by Robert Ambrogi - Editor
BullsEye Newsletter: October 2007
It is déjà vu all over again, as the
Supreme Court once again has agreed to review a controversial patent
ruling of the Federal Circuit Court of Appeals. The issue this time:
whether a patent owner's rights were exhausted by a license agreement
and subsequent sale of product pursuant to the license.
With the Supreme Court's 2007 decisions in KSR v. Teleflex and MedImmune
v. Genentech and its 2006 decision in eBay v. MercExchange, it
has reshaped the landscape of patent law by rejecting the views of the Federal
Circuit – the very court that was established to help bring uniformity
to patent law. Now the nation's highest court has an opportunity to do that again.
On September 25th, the court granted certiorari in Quanta Computer v. LG
Electronics, which was decided by the Federal Circuit as LG Electronics
v. Bizcom Electronics, 453 F.3d 1364 (Fed. Cir. 2006).
In seeking Supreme Court review, Quanta and other petitioners challenged the
Federal Circuit's application of the exhaustion doctrine –
also known as the first-sale doctrine – arguing that it is
at odds with nearly a century of Supreme Court precedent. LG countered
that the petitioners were seeking to make a mountain out of a molehill
in that the Federal Circuit's decision turned on the case's unique
facts.
The question the court will decide, as stated by the petition for review, is
this: "Whether the Federal Circuit erred by holding, in conflict with decisions
of this Court and other courts of appeals, that respondent’s patent rights
were not exhausted by its license agreement with Intel Corporation, and Intel’s
subsequent sale of product under the license to petitioners."
Circuit Finds Exhaustion
The case involves a series of patents that LG licensed
to Intel Corp. and Intel's subsequent sales of products to third
parties pursuant to that license. LG's patents cover various systems
and methods for enhancing the operation of personal computers.
Under its license with LG, Intel was authorized to sell microprocessors
and chipsets to third parties. However, it was required to notify
purchasers that they were not authorized to combine the Intel products
with non-Intel components. This was because LG's patents covered
not the products directly but the processes that resulted from their
combination with other components.
LG sued a number of companies that purchased the Intel microprocessors
and chipsets for infringement of its patents. The trial court granted
summary judgment in favor of the purchasers, ruling that the licensing
arrangement exhausted LG's patent rights.
On appeal, the Federal Circuit reversed the trial court's finding
of exhaustion. Exhaustion, the court reasoned, applies only to an
unconditional sale, one that exhausts the patentee's right to control
the purchaser's subsequent use of the device. It does not apply to
an expressly conditional license or sale, the court said.
Given that LG's license to Intel carried the condition that
Intel had to notify customers of its limited scope, the license was
clearly conditional, the court held.
"The LGE-Intel license expressly disclaims granting a license allowing
computer system manufacturers to combine Intel's licensed parts with other
non-Intel components," the court explained.
"Moreover, this conditional agreement required Intel to notify
its customers of the limited scope of the license, which it did.
Although Intel was free to sell its microprocessors and chipsets,
those sales were conditional, and Intel’s customers were expressly
prohibited from infringing LGE's combination patents."
Contrary To Precedent?
In asking the Supreme Court to review the Federal Circuit's
decision, Quanta and the other petitioners argued that the Federal
Circuit's application of the exhaustion doctrine was contrary to
clearly established Supreme Court precedent.
"Under the patent exhaustion doctrine that this Court has applied for
more than 90 years," they wrote in their petition for review,
"an authorized first sale of a patented article exhausts the
patent owner's rights in that article, and nullifies any 'conditions'
that the patent owner has tried to attach to its use or resale."
The Federal Circuit's decision was in direct conflict with
Supreme Court precedent, the petitioners asserted, and was "an
unprecedented and extremely dangerous expansion of the patent monopoly."
LG, in opposing the request for certiorari, argued that the
petitioners were exaggerating the significance of the case.
"Petitioners strain to make a broad doctrinal issue out of a narrow case-specific
ruling," LG asserted. "The Federal Circuit … disagreed with
the trial court's case-specific assessment of the terms of dealing in this
case, and returned the case to the district court for trial. … That interlocutory
ruling presents no issue warranting review."
In deciding to hear the case, the Supreme Court apparently
disagreed with LG and saw grounds for review. In so doing, it has
set the stage for perhaps another disruption of Federal Circuit patent
law.
The court ordered briefs to be filed on an expedited schedule.
As of this writing, it has not scheduled a date for oral arguments.
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