In a key patent decision, the U.S. Supreme Court ruled on June 9, 2008, that the doctrine of patent exhaustion—which provides that the initial authorized sale of a patented item terminates all subsequent patent rights to that item—applies equally to both method patents and patents that cover a tangible object. This doctrine, which dates back to the mid-19th century, is a central feature of U.S. patent law, preventing patent holders from controlling the use of products and processes after they have been sold. (If someone invents a new type of screw, individuals who purchase those screws from an authorized seller can use the screws to build whatever they want.)

With Justice Clarence Thomas writing for a unanimous court and relying heavily on the 1942 case of United States v. Univis Lens Co., the Supreme Court held in Quanta Computer, Inc. v. LG Electronics, Inc. that patent exhaustion applies to the sale of components that must be combined with other components in order to practice a patented method. In short, patent exhaustion applies to a method patent with the same force as it applies to a patent that is linked to a tangible article.

Facts of the Case

Respondent LG Electronics (LGE) purchased the three computer technology patents at issue in this case in 1999. All three contained so-called "method" claims, which describe a way of performing certain tasks (in this case with a computer). LGE then licensed those patents to Intel Corporation.

The first patent covered a system for ensuring that a computer retrieves the most current available data from its main memory by monitoring data requests and, when necessary, updating the main memory from the cache memory. The second patent related to the efficient coordination of requests to read from and write to the main memory. The third patent involved a system that managed data traffic on sets of wires connected to multiple computer components by giving heavy users priority access.

LGE licensed Intel to sell products that practiced the methods claimed in the LGE patents. The license agreement between the parties also expressly stated that no license was granted to Intel, or to any third party, to combine licensed products with components acquired from sources other than LGE or Intel. A separate agreement between LGE and Intel required Intel to provide notice to its customers informing them that, while it had obtained a broad license "ensuring that any Intel product that you purchase is licensed by LGE and thus does not infringe any patents held by LGE," the license "does not extend, expressly or by implication, to any product that you make by combining an Intel product with any non-Intel product." The agreement did not prohibit Intel from selling products to purchasers who intended to combine them with non-Intel parts and did not condition Intel's license on its purchasers' decision to abide by Intel's notice.

The petitioners in this case were a group of computer manufacturers, including Quanta Computer, Inc. All had purchased microprocessors and chipsets from Intel and combined them with non-Intel components in ways that practice the LGE patents. LGE sued the manufacturers for infringement. A California district court ruled in LGE's favor, saying the doctrine of patent exhaustion did not apply to patents that describe a process or method. The U.S. Court of Appeals for the Federal Circuit affirmed in part and reversed in part, agreeing that patent exhaustion does not apply to method claims. The Federal Circuit further concluded that exhaustion did not apply in this particular case in light of the express terms of the license agreement between LGE and Intel.

The Supreme Court Decision

The Supreme Court reversed the judgment of the Federal Circuit. First, the court agreed with Quanta and held that the doctrine of patent exhaustion applies to method patents in the same way that it applies to patents for tangible devices. The court noted that both its precedents of those of the Federal Circuit had repeatedly held that method patents "were exhausted by the sale of an item that embodied the method." The lack of differentiation between transactions involving patented methods and patented apparatuses or materials makes sense, reasoned the Supreme Court, because otherwise it would be too easy for clever patent drafters to completely bypass the exhaustion doctrine by simply characterizing patent claims "to describe a method rather than an apparatus."

Second, the Supreme Court addressed the extent to which a product must "embody" a patent in order for exhaustion to apply. In Univis Lens, the court held that patent exhaustion was triggered by the authorized sale of unfinished lens "blanks" for bifocal and trifocal lenses, even though the patent at issue only covered lenses that were further ground and finished for final use in eyeglasses. The court followed this reasoning in the context of method claims and held that a product does not actually have to embody all elements of the patent claims. Because the microprocessors and chipsets sold by Intel to Quanta and other manufacturers could not function unless connected to other components, and because those microprocessors and chipsets constituted a "material part" of the patented invention and "all but completely practice the patent," the doctrine of patent exhaustion applied to sales of those components.

Third, the Supreme Court rejected LGE's argument that patent exhaustion was inapplicable to this case because there was no authorized sale of patented products. The court determined that since Intel was authorized to make and sell devices without restriction, the sale of those devices exhausted LGE's patent rights. The Supreme Court addressed the notice provision in the separate agreement that followed Intel's license agreement, but found that this provision did not restrict the scope of the license grant. The court suggested that had LGE's license with Intel actually restricted the sale of products to Quanta and other manufacturers, the sale to them would have been a breach of the license and the case might have come out differently. But since there was no restriction on Intel's right to sell the microprocessors and chipsets in the license agreement, and because there was no allegation of a breach of the notice provision contained in the subsequent agreement, there was no infringement and no breach. In other words, the court determined that whether Quanta and the others had an implied license to practice the patented methods, and whether they had actually taken heed of Intel's notice, were irrelevant. LGE's right to enforce its patents, the Supreme Court said, was exhausted by Intel's authorized sale to Quanta et al. regardless of the answers to those questions.

Conclusion

So what does the Quanta decision mean for patent holders going forward?

The Quanta case clarifies two open questions in patent law: (1) Method claims can be subject to exhaustion; and (2) When a product includes essential features of a patent and the "reasonable and intended use" of the product is to practice the patent, then sales of a product that does not fully practice the invention can still trigger exhaustion.

In addition, although the defendant won in this case, the Supreme Court opinion suggests that parties may be able to limit the scope of patent exhaustion by including specific licensing terms. For example, LGE might have prevailed if the license agreement had expressly prohibited Intel from selling products to purchasers who intended to combine them with non-Intel parts. However, limiting the scope of patent exhaustion through specific licensing terms may now be more difficult to accomplish. Licensors who wish to do so in the future will have to draft their agreements very carefully in light of this ruling.