• Supreme Court's Quanta Decision Answers Some Questions about Patent Licenses, Raises Others
  • June 30, 2008 | Authors: Douglas "Doug" D. Salyers; Julie A. Tennyson; Jeffrey "Jeff" C. Morgan
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • The Supreme Court’s June 9, 2008 decision in Quanta Computer, Inc. v. LG Electronics, Inc. has broad implications for patent licensors and licensees and the companies who buy products from them.

    In Quanta, the Supreme Court reversed the Court of Appeals for the Federal Circuit and invoked the centuries-old doctrine of “patent exhaustion.” Quanta is the most recent Supreme Court decision to address patent licensing issues. In 2007, the Supreme Court held in MedImmune, Inc. v. Genentech, Inc. that a patent licensee was not first required to breach its license agreement before it could challenge the infringement or validity of the licensed patent. The Supreme Court’s decision in Quanta likewise alters the balance of power between patent licensors and licensees.

    In Quanta, the Court held that the first authorized sale of a component that embodies “essential features” of a patented invention, and whose “only reasonable and intended use” is “to practice the patent,” “exhausts” the patent owner’s right to sue downstream makers, users, and sellers of the patented invention. Additionally, the Court clarified that the doctrine of patent exhaustion (also known as the “first sale” doctrine) also applies to method patents. The case is notable because the patent owner (LGE) was careful in its license agreement to prohibit the licensee / first authorized seller (Intel) from combining the component (an Intel chip) with non-Intel parts, and from sublicensing to downstream third-parties.

    The Court left open the possibility that a patent owner can restrict and sue downstream makers, users, and sellers if the component sold does not “essentially” embody a licensed patent. Also, the Court suggested that the outcome might have been different if the patent owner (LGE) had restricted its licensee’s (Intel) right to sell to others for only certain uses. Instead, the Court based its holding in part on the fact that the LGE / Intel license agreement gave Intel sufficiently unrestricted rights to sell to others. The Court also left open the possibility that a patent owner could sue its licensee for breach of contract damages “even though exhaustion operates to eliminate patent damages.”

    How does this decision affect your business?

    The Quanta decision has important and complicated implications for patent licensors, licensees, and the companies that buy products from them. After Quanta, licensors need to evaluate whether any of their licenses have carve-out provisions that purport to limit downstream purchasers’ rights to make, use, or sell the licensed product or a licensed patent. If they do, licensors should determine whether what their licensees sell “essentially” embodies the patented invention, and whether its “only reasonable and intended use” is to practice the patented invention. Further, before deciding to sue licensees or downstream purchasers for infringement, licensors will need to evaluate whether the licensed product at issue practices more than one patent. Under Quanta, a license under one patent may cut off (or “exhaust”) the rights to sue under another patent.

    For their part, licensees need to be aware that although the doctrine of patent exhaustion may protect them and their downstream purchasers from patent infringement suits, the doctrine may not protect them from breach of contract claims.

    These are complicated technical and legal issues that must be carefully examined before deciding on any course of action.