The Validity of Conditional Sales: Competing Views of Patent Exhaustion in Quanta Computer, Inc. V. LG Electronics, Inc

By McCammon, Jason | Harvard Journal of Law & Public Policy, Spring 2009 | Go to article overview

The Validity of Conditional Sales: Competing Views of Patent Exhaustion in Quanta Computer, Inc. V. LG Electronics, Inc


McCammon, Jason, Harvard Journal of Law & Public Policy


The doctrine of patent exhaustion limits the ability of a patentee to control the disposition of a patented article after the item is sold. In some instances, however, patentees may contract with buyers in order to exercise downstream control of patented items. When and to what extent patentees may use contract law to limit patent exhaustion, generally through restrictive licenses or conditions at the time of sale, (1) remains an open question. (2) The Supreme Court has not articulated a bright-line test for determining when the transfer (3) of an item from a patentee triggers the doctrine of patent exhaustion. Last Term, in Quanta Computer, Inc. v. LG Electronics, Inc., (4) the Supreme Court unanimously reaffirmed that an unrestricted sale of a patented good triggers patent exhaustion. The Court's decision, however, does not squarely address the underlying question of whether a patentee may impose restrictions or conditions through licenses or other notice at the time of sale. By declining to address this issue directly, the Court left open at least two potentially competing interpretations of how the exhaustion doctrine should deal with restrictions or conditions. As a result, lower courts have insufficient guidance to apply the Court's holding consistently and correctly.

LG Electronics (LG) owns a number of computer technology patents, three of which were at issue in Quanta. (5) Simply stated, these patents deal with technology and processes for transferring information to and from random access memory (RAM). (6) LG licensed the patents to Intel, authorizing Intel to manufacture and sell processors and chipsets that used the LG-patented technology. (7) Specifically, the LG-Intel License Agreement authorized Intel to "make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of" Intel products that practiced the licensed patents. (8) The License Agreement went on to limit the scope of the license with respect to third parties, stating that no license may be

   granted by either party hereto.., to any third party for the
   combination by a third party of Licensed Products of either
   party with items, components, or the like acquired ... from
   sources other than a party hereto, or for the use, import, offer
   for sale or sale of such combination. (9)

Finally, the License Agreement stated that "[n]otwithstanding anything to the contrary contained in this Agreement, the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products." (10)

In a separate agreement between LG and Intel (the Master Agreement), Intel agreed to notify its customers that Intel's license to sell the LG technology did "not extend, expressly or by implication, to any product that you make by combining an Intel product with any non-Intel product." (11) Intel sold components of the LG-patented systems to, among others, Quanta Computers. (12) Although Quanta received the notice specified in the Master Agreement, it manufactured computers combining Intel parts and non-Intel parts in a way that practiced the LG patents. (13) LG then sued Quanta for patent infringement. (14)

The district court granted summary judgment to Quanta, finding that the components in question, although not fully practicing the patents at the time of sale, sufficiently embodied the patents to trigger patent exhaustion. (15) In a later ruling clarifying its original summary judgment order, however, the district court ruled that patent exhaustion does not apply to method claims (that is, claims covering processes rather than devices). (16) Because each of the patents in question contained at least one method claim, the district court reasoned, the defense of patent exhaustion did not apply. (17)

The Court of Appeals for the Federal Circuit affirmed in part and reversed in part.

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