Is The Supreme Court Exhausted With Patents?Presented by:John Kappos, Esq.Paul Veravanich, Esq.Newport Beach Corporate Cou...
2Exhausted With Patents?• Recent Supreme Court decisions: eBay v. MercExchange, 126 S. Ct. 1837 (2006)― injunction unlike...
3Overview• Patent basics• Patent exhaustion• The Quanta case• Practical concerns post-Quanta
4Patent Basics
5Patent Basics• Exclusive right to an invention Right to exclude others from making,using, offering to sell, or selling a...
6Patent Exhaustion• Under the doctrine of patent exhaustion, an initialauthorized sale of a patented item terminates allpa...
7Patent Exhaustion Before Last Month• Patent exhaustion does not apply to methodpatents because an article does not “embod...
8The Quanta Case• LG Electronics’ computer chip component-related patents Microprocessors and chipsets Efficient process...
9No license “is granted by either party hereto … to anythird party for the combination . . . of LicensedProducts . . . wit...
10Intel to give written notice to customers that the license“does not extend, expressly or by implication, to anyproduct t...
11The Quanta Case• LG sought to prevent Intel’s customers fromcombining Intel microprocessors and chipsetswith non-Intel p...
12The Quanta Case• The District Court Ruling on summary judgment No reasonable non-infringing use for Intel microprocess...
13The Quanta Case• The Federal Circuit Affirmed ruling that exhaustion doctrine does not apply tomethod claims License t...
14The Quanta Case• The United States Supreme Court Decided June 9, 2008 Opinion authored by Justice Clarence Thomas Cou...
15The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Q...
16The Supreme Court’s Decision• Method claims LG argued method claims cannot be exhausted― method claims are not linked t...
17The Supreme Court’s Decision• Method claims Court held method claims can be exhausted― methods may be embodied in a pro...
18The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Q...
19The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? Quanta argued― sale of an incomplete produ...
20The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? LG argued― Univis Lens distinguishable bec...
21The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? Court held Intel products “embody” the pat...
22The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Q...
23What Is An “Authorized Sale”?• Exhaustion is triggered only by a patent holder’sauthorized sale• LG argued its license d...
24What Is An “Authorized Sale”?• Court held sale to Quanta without restrictions wasauthorized The grant clause does not r...
25What Is An “Authorized Sale”?• What could LG have done?Nothing in the License Agreement restricts Intel’sright to sell i...
26Practical Implications of Quanta• Supreme Court left open the enforceability of post-sale limitations on use of a patent...
27Practical Implications of Quanta• Medical device industry Does patent exhaustion allow hospitals to re-sterilize andreu...
28Practical Implications of Quanta• Agriculture industry’s use of genetically engineeredcrops Does exhaustion allow farme...
29Practical Implications of Quanta• Does a litigation settlement give rise to patentexhaustion with respect to the defenda...
30Practical Implications of Quanta• Licenses along a manufacturing-supply chain Does a license to distributor cause “reve...
Thank YouNewport Beach Corporate Counsel SeminarJuly 22, 2008For More Information, Contact:O’Melveny & Myers LLP610 Newpor...
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Is The Supreme Court Exhausted With Patents

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An analysis of the Supreme Court\'s opinion in Quanta v. LG Electronics regarding the doctrine of patent exhaustion, including the practical implications of the decision on licensing and settlements.

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Is The Supreme Court Exhausted With Patents

  1. 1. Is The Supreme Court Exhausted With Patents?Presented by:John Kappos, Esq.Paul Veravanich, Esq.Newport Beach Corporate Counsel SeminarJuly 22, 2008
  2. 2. 2Exhausted With Patents?• Recent Supreme Court decisions: eBay v. MercExchange, 126 S. Ct. 1837 (2006)― injunction unlikely for non-manufacturing patentee Medimmune v. Genentech, 127 S. Ct. 764 (2007)― licensee has standing to challenge patent without breach KSR v. Teleflex, 127 S. Ct. 1727 (2007)― relaxed standard for obviousness Microsoft v. AT&T, 127 S. Ct. 1746 (2007)― limiting extraterritorial reach of U.S. patents• All disfavored patent owners
  3. 3. 3Overview• Patent basics• Patent exhaustion• The Quanta case• Practical concerns post-Quanta
  4. 4. 4Patent Basics
  5. 5. 5Patent Basics• Exclusive right to an invention Right to exclude others from making,using, offering to sell, or selling apatented invention• Limited time duration Twenty years after filing date
  6. 6. 6Patent Exhaustion• Under the doctrine of patent exhaustion, an initialauthorized sale of a patented item terminates allpatent rights to that item― Bloomer v. McQuewan, 55 U.S. 539 (1853) “First sale doctrine”
  7. 7. 7Patent Exhaustion Before Last Month• Patent exhaustion does not apply to methodpatents because an article does not “embody” amethod• Post-sale limitations on use of a patented itemallowed so long as the limitations relate tocomponents within scope of the patent― Mallinckrodt v. Medipart, 976 F.2d 700 (Fed. Cir. 1992) Limited licenses permitted Tying arrangements not permitted
  8. 8. 8The Quanta Case• LG Electronics’ computer chip component-related patents Microprocessors and chipsets Efficient processing of “read” and “write” instructions• LG-Intel License and Master AgreementIntel authorized to “make, use, sell (directly orindirectly), offer to sell, import or otherwise dispose of”Licensed Products
  9. 9. 9No license “is granted by either party hereto … to anythird party for the combination . . . of LicensedProducts . . . with . . . components . . . from sourcesother than a party hereto”The Quanta Case• LG Electronics’ computer chip component-related patents Microprocessors and chipsets Efficient processing of “read” and “write” instructions• LG-Intel License and Master Agreement
  10. 10. 10Intel to give written notice to customers that the license“does not extend, expressly or by implication, to anyproduct that you make by combining an Intel productwith any non-Intel product”The Quanta Case• LG Electronics’ computer chip component-related patents Microprocessors and chipsets Efficient processing of “read” and “write” instructions• LG-Intel License and Master Agreement
  11. 11. 11The Quanta Case• LG sought to prevent Intel’s customers fromcombining Intel microprocessors and chipsetswith non-Intel parts Requires separate LG license• Quanta Computer – world’s largestmanufacturer of notebooks Purchased Intel microprocessors and chipsets Received notice that license does not extend tocombinations with non-Intel products Combined Intel microprocessors and chipsets withnon-Intel memory and busses
  12. 12. 12The Quanta Case• The District Court Ruling on summary judgment No reasonable non-infringing use for Intel microprocessorsand chipsets Patent rights on device claims exhausted But, exhaustion doctrine does not apply to method claims
  13. 13. 13The Quanta Case• The Federal Circuit Affirmed ruling that exhaustion doctrine does not apply tomethod claims License to Intel did not authorize Intel to sellmicroprocessors and chipsets for use in combination withnon-Intel parts Patent rights on device claims not exhausted
  14. 14. 14The Quanta Case• The United States Supreme Court Decided June 9, 2008 Opinion authored by Justice Clarence Thomas Court unanimous in its holding
  15. 15. 15The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Quanta was an “authorized sale”
  16. 16. 16The Supreme Court’s Decision• Method claims LG argued method claims cannot be exhausted― method claims are not linked to a tangible article― linked to a process― right to use method can only be transferred by contract Quanta argued method claims can be exhausted― methods held exhausted in earlier cases― if method claims exempt, have absurd result― patent owner could avoid exhaustion by simplyinserting method claims
  17. 17. 17The Supreme Court’s Decision• Method claims Court held method claims can be exhausted― methods may be embodied in a product― consistent with precedents― Ethyl Gasoline Corp. v. United States (1940), saleof a motor fuel produced under one patentexhausted another patent for a method of usingthe fuel in combustion motors― United States v. Univis Lens (1942), foundexhaustion of method claims by sales of lensblanks for grinding multi-focal lenses― avoids absurd result:― if methods exempt from exhaustion, then Intelcustomers liable even when they combine Intelmicroprocessors and chipsets with Intel parts
  18. 18. 18The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Quanta was an “authorized sale”
  19. 19. 19The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? Quanta argued― sale of an incomplete product can exhaust patent― United States v. Univis Lens― if sale of incomplete product avoids exhaustion, haveabsurd result― patent owners could authorize the sale of items thatare complete except for one minor step
  20. 20. 20The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? LG argued― Univis Lens distinguishable because― lens finishing involved removal of componentswhereas here, memory and busses are added― lens blanks and finished lenses were covered by thesame patents whereas here, different patents coverthe Intel components and the finished computers― The Intel microprocessors and chipsets are individualelements of LG’s patented combination― cannot ascribe to one element the status of theinvention itself― the Aro case warns that no element of acombination patent is equivalent to the invention
  21. 21. 21The Supreme Court’s Decision• Do the Intel products “embody” the LG patents? Court held Intel products “embody” the patents― The Intel products have no substantial non-infringing use― the object of Intel’s sale was to allow Quanta tomake computers that practice the LG patents― The final steps to combine Intel microprocessors andchipsets with memory and busses is not inventive― “The sale of a device that practices patent A does not,by virtue of practicing patent A, exhaust patent B”― “But if the device practices patent A whilesubstantially embodying patent B, its relationship topatent A does not prevent exhaustion of patent B”
  22. 22. 22The Supreme Court’s Decision• Exhaustion applies to method claims• The Intel products “embody” the LG patents• Sale to Quanta was an “authorized sale”
  23. 23. 23What Is An “Authorized Sale”?• Exhaustion is triggered only by a patent holder’sauthorized sale• LG argued its license did not authorize Intel to sellcomponents to Quanta without restrictions License agreement disclaimed third party licenses Master Agreement required notice to Intel customers
  24. 24. 24What Is An “Authorized Sale”?• Court held sale to Quanta without restrictions wasauthorized The grant clause does not restrict Intel’s right to sell topurchasers who intend to combine with non-Intel parts The term disclaiming third-party license is of no effectbecause Quanta does not rely on implied license― doctrine of exhaustion is different from implied license Quanta received notice― no breach of the Master Agreement• “Intel’s authority to sell its products . . . was notconditioned on . . . Quanta’s decision to abide byLGE’s directions in that notice”
  25. 25. 25What Is An “Authorized Sale”?• What could LG have done?Nothing in the License Agreement restricts Intel’sright to sell its microprocessors and chipsets topurchasers who intend to combine them with non-Intel parts. It broadly permits Intel to “make, use, [or]sell” products free of [LG’s] patent claimsQuanta Computer v. LG Electronics Limit grant clause to restrict Intel’s right to sell only topurchasers who will not combine with non-Intel parts
  26. 26. 26Practical Implications of Quanta• Supreme Court left open the enforceability of post-sale limitations on use of a patented item― Mallinckrodt v. Medipart not overruled Field of use restrictions on sales Include as part of license grant
  27. 27. 27Practical Implications of Quanta• Medical device industry Does patent exhaustion allow hospitals to re-sterilize andreuse medical devices labeled single-use-only? Single-use licenses“By purchasing this product the customer is granted a licensefor single-use-only; Any re-sterilization or subsequent reuse isan unlicensed use and therefore constitutes patentinfringement”
  28. 28. 28Practical Implications of Quanta• Agriculture industry’s use of genetically engineeredcrops Does exhaustion allow farmers to hold a portion of thisyear’s harvest as seed for next year’s crop? The seed for next year’s crop is not the subject of anauthorized sale Single-season license
  29. 29. 29Practical Implications of Quanta• Does a litigation settlement give rise to patentexhaustion with respect to the defendant’scustomers? Look to language of the agreement and/or covenant notto sue Transcore v. Electronic Transaction Consultants, 2008 U.S.Dist. LEXIS 41812 (N.D. Tex. May 22, 2008)
  30. 30. 30Practical Implications of Quanta• Licenses along a manufacturing-supply chain Does a license to distributor cause “reverse exhaustion” torelease the manufacturer?― grant covenant not to sue― specify that royalty is paid on markup, not wholesale price― specify that right to recover royalty from manufacturer is reserved Beware PSC Inc. v. Symbol Techs., Inc., 26 F. Supp. 2d 505(W.D.N.Y. 1998)― patent misuse to charge more than one royalty for the same product― decision not appealed
  31. 31. Thank YouNewport Beach Corporate Counsel SeminarJuly 22, 2008For More Information, Contact:O’Melveny & Myers LLP610 Newport Center Drive, 17thFloorNewport Beach, CA 92660(949) 760-9600www.omm.comJohn Kappos(949) 823-6954jkappos@omm.comPaul Veravanich(949) 823-6983pv@omm.comveravanich@yahoo.comhttp://www.linkedin.com/in/veravanich
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