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LG Electronics (“LGE”) owns the rights to several computer technology patents,Quanta Computer v. LG Electronics: Reviving exhaustion, applying it to method patents Articles all of which describe a computer operation or method, not actual products. LGE licensed these patents to Intel Corporation in a License Agreement that authorizes Intel to manufacture and sell microprocessors and chipsets that use and incorporate the LGE patents. LGE and Intel had a separate agreement (“Master Agreement”) that required Intel to give its customers written notice that the license does not extend to a product made by combining an Intel Product with a non-Intel product. The Master Agreement states that breach of it does not affect the integrity and terms of the License Agreement.

Quanta purchased microprocessors and chipsets from Intel, and then manufactured computers using the Intel parts in combination with non-Intel parts, but without modifying the Intel parts. LGE sued Quanta, claiming this combination infringed the LGE patents. Quanta claimed that LGE’s patents were exhausted when Intel sold Quanta the parts that embodied LGE’s patent and therefore LGE has no further rights.

The District Court initially granted summary judgment in favor of Quanta, but upon reconsideration, denied the summary judgment on the grounds that the exhaustion doctrine does not apply to method patents. The Federal Circuit agreed that the patent exhaustion does not apply to method patents, and alternatively found that LGE did not license Intel to sell the Intel products to Quanta to combine with non-Intel products.

The United States Supreme Court heard the case on January 16, 2008 and issued its opinion, reversing the Federal Circuit and finding in favor of Quanta, on June 9, 2008.

The doctrine of patent exhaustion and its history pre-Quanta

The basic concept of patent exhaustion means that the first authorized sale of a patented item terminates all patent rights to that item. Quanta, 128 S.Ct. at 2115. The doctrine is premised on the notion that a patentee is entitled to a single royalty – in authorizing that first sale, the patentee presumably has bargained for and received the value of the patent right. The Supreme Court has explained that the touchstone of the patent exhaustion doctrine is “whether or not there has been such a disposition of the article that it may fairly be said that the patentee has received his reward for the use of the article.” United States v. Masonite Corp., 316 U.S. 265, 278 (1942).

In the early 1900’s, some courts allowed patentees to place post-sale restrictions on their patents that enabled them to exercise control (and receive additional royalties) in the downstream chain, long after the initial authorized sale. Quanta, 128 S.Ct. at 2115-2116. But by 1917, the Supreme Court made it clear that such post-sale restrictions would not be tolerated. In Motion Picture Patents Co. v. Universal Film Mfg Co., 243 U.S. 502, 516 (1917), the court held that “the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.”

Prior to Quanta, the Supreme Court’s most recent and important precedent on the exhaustion doctrine, including its application to components and method patents, was United States v. Univis Lens Co., 316 U.S. 241 (1942). In Univis, the patentee (Univis Corp.) held a patent with claims directed to an eyeglass lens and the method for making lenses by producing, grinding and polishing lens blanks. Univis Corp. licensed its related company, Univis Lens, to manufacture lens blanks.