is Benarasi or South Indian dish seen without it. Why?
Simply because it is a wonderful digestive.
• Many women across the country use it a natural epilator
• Treatment of diarrhoea, arthritis and many skin diseases
• Some of the newly discovered facts about it:
o As an astounding anti-cancer agent.
o COX-2 inhibitor drugs have been known to block an enzyme called cyclooxygenase-2 which
aggravates arthritis. Turmeric contains curcumin which inhibits this enzyme.

Why do such incidences keep happening? Section 102 of the US Patent Act does not provide a
general definition of 'prior art', but a very narrow rule-bound method to be used by low-level
patent examiners for determining which materials will defeat a patent application by violation of
the novelty and non-obviousness criteria. Prior foreign activity anticipates a US patent only when
the foreign activity is in a tangible, accessible form such as a published document or a patent.
However, prior foreign knowledge, use and invention are all excluded when the question of prior
art is considered in relation to a US patent application. What a glaring loophole?
US’s reply to India’s constant patent problems:
'India has not yet made available product patent protection for pharmaceuticals and agricultural
chemicals, and thus has chosen to take advantage of at least part of the exclusive marketing
rights. Thus, India has violated its obligations under Article 70, paragraphs 8 and 9, of the TRIPs
Agreement to (1) establish a mailbox system in its law, and ensure that no applicants are denied
eligibility for patent protection because of the delay in establishing the mailbox system, and (2)
establish a system for the grant of exclusive marketing rights.'

Isn’t it surprising how such a simple issue has become a matter of national pride?
There is a very valuable lesson to be learnt here: it’s the simplest thing in the world to find a
loophole in something if you really want to but the most difficult thing in the world to be able to
hold your head up when you’re discovered. There’s nothing as peaceful as a clear conscience is
there?