Resale Royalties

Quanta Computer's troubles began seven years ago with a warning letter from Intel, one of its major suppliers. It informed Quanta that Intel was licensing certain patent rights from LG Electronics but this license "does not extend ... to any product that you may make by combining an Intel product with any non-Intel product." In other words Quanta could continue purchasing computer chips and chipsets from Intel, but Quanta--as well as other Intel customers--wasn't allowed by the patent license to use these products to make computers.

Quanta thought the limitation wasn't enforceable, but LG soon attempted to prove otherwise. In early 2001 the South Korean firm filed patent infringement suits against Taiwan-based Quanta and eight other Intel customers.

Economic Turmoil
In recent years more and more businesses have used the Federal Circuit's limit on the first-sale doctrine to impose licensing restrictions on downstream purchasers.

"These use restrictions have arisen in all sorts of industries and all sorts of contexts," Patterson says. "In the past few years, the number and scope of these restrictions have been accelerating. They are broad and getting broader."

This trend is expected to increase if the Supreme Court upholds the Federal Circuit's ruling in this case.

"We'll continue down the road of having more and more restrictions placed on sales," says Katherine Strandburg, a professor of patent law currently teaching at New York University Law School. "More and more things will be treated as licenses rather than sales."

This will boost patent holders' revenues but may hurt the economy because it would require everyone down the supply chain to pay royalties. Moreover, downstream businesses and consumers would be unsure whether they could legitimately use patented items they have purchased.

"Every time you buy a patented product you would have to wonder if the seller is licensed to sell it for your particular purpose," Patterson says. "Downstream purchasers won't know what they are getting." And what about companies that purchase patented components from a variety of suppliers? "They can get lots of overlapping, and perhaps inconsistent, [patent] obligations," Strandburg warns.


Steven Seidenberg

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