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In a closely watched case that may determine how far companies can go when demanding fees for patents they’ve licensed, several Supreme Court justices Wednesday seemed open to limiting patent-holders’ rights in connection with the use of their products by downstream purchasers in the manufacturing process. The case before the Court was a dispute between Taiwanese computer maker Quanta Computer and Korea-based LG Electronics over what Quanta claims are duplicative license fees LG seeks to impose for computer memory technology patents that LG licensed to Intel Corp. LG sued a group of companies, including Quanta, claiming that combining Intel products with non-Intel products constituted patent infringement. Quanta uses Intel chips in its laptop computers. Quanta argues that, under the doctrine of patent exhaustion, LG’s license agreement with Intel exhausted its patent rights. Sidley Austin partner Carter Phillips, arguing for LG, told the justices that patent exhaustion “ought to be retained as a very narrow first-sale doctrine, because it doesn’t have any congressional support or approval at this point.” Chief Justice John Roberts Jr. acknowledged that, because of conflicting precedents between the high court and the U.S. Court of Appeals for the Federal Circuit, “the question of how the patent exhaustion doctrine applies is the subject of great confusion.” Maureen Mahoney of Latham & Watkins, arguing on behalf of Quanta, said that after an authorized sale of a licensed product, the patent-holder “can’t try to maintain part of the monopoly right to sell.” Roberts and Justice Stephen Breyer both questioned the practical effect of the provision in LG’s license agreement with Intel that sought to invalidate the license in the event that third-party purchasers combined the purchased products with their own products. Roberts told Phillips, “There’s nothing to do with these chip sets other than use them in the computers. I mean, you don’t put them on your shelf.” Breyer said that putting the chip sets in laptop computers constituted “virtually almost the only logical use” of the products. Phillips countered that the companies “received explicit and specific notice that the one thing they could not do was use these chips to build new systems and then sell those systems.” Quanta and the other companies “bought cheap chips and turned them into $2,000 laptops,” Phillips said. Throughout the argument, Breyer returned often to a hypothetical in which he goes to a bicycle shop to buy pedals for his bicycle. “These are fabulous pedals. The inventor has licensed somebody to make them, and he sold them to the shop,” he said. “I start pedaling down the road. Now, we don’t want 19 patent inspectors chasing me.” Breyer questioned why the patent on the pedals would not be exhausted. Several other justices also referred to Breyer’s bicycle hypothetical — one that the justice said he was comfortable with in the face of the technology involved in the case. “I know how to ride a bicycle, and I don’t know how to work the chips,” he said.
Laurel Newby is copy chief of law.com, an ALM Web site. She can be contacted at [email protected].

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