=DJ Upcoming Supreme Court Case Could Redefine Patent Exhaustion
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Dow Jones Real-Time News for InvestorsSM
2:30 p.m. 12/27/2007
By Stuart Weinberg
Of DOW JONES NEWSWIRES
TORONTO (Dow Jones)--When he bought a bunch of coffins from Lockhart & Seelye, Alpheus Burke probably didn't know he was helping set an important standard in intellectual-property law.
That standard, patent exhaustion, could be redefined by the U.S. Supreme Court in January when it hears a case that could change the way patent licenses are structured and negotiated.
The doctrine of patent exhaustion, also known as first-sale doctrine, is triggered when the first authorized, and unrestricted, sale of a patented article takes place.
The doctrine was forumulated following a patent dispute between Burke and James Adams, whose patented coffin lids were part of the coffins that Burke bought from Lockhart. Adams had granted Lockhart a license to sell the lids, but only within a 10-mile radius of the center of Boston. While Lockhart complied, Burke sold the coffins in Natick, Mass., about 17 miles from Boston center. So Adams sued Burke for infringement, and lost in Supreme Court on the grounds that his patent rights had been exhausted after Lockhart sold Burke the coffins within the required 10-mile radius. That was 134 years ago.
The case under review in January pits Quanta Computer Inc. (2382.TW) and several other Taiwanese computer makers against South Korea-based LG Electronics Inc. It's rooted in a patent-license agreement between LG and Intel Corp. (INTC) signed in 2000.
LG licensed several patents to Intel and required the computer-chip giant to notify its customers not to combine Intel chips with any non-Intel components. Intel complied, but some of its customers allegedly violated the condition, prompting LG to sue them for infringement. One of those customers was Quanta.
LG lost the case in district court, which ruled that LG's patents were exhausted because it had granted Intel an unrestricted license to sell LG's technology. But the Court of Appeals for the Federal Circuit reversed that decision, ruling that LG's patents weren't exhausted because of the notification that LG required Intel to send its customers.
27 Amicus Briefs Filed For Supreme Court Case
Since the Supreme Court agreed in September to hear the case, no fewer than 27 amicus briefs have been filed.
Some companies that generate the bulk of their revenue from patent licensing, such as Qualcomm Inc. (QCOM) and Wi-LAN Inc. (WIN.T), expressed concerns that a broad interpretation of exhaustion could usurp their patent rights and limit their ability to collect fair value for their intellectual property.
Other companies, including Hewlett Packard Co. (HPQ), Dell Inc. (DELL) and Cisco Systems Inc. (CSCO), fear that a narrow interpretation of exhaustion could lead to conditional license agreements that allow patent holders to collect royalties at multiple levels of the production chain. "Anybody who has a (patent) license...could conceivably be dragged into this," said Barry Cohen, intellectual-property lawyer at Reed & Armstrong LLP.
LG supporters argue that patentees should be able to divide the cost of a license among different levels of the the production chain because it helps minimize the burden on any one company, or group of companies, while allowing patentees to realize full value for their intellectual property. "Nothing in the patent laws requires a patentee to make an unconditional sale that enables it to recoup the value of its patent rights in a single transaction," wrote Papst Licensing GMBH & Co. Kg, a German-company that licenses disk-drive and electronic-motor technology, in its brief.
In many circumstances, Papst added, companies don't want to purchase the full value of a patent because either they can't afford to or they want to use the patent in only one specific way.
Jim Skippen, chief executive of Wi-LAN, an Ottawa firm that licenses wireless patents, said a broad view of exhaustion could force patent holders to target downstream product manufacturers with high royalty demands to compensate for the inability to license upstream companies, which include semiconductor and component makers. This could spark conflict between the downstream and upstream firms because the latter group typically indemnifies the former against patent-infringement liability, he said. "What will happen is you won't be able to license down the chain so you'll go after the highest-value guy, and guess what, the component guys have all given indemnities," he said, noting that not one upstream company has filed an amicus brief.
Big Tech Cos Don't Like Split-Royalty Concept
Dell, Hewlett-Packard, Cisco and eBay Inc. (EBAY) don't buy into the split-royalty concept. In a jointly filed amicus brief, they argue that the "first purchaser" of a patented technology ought to be willing and able to pay a full royalty, so long as the patent holder properly assesses the economic value of their invention. That's because the licensee can pass the cost of a license on to its customers, the brief said. "In this way, the total royalty paid to the patent owner by the first purchaser is naturally and efficiently distributed, through normal market forces, across every party that owns and makes use of the invention...," the brief said.
While that sounds good on paper, it doesn't translate well into reality, said Jerold Schnayer, lawyer for Papst. If an upstream company hiked the cost of its products noticeably to factor in patent royalties, downstream firms would tell it to "get lost," he said. The end result of such a full-price, single-license scenario would be a lot more litigation, he said. "You'd have to sue everybody (to get paid)," he said.
David Kappos, vice-president and assistant general counsel at International Business Machines Corp. (IBM), said he hopes the Supreme Court takes a balanced view of exhaustion. While IBM, which generates about $1 billion a year from licensing its large patent portfolio, has no problem with anyone licensing and enforcing their patents, it doesn't believe any patent holder, including IBM, should have multiple bites at the apple, Kappos said. "We don't think anyone (should) be able to sell, or license someone to sell, a product and then go out and tell the (licensee's) innocent customers who buy that product, 'Gee, we got some more news for you, you need a patent license in order to do anything with that product,' " he said.
Having said that, Kappos added that an overly rigid view of exhaustion doesn't make sense either, as it prevents "sophisticated parties" from doing business with one another. "In our view, if two sophisticated parties agree and make an explicit form of contract that says 'we understand that this deal is not going to enforce patent rights in certain cases,' then we think it's okay," he said. "We're big boys and girls and we know what we're doing...."
The Supreme Court is scheduled to hear the Quanta-LG case on Jan. 16.
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