InsideCounsel » January 2008
Resale Royalties
High Court may use Quanta to shore up the first-sale doctrine in patent law.
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.
If enforceable, this limitation would be a serious problem for Quanta, the world’s largest manufacturer of notebook computers, whose customers include Dell, Compaq, Apple, Hewlett Packard and Sony.
Quanta Computer Inc. v. LG Electronics Inc. is now before the Supreme Court, and the stakes are huge. If it wins LG could assert its patent rights against a wide range of computer companies, as well as the buyers of those computers. More importantly other patent owners could follow LG’s example and use patent licenses to impose conditions on and demand royalties from everyone along the supply chain—from licensees all the way down to the consumer.
“There are few users of patented products on whom this will not have an impact,” says Mark Patterson, who teaches patent and antitrust law at Fordham Law School in New York.
Third-Party Protection
The crux of the lawsuit is the “first-sale doctrine,” also known as “patent exhaustion.” Under this well-established legal principle a patent licensor’s rights in a product are exhausted once the licensee sells the product to a third party; the third party can then use or resell the product free of any restrictions that the patent owner imposes.
Quanta claims that, because of this doctrine, it can use the computer chips it purchased from Intel (the patent licensee) without worrying about the patent rights of LG. But the Federal Circuit has ruled otherwise.
A three-judge panel unanimously held in 2006 that patent exhaustion occurs only when there is an unconditional sale, and Intel’s sale of computer chips was conditional: Because of the September 2000 letter, Quanta knew that any use of Intel’s chips was subject to LG’s patent rights.
The Federal Circuit’s position in this case isn’t exactly new. Since 1992 the court has held repeatedly that the first-sale doctrine applies only to unconditional sales and that “private parties retain the freedom to contract concerning conditions of sale.”
This line of cases, however, may conflict with prior High Court rulings. “The Federal Circuit cases don’t directly violate the old Supreme Court cases,” says Robert Yorio, an IP litigator at Palo Alto, Calif.-based Carr & Ferrell. “Do they violate any of the reasoning in these Supreme Court cases? That’s the real issue. There are good arguments both ways.”
