Jim, you are correct that the Quanta decision didn't specifically touch on Qualcomm's licensing method. Also, the case involved LG as well as Intel. Here is the main part of an analysis provided by one of the law firms filing a friend of the court brief. Art
"The Supreme Court’s Decision
While the main argument of the parties before the Federal Circuit concerned whether exhaustion with respect to system patents was avoided as a result of a conditional sale, LGE relied on a very different argument in its brief to the Supreme Court and in oral argument. There, LGE primarily asserted that this case is not a patent exhaustion case at all, but should be analyzed under the implied license doctrine with respect to both LGE’s system patents and its method patents. In short, LGE argued that exhaustion applies only to patents covering the article sold, here the microprocessor or chipset itself, not to patents covering systems that may be made using the article sold. In other words, LGE presented the case to the Supreme Court as an implied license case and not as an exhaustion and conditional sales case, perhaps because LGE itself was struggling to explain the Federal Circuit’s extreme stretch of the conditional sale principle. The Supreme Court was not persuaded by LGE’s arguments and applied the patent exhaustion doctrine.
The Patent Exhaustion Doctrine Applies to Method Patents
Reversing the Federal Circuit’s holding that the patent exhaustion doctrine is inapplicable to method patents, the Supreme Court held that “[n]othing in this Court’s approach to patent exhaustion supports LGE’s argument that method patents cannot be exhausted.” The Court specifically noted the risk that to hold otherwise would seriously undermine the exhaustion doctrine as patentees could simply draft claims as method claims rather than apparatus claims and thus practically shield any product from exhaustion. The Court emphasized the “danger of allowing such an end-run around exhaustion” for downstream purchasers. Thus, while patented methods may not be sold like articles or devices, the exhaustion doctrine, generally, is still applicable where a product sold embodies the patented method.
The Sale of Products Embodying Essential Features of a Patented Invention Generally Results in Exhaustion
Relying on its Univis Lens decision, the Supreme Court confirmed that the sale of components results in exhaustion of a patent covering the combination of such components with other elements if the components “substantially embod[y]” the patent. The Court relied on two criteria to find that the components “substantially embod[y]” the patent and that exhaustion occurs. First, the component’s only reasonable use must practice the patent at issue. The court emphasizes that the inquiry is whether possible alternative uses would not practice the patent, not whether such uses would notinfringe the patent. Hence, the Court expressly rejects use outside the country or use as a replacement part as relevant alternative uses because, even though such uses may not infringe the patent, they would still practice it. The Court also notes that disabling the patented features does not constitute a relevant alternative use because it does not constitute a real use at all. Second, the components sold must embody the “essential, or inventive, feature[s]” of the patent at issue. The Court finds this to be the case with respect to the Intel microprocessors and chipsets because “the only step necessary to practice the patent is the application of common processes or the addition of standard parts.” While the Intel microprocessors and chipsets did not practice LGE’s patents unless attached to memory and buses, such attachments were not “inventive” and only involved standard components with which the microprocessors and chipsets were specifically designed to function. The Court contrasts this situation with the situation in Aro Mfg. Co. v. Convertible Top Replacement Co., [12] where the combination itself was the only inventive aspect of the patent and no individual element could be viewed as central to or equivalent to the invention. With respect to LGE’s patents, by contrast, the Court states that “the inventive part of the patent is not the fact that memory and buses are combined with a microprocessor or chipset; rather, it is included in the design of the Intel Products themselves and the way these products access the memory or bus.”
Disclaimers and Intel’s Obligation to Notify Customers did not Affect Intel’s Authorization to Sell
The Supreme Court also confirmed that the focus in determining whether exhaustion occurs is on whether the sale is authorized by the patent holder. In this case, the Court found that Intel’s sales were authorized by LGE. Specifically, the Court notes that “[n]othing in the License Agreement restricts Intel’s right to sell its microprocessors and chipsets to purchasers who intend to combine them with non-Intel parts.” A failure of the requirement in the master agreement that Intel provide notice to its customers regarding combination of Intel products with non-Intel components would not result in a breach of the license agreement and, in any event, Intel’s rights to make, use, and sell products was not conditioned on Intel providing such notice. In addition, the Court found the specific disclaimer in the license agreement of any license to third parties to practice combination patents to be irrelevant because Quanta’s defense is based on patent exhaustion, not on an implied license.
It is Unclear if Patent Exhaustion Can Still be Avoided by Making Conditional Sales
The Supreme Court never reaches the questions of whether LGE could have avoided patent exhaustion by limiting Intel’s authority to sell or requiring Intel to place conditions on its customers’ use of its products and, if so, what would be required for a sale to be validly conditioned. While the Federal Circuit found not one, but two conditional sales, LGE, in its Supreme Court argument, seemed to acknowledge that, in this case, there was no conditional sale, focusing instead on the characterization of the case as an implied license case. Not surprisingly, the Court saw no basis for a conditional sale in this case and did not address the issue. Thus, the decision does not provide guidance on the viability of the concept of conditional sales to avoid exhaustion as sanctioned by the Federal Circuit in Mallinckrodt.
Significance of the Decision and Open Issues
The Quanta decision will have a significant impact on the computer industry as well as other industries heavily relying on patent protection and enforcement in downstream markets. The application of the patent exhaustion doctrine to method patents and the sale of components embodying essential features of a patented system will make it more difficult for patent holders to license component manufacturers while still seeking to enforce their patents against downstream purchasers and users. As a result of the decision, patent holders may refocus their licensing efforts downstream or attempt to require component supplier licensees to impose contractual restrictions on buyers, possibly through multiple levels of distribution. This may result in more disputes concerning appropriate royalties in licensing discussions as well as questions of contract formation and enforceability with respect to such restrictions. In addition, patent holders may increasingly seek to limit their licensees’ authority to sell products, e.g., by permitting them only to sell to separately licensed users, by excluding certain patents (e.g., those applicable to systems or methods) from the scope of licensed patents, or by conditioning the licensee’s right to sell on imposing (contractual) conditions on purchasers.
Another question unresolved by the decision is what the effect of a conditional sale is—that is, whether the patent holder has a right to sue for patent infringement or merely breach of contract if a condition is validly imposed but the downstream user does not comply with the condition. The Court did not need to address this issue because it did not find a conditional sale.
Also unsettled remains the question whether a “covenant not to sue” amounts to an authorization to sell. The Supreme Court’s decision might suggest so when it emphasizes that Intel was authorized to sell as long as its sales did not amount to a breach of its license agreement, but it does not squarely address the issue.
While purchasers have more certainty regarding exhaustion of method and combination patents as a result of the Court’s decision, there are still risks and unanswered questions. For example, exhaustion still does not apply if the product purchased is not an essential element of the patented invention or if the seller’s authority to sell was limited (which the purchaser may have no way of knowing). Thus, purchasers still need to conduct diligence on third party patents and their sellers’ rights and may want to consider requesting broader indemnification rights. The Court’s decision is also not entirely clear on whether the sale of products embodying essential features of a patent can trigger exhaustion even where the product sold has reasonable uses other than practicing such patent. In relying on Univis in formulating its test, the Supreme Court does not discuss the fact that Univis itself appears to mix elements of the exhaustion doctrine with elements of the traditional implied license inquiry. Finally, for all parties involved there remains uncertainty with respect to the effect of, and requirements for, conditional sales.
Note: Morrison & Foerster represented amicus curiae Gen-Probe Incorporated in the Quanta case, which filed a brief in support of petitioners Quanta Computer, Inc., et al.
Footnotes
[1] The purchaser does not, however, acquire a right to make the product.
[2] Intel Corp. v. ULSI Sys. Tech., Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993).
[3] Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708 (Fed. Cir. 1992).
[4] Id. at 709.
[5] 316 U.S. 241 (1942).
[6] Id. at 250-251.
[7] To find an implied license, the Federal Circuit has formulated a two-prong test requiring that (1) the product sold has no reasonable non-infringing uses, and (2) the circumstances of the sale plainly indicate that the grant of a license should be inferred. However, courts have implied patent licenses under different circumstances, sometimes relying on different legal theories, and recent Federal Circuit decisions also indicate a departure from the strict two-prong test.
[8] LG Elecs., Inc. v. Asustek, Inc., 248 F. Supp. 2d 912, 917 (N.D. Cal. 2003).
[9] Id.
[10] LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d at 1370.
[11] Jazz Photo Corp. v. Int'l Trade Comm'n, 264 F.3d 1094, 1108 (Fed. Cir. 2001)
[12] 365 U.S. 336 (1961)."
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