Supreme Court to Review Key Patent Ruling

By Robert Ambrogi Esq

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.



Robert Ambrogi Esq

We are proud to partner with an author of Bob’s caliber to provide exclusive articles for our legal clients and leading industry experts. Robert J. Ambrogi is a news media veteran and the only person ever to hold the top editorial positions at the two leading national U.S. legal newspapers, the National Law Journal and Lawyers Weekly USA. He is currently a Massachusetts lawyer who represents clients at the intersection of law, media and technology. He is also internationally known for his writing and blogging about the Internet and technology. Media and Technology Law Bob represents a range of businesses and individuals, concentrating in print and electronic media companies and the editorial, sales, marketing and technology professionals who work in them. He also counsels businesses and individuals in employment matters. Arbitration and Mediation An established professional in alternative dispute resolution, Bob has been an arbitrator since 1994, focusing on labor and employment and securities disputes. A mediator in a range of civil disputes, Bob completed the training required by Massachusetts law to protect confidentiality.

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