An analysis of the Supreme Court\'s opinion in Quanta v. LG Electronics regarding the doctrine of patent exhaustion, including the practical implications of the decision on licensing and settlements.

1. Is The Supreme Court Exhausted With Patents?
Presented by:
John Kappos, Esq.
Paul Veravanich, Esq.
Newport Beach Corporate Counsel Seminar
July 22, 2008

2. 2
Exhausted With Patents?
• Recent Supreme Court decisions:
 eBay v. MercExchange, 126 S. Ct. 1837 (2006)
― injunction unlikely for non-manufacturing patentee
 Medimmune v. Genentech, 127 S. Ct. 764 (2007)
― licensee has standing to challenge patent without breach
 KSR v. Teleflex, 127 S. Ct. 1727 (2007)
― relaxed standard for obviousness
 Microsoft v. AT&T, 127 S. Ct. 1746 (2007)
― limiting extraterritorial reach of U.S. patents
• All disfavored patent owners

3. 3
Overview
• Patent basics
• Patent exhaustion
• The Quanta case
• Practical concerns post-Quanta

4. 4
Patent Basics

5. 5
Patent Basics
• Exclusive right to an invention
 Right to exclude others from making,
using, offering to sell, or selling a
patented invention
• Limited time duration
 Twenty years after filing date

6. 6
Patent Exhaustion
• Under the doctrine of patent exhaustion, an initial
authorized sale of a patented item terminates all
patent rights to that item
― Bloomer v. McQuewan, 55 U.S. 539 (1853)
 “First sale doctrine”

7. 7
Patent Exhaustion Before Last Month
• Patent exhaustion does not apply to method
patents because an article does not “embody” a
method
• Post-sale limitations on use of a patented item
allowed so long as the limitations relate to
components within scope of the patent
― Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992)
 Limited licenses permitted
 Tying arrangements not permitted

8. 8
The Quanta Case
• LG Electronics’ computer chip component-
related patents
 Microprocessors and chipsets
 Efficient processing of “read” and “write” instructions
• LG-Intel License and Master Agreement
Intel authorized to “make, use, sell (directly or
indirectly), offer to sell, import or otherwise dispose of”
Licensed Products

9. 9
No license “is granted by either party hereto … to any
third party for the combination . . . of Licensed
Products . . . with . . . components . . . from sources
other than a party hereto”
The Quanta Case
• LG Electronics’ computer chip component-
related patents
 Microprocessors and chipsets
 Efficient processing of “read” and “write” instructions
• LG-Intel License and Master Agreement

10. 10
Intel to give written notice to customers that the license
“does not extend, expressly or by implication, to any
product that you make by combining an Intel product
with any non-Intel product”
The Quanta Case
• LG Electronics’ computer chip component-
related patents
 Microprocessors and chipsets
 Efficient processing of “read” and “write” instructions
• LG-Intel License and Master Agreement

11. 11
The Quanta Case
• LG sought to prevent Intel’s customers from
combining Intel microprocessors and chipsets
with non-Intel parts
 Requires separate LG license
• Quanta Computer – world’s largest
manufacturer of notebooks
 Purchased Intel microprocessors and chipsets
 Received notice that license does not extend to
combinations with non-Intel products
 Combined Intel microprocessors and chipsets with
non-Intel memory and busses

12. 12
The Quanta Case
• The District Court
 Ruling on summary judgment
 No reasonable non-infringing use for Intel microprocessors
and chipsets
 Patent rights on device claims exhausted
 But, exhaustion doctrine does not apply to method claims

13. 13
The Quanta Case
• The Federal Circuit
 Affirmed ruling that exhaustion doctrine does not apply to
method claims
 License to Intel did not authorize Intel to sell
microprocessors and chipsets for use in combination with
non-Intel parts
 Patent rights on device claims not exhausted

14. 14
The Quanta Case
• The United States Supreme Court
 Decided June 9, 2008
 Opinion authored by Justice Clarence Thomas
 Court unanimous in its holding

15. 15
The Supreme Court’s Decision
• Exhaustion applies to method claims
• The Intel products “embody” the LG patents
• Sale to Quanta was an “authorized sale”

16. 16
The Supreme Court’s Decision
• Method claims
 LG argued method claims cannot be exhausted
― method claims are not linked to a tangible article
― linked to a process
― right to use method can only be transferred by contract
 Quanta argued method claims can be exhausted
― methods held exhausted in earlier cases
― if method claims exempt, have absurd result
― patent owner could avoid exhaustion by simply
inserting method claims

17. 17
The Supreme Court’s Decision
• Method claims
 Court held method claims can be exhausted
― methods may be embodied in a product
― consistent with precedents
― Ethyl Gasoline Corp. v. United States (1940), sale
of a motor fuel produced under one patent
exhausted another patent for a method of using
the fuel in combustion motors
― United States v. Univis Lens (1942), found
exhaustion of method claims by sales of lens
blanks for grinding multi-focal lenses
― avoids absurd result:
― if methods exempt from exhaustion, then Intel
customers liable even when they combine Intel
microprocessors and chipsets with Intel parts

18. 18
The Supreme Court’s Decision
• Exhaustion applies to method claims
• The Intel products “embody” the LG patents
• Sale to Quanta was an “authorized sale”

19. 19
The Supreme Court’s Decision
• Do the Intel products “embody” the LG patents?
 Quanta argued
― sale of an incomplete product can exhaust patent
― United States v. Univis Lens
― if sale of incomplete product avoids exhaustion, have
absurd result
― patent owners could authorize the sale of items that
are complete except for one minor step

20. 20
The Supreme Court’s Decision
• Do the Intel products “embody” the LG patents?
 LG argued
― Univis Lens distinguishable because
― lens finishing involved removal of components
whereas here, memory and busses are added
― lens blanks and finished lenses were covered by the
same patents whereas here, different patents cover
the Intel components and the finished computers
― The Intel microprocessors and chipsets are individual
elements of LG’s patented combination
― cannot ascribe to one element the status of the
invention itself
― the Aro case warns that no element of a
combination patent is equivalent to the invention

21. 21
The Supreme Court’s Decision
• Do the Intel products “embody” the LG patents?
 Court held Intel products “embody” the patents
― The Intel products have no substantial non-infringing use
― the object of Intel’s sale was to allow Quanta to
make computers that practice the LG patents
― The final steps to combine Intel microprocessors and
chipsets with memory and busses is not inventive
― “The sale of a device that practices patent A does not,
by virtue of practicing patent A, exhaust patent B”
― “But if the device practices patent A while
substantially embodying patent B, its relationship to
patent A does not prevent exhaustion of patent B”

22. 22
The Supreme Court’s Decision
• Exhaustion applies to method claims
• The Intel products “embody” the LG patents
• Sale to Quanta was an “authorized sale”

23. 23
What Is An “Authorized Sale”?
• Exhaustion is triggered only by a patent holder’s
authorized sale
• LG argued its license did not authorize Intel to sell
components to Quanta without restrictions
 License agreement disclaimed third party licenses
 Master Agreement required notice to Intel customers

24. 24
What Is An “Authorized Sale”?
• Court held sale to Quanta without restrictions was
authorized
 The grant clause does not restrict Intel’s right to sell to
purchasers who intend to combine with non-Intel parts
 The term disclaiming third-party license is of no effect
because Quanta does not rely on implied license
― doctrine of exhaustion is different from implied license
 Quanta received notice
― no breach of the Master Agreement
• “Intel’s authority to sell its products . . . was not
conditioned on . . . Quanta’s decision to abide by
LGE’s directions in that notice”

25. 25
What Is An “Authorized Sale”?
• What could LG have done?
Nothing in the License Agreement restricts Intel’s
right to sell its microprocessors and chipsets to
purchasers who intend to combine them with non-
Intel parts. It broadly permits Intel to “make, use, [or]
sell” products free of [LG’s] patent claims
Quanta Computer v. LG Electronics
 Limit grant clause to restrict Intel’s right to sell only to
purchasers who will not combine with non-Intel parts

26. 26
Practical Implications of Quanta
• Supreme Court left open the enforceability of post-
sale limitations on use of a patented item
― Mallinckrodt v. Medipart not overruled
 Field of use restrictions on sales
 Include as part of license grant

27. 27
Practical Implications of Quanta
• Medical device industry
 Does patent exhaustion allow hospitals to re-sterilize and
reuse medical devices labeled single-use-only?
 Single-use licenses
“By purchasing this product the customer is granted a license
for single-use-only; Any re-sterilization or subsequent reuse is
an unlicensed use and therefore constitutes patent
infringement”

28. 28
Practical Implications of Quanta
• Agriculture industry’s use of genetically engineered
crops
 Does exhaustion allow farmers to hold a portion of this
year’s harvest as seed for next year’s crop?
 The seed for next year’s crop is not the subject of an
authorized sale
 Single-season license

29. 29
Practical Implications of Quanta
• Does a litigation settlement give rise to patent
exhaustion with respect to the defendant’s
customers?
 Look to language of the agreement and/or covenant not
to sue
 Transcore v. Electronic Transaction Consultants, 2008 U.S.
Dist. LEXIS 41812 (N.D. Tex. May 22, 2008)

30. 30
Practical Implications of Quanta
• Licenses along a manufacturing-supply chain
 Does a license to distributor cause “reverse exhaustion” to
release the manufacturer?
― grant covenant not to sue
― specify that royalty is paid on markup, not wholesale price
― specify that right to recover royalty from manufacturer is reserved
 Beware PSC Inc. v. Symbol Techs., Inc., 26 F. Supp. 2d 505
(W.D.N.Y. 1998)
― patent misuse to charge more than one royalty for the same product
― decision not appealed

31. Thank You
Newport Beach Corporate Counsel Seminar
July 22, 2008
For More Information, Contact:
O’Melveny & Myers LLP
610 Newport Center Drive, 17th
Floor
Newport Beach, CA 92660
(949) 760-9600
www.omm.com
John Kappos
(949) 823-6954
jkappos@omm.com
Paul Veravanich
(949) 823-6983
pv@omm.com
veravanich@yahoo.com
http://www.linkedin.com/in/veravanich