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Intellectual Property Notes
Bonus Issue: Quanta Computer v. LG Electronics

Sup Ct - Patent exhaustion doctrine applies to method patents.
Quanta Computer, Inc. v. LG Electronics, Inc.
(6/9/08)  Decision
LG sued Quanta and others (collectively "Quanta") for patent infringement.  The trial court held that exhaustion did not apply and the Federal Circuit affirmed in part and reversed in part, agreeing that patent exhaustion did not apply to method claims.  The Supreme Court reversed the judgment of the Federal Circuit.

In 1999, LG purchased a portfolio of computer technology patents, including the patents at issue here: the '641, '379, and '733 patents.  The '641 patent discloses a system for ensuring that the most current data are retrieved from the main memory.  The '379 patent relates to the coordination of requests to read from and write to main memory, while the '733 patent manages the data traffic on a bus connecting two computer components.  LG licensed these patents to Intel and the license agreement permitted Intel to manufacture and sell microprocessors and chipsets that use the LG patents.  The license agreement stipulates that no license is granted to any third-party for the combination of licensed products of either party with items from other sources.  In a separate agreement, Intel agreed to give written notice to its own customers informing them that any Intel product purchased by them was licensed by LG and that the license did not extend to products made by combining any Intel product with a non-Intel product.  Quanta, a computer manufacturer, purchased microprocessors and chipsets from Intel and made computers using Intel parts in combination with non-Intel memory and buses in ways that practice the LG patents.  LG sued, asserting that this combination of products infringed its patents.  The trial court held that patent exhaustion did not apply to method claims, a holding with which the Federal Circuit agreed.  Alternatively, the Federal Circuit held that exhaustion did not apply because LG did not license Intel to sell the Intel products to Quanta for use in combination with non-Intel products.

The Supreme Court ultimately held that because the exhaustion doctrine applied to method patents and because the license authorized the sale of components that substantially embodied the patents-in-suit, the sale exhausted the patents.  Eliminating exhaustion from method patents would seriously undermine the exhaustion doctrine.  Patentees seeking to avoid patent exhaustion would simply draft their patent claims to describe a method rather than an apparatus.  Regarding the extent to which a product had to embody a patent in order to trigger exhaustion, LG had suggested no reasonable use for the Intel products other than incorporating them into computer systems that practiced the LG patents.  Further, the only apparent object of Intel's sales to Quanta was to permit the latter to incorporate the Intel products into computers that would practice the patents.  Moreover, the Intel products constituted a material part of the patented invention and all but completely practiced the patents.  The incomplete article substantially embodied the patents because the only step necessary to practice them was the application of common processes or the addition of standard parts.  Everything inventive about each patent was embodied in the Intel products.  The exhaustion analysis was not altered by the fact that more than one patent was practiced by the same product.  While LG argued that there was no authorized sale here, nothing in the license agreement restricted Intel's right to sell its microprocessors and chipsets to purchasers who intended to combine them with non-Intel parts.  The provision requiring notice to Quanta appeared only in the master agreement.  Hence, Intel's authority to sell its products embodying the LG patents was not conditioned on the notice or on Quanta's decision to abide by LG's directions in that notice.  Because Intel was authorized to sell its products to Quanta, the patent exhaustion doctrine prevented LG from further asserting its patent rights with regard to the patents substantially embodied by those products.

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