Quanta Computer, Inc. v. LG Electronics, Inc.

• Decision Date: 09 June 2008
• Docket Number: No. 06–937.,06–937.
• Citation: 76 USLW 4375,86 U.S.P.Q.2d 1673,553 U.S. 617,128 S.Ct. 2109,08 Cal. Daily Op. Serv. 6935,2008 Daily Journal D.A.R. 8356,170 L.Ed.2d 996,21 Fla. L. Weekly Fed. S 308
• Parties: QUANTA COMPUTER, INC., et al., Petitioners, v. LG ELECTRONICS, INC.
• Court: U.S. Supreme Court

08 Cal. Daily Op. Serv. 6935

128 S.Ct. 2109

170 L.Ed.2d 996

2008 Daily Journal D.A.R. 8356

21 Fla. L. Weekly Fed. S 308

553 U.S. 617

76 USLW 4375

86 U.S.P.Q.2d 1673

QUANTA COMPUTER, INC., et al., Petitioners,

v.LG ELECTRONICS, INC.

No. 06–937.

Supreme Court of the United States

Argued Jan. 16, 2008.Decided June 9, 2008.

Syllabus ^*

The longstanding doctrine of patent exhaustion limits the patent rights that survive the initial authorized sale of a patented item. Respondent (LGE) purchased, inter alia, the computer technology patents at issue (LGE Patents): One discloses a system for ensuring that most current data are retrieved from main memory, one relates to the coordination of requests to read from and write to main memory, and one addresses the problem of managing data traffic on a set of wires, or “bus,” connecting two computer components. LGE licensed the patents to Intel Corporation (Intel), in an agreement (License Agreement) that authorizes Intel to manufacture and sell microprocessors and chipsets using the LGE Patents (Intel Products) and that does not purport to alter patent exhaustion rules. A separate agreement (Master Agreement) required Intel to give its customers written notice that the license does not extend to a product made by combining an Intel Product with a non-Intel product, and provided that a breach of the agreement would not affect the License Agreement. Petitioner computer manufacturers (Quanta) purchased microprocessors and chipsets from Intel. Quanta then manufactured computers using Intel parts in combination with non-Intel parts, but did not modify the Intel components. LGE sued, asserting that this combination infringed the LGE Patents. The District Court granted Quanta summary judgment, but on reconsideration, denied summary judgment as to the LGE Patents because they contained method claims. The Federal Circuit affirmed in part and reversed in part, agreeing with the District Court that the patent exhaustion doctrine does not apply to method patents, which describe operations to make or use a product; and concluding, in the alternative, that exhaustion did not apply because LGE did not license Intel to sell the Intel Products to Quanta to combine with non-Intel products.

Held: Because the doctrine of patent exhaustion applies to method patents, and because the License Agreement authorizes the sale of components that substantially embody the patents in suit, the exhaustion doctrine prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products. Pp. 2115 – 2122.

(a) The patent exhaustion doctrine provides that a patented item's initial authorized sale terminates all patent rights to that item. See, e.g., Bloomer v. McQuewan, 14 How. 539, 14 L.Ed. 532. In the Court's most recent discussion of the doctrine, United States v. Univis Lens Co., 316 U.S. 241, 62 S.Ct. 1088, 86 L.Ed. 1408, patents for finished eyeglass lenses, held by the respondent (Univis), did not survive the sale of lens blanks by the licensed manufacturer to wholesalers and finishing retailers who ground the blanks into patented finished lenses. The Court assumed that Univis' patents were practiced in part by the wholesalers and finishing retailers, concluding that the traditional bar on patent restrictions following an item's sale applies when the item sufficiently embodies the patent—even if it does not completely practice the patent—such that its only and intended use is to be finished under the patent's terms. The parties' arguments here are addressed with this patent exhaustion history in mind. Pp. 2115 – 2117.

(b) Nothing in this Court's approach to patent exhaustion supports LGE's argument that method claims, as a category, are never exhaustible. A patented method may not be sold in the same way as an article or device, but methods nonetheless may be “embodied” in a product, the sale of which exhausts patent rights. The Court has repeatedly found method patents exhausted by the sale of an item embodying the method. See Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 446, 457, 60 S.Ct. 618, 84 L.Ed. 852; Univis, supra, at 248–251, 62 S.Ct. 1088. These cases rest on solid footing. Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine, since patentees seeking to avoid exhaustion could simply draft their claims to describe a method rather than an apparatus. On LGE's theory here, for example, although Intel is authorized to sell a completed computer system that practices the LGE Patents, downstream purchasers could be liable for patent infringement, which would violate the longstanding principle that, when a patented item is “once lawfully made and sold, there is no restriction on [its] use to be implied for the [patentee's] benefit,” Adams v. Burke, 17 Wall. 453, 457, 21 L.Ed. 700. Pp. 2117 – 2118.

(c) The Intel Products embodied the patents here. Univis governs this case. There, exhaustion was triggered by the sale of the lens blanks because their only reasonable and intended use was to practice the patent and because they “embodie[d] essential features of [the] patented invention,” 316 U.S., at 249–251, 62 S.Ct. 1088. Each of those attributes is shared by the microprocessors and chipsets Intel sold to Quanta under the License Agreement. First, LGE has suggested no reasonable use for the Intel Products other than incorporating them into computer systems that practice the LGE Patents: A microprocessor or chipset cannot function until it is connected to buses and memory. And as in Univis, the only apparent object of Intel's sales was to permit Quanta to incorporate the Intel Products into computers that would practice the patents. Second, like the Univis lens blanks, the Intel Products constitute a material part of the patented invention and all but completely practice the patent. The only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the Intel Products. LGE's attempts to distinguish Univis are unavailing. Pp. 2118 – 2121.

(d) Intel's sale to Quanta exhausted LGE's patent rights. Exhaustion is triggered only by a sale authorized by the patent holder. Univis, supra, at 249, 62 S.Ct. 1088. LGE argues that this sale was not authorized because the License Agreement does not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE Patents. But the License Agreement does not restrict Intel's right to sell its products to purchasers who intend to combine them with non-Intel parts. Intel was required to give its customers notice that LGE had not licensed those customers to practice its patents, but neither party contends that Intel breached that agreement. In any event, the notice provision is in the Master Agreement, and LGE does not suggest that a breach of that agreement would constitute a License Agreement breach. Contrary to LGE's position, the question whether third parties may have received implied licenses is irrelevant, because Quanta asserts its right to practice the patents based not on implied license but on exhaustion, and exhaustion turns only on Intel's own license to sell products practicing the LGE Patents. LGE's alternative argument, invoking the principle that patent exhaustion does not apply to postsale restrictions on “making” an article, is simply a rephrasing of its argument that combining the Intel Products with other components adds more than standard finishing to complete a patented article. Pp. 2121 – 2122.

453 F.3d 1364, reversed.

THOMAS, J., delivered the opinion for a unanimous Court.

Maureen E. Mahoney, Washington, D.C., for petitioners.

Thomas G. Hungar, for the United States as amicus curiae, by special leave of the Court, supporting the petitioners.

Carter G. Phillips, Washington, D.C., for the respondent.Terrence D. Garnett, Vincent K. Yip, Peter Wied, Paul, Hastings, Janofsky & Walker LLP, Los Angeles, CA, Maureen E. Mahoney, Counsel of Record, J. Scott Ballenger, Barry J. Blonien, Melissa B. Arbus, Anne W. Robinson, Latham & Watkins LLP, Washington, D.C., Maxwell A. Fox, Paul, Hastings, Janofsky & Walker LLP, Minato–Ku, Tokyo, for Petitioners.Carter G. Phillips, Counsel of Record, Virginia A. Seitz, Jeffrey T. Green, Jeffrey P. Kushan, Rachel H. Townsend, Quin M. Sorenson, Sidley Austin LLP, Washington, D.C., for Respondent. Justice THOMAS delivered the opinion of the Court.

For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item. In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods. The Court of Appeals for the Federal Circuit held that the doctrine does not apply to method patents at all and, in the alternative, that it does not apply here because the sales were not authorized by the license agreement. We disagree on both scores. Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents.

I

Respondent LG Electronics, Inc. (LGE), purchased a portfolio of computer technology patents in 1999, including the three patents at issue here: U.S. Patent Nos. 4,939,641 ('641); 5,379,379 ('379); and 5,077,733 ('733) (collectively LGE Patents). The main functions of a computer system are carried out on a microprocessor, or central processing unit, which interprets program instructions, processes data, and controls other devices in the system. A set of wires, or bus, connects the microprocessor to a chipset, which transfers data between the microprocessor and other devices, including the keyboard, mouse, monitor, hard drive, memory, and...