The Supreme Court on Monday breathed new life into the doctrine of patent exhaustion -- thereby limiting the power of patent-holders over "downstream" transactions.
In a unanimous ruling authored by Justice Clarence Thomas, the Court stood firm behind the 150-year-old doctrine under which "the sale of a patented item terminates all patent rights to that item." In other words, the patent holder has little or no power to restrict what the purchaser does with the patented items after the first sale.
The ruling came in the case of Quanta Computer v. LG Electronics. The dispute arose over efforts to control what purchasers of Intel Corp. components did with those parts. The Korean company LG had licensed to Intel a series of patents on computer-related methods for use with Intel microprocessors and chipsets. Intel agreed to inform its customers that the LG licenses do not extend to any combination of Intel parts with non-Intel parts. Nonetheless Quanta, a Taiwan-based computer maker that bought Intel parts, combined them with non-Intel parts in ways that exercised the LG patents. LG sued Quanta for patent infringement.
The U.S. Court of Appeals for the Federal Circuit ruled partly in LG's favor, finding that the patent exhaustion doctrine did not apply to patents for methods or processes, such as the LG patents.
The computer industry expressed concern that the Federal Circuit's ruling would open the door to original patent-holders being able to demand multiple royalties as computer components are combined in many ways after the original purchase.
"The regime created by the Federal Circuit's revision of the patent exhaustion doctrine allows each patent owner to work its way through every manufacturing chain that in any way implicates its patents, extracting a separate royalty for the same invention at each stage," wrote Mayer Brown partner Andrew Pincus, author of a brief in the case for Dell Inc. and Hewlett-Packard Co.
The Supreme Court reversed the Federal Circuit, continuing its trend of trimming back the lower court's protection of patent-holders' power.
Thomas wrote that if the Federal Circuit were upheld, patentees could make an "endrun" around the patent exhaustion doctrine simply by describing their patents as method patents. "Any downstream purchasers of the system could nonetheless be liable for patent infringement," Thomas wrote.
The decision was not a surprise given the high court's recent history, says Michael Barclay, an intellectual property litigator at Wilson Sonsini Goodrich & Rosati. But the unanimity of the Court was unexpected, according to Barclay. Because the case was argued in January, there was widespread speculation that the delay in issuing the opinion meant division among the justices.
On Monday the Court also issued two other unanimous opinions: Allison Engine Co. v. United States, a False Claims Act case, and Bridge v. Phoenix Bond & Indemnity Co., a RICO dispute. The only divided decision was Engquist v. Oregon Department of Agriculture, in which six justices said that in a public employment context, a worker cannot bring an equal protection claim as a "class of one." Justice John Paul Stevens, joined by Justices David Souter and Ruth Bader Ginsburg, dissented, stating that the majority should have used a "scalpel rather than a meat-axe" in dealing with such claims.
The Court announced it would sit again on Thursday to issue more opinions as it enters the final weeks of the term.
