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Patent Exhaustion

Posted Wednesday, May 23, 2012 by Mike Cicero

A United States patent grants the patent holder the right to exclude others from making, using, offering for sale, or selling the invention throughout the U.S. and from importing it into the U.S. for the term of the patent. It would not make much sense though to restrict a person from using or reselling an invention once that person purchased it and it became personal property. The doctrine of patent exhaustion protects purchasers of patented items by providing that a single, authorized, and unconditional sale of a patented item carries the item outside the monopoly of patent law. In other words, such a sale frees that item from every restriction the patent holder may attempt to put on it. When dealing with patent rights for an invention that is embodied in a tangible item, the doctrine of patent exhaustion is very straightforward. When a person buys a car or a DVD player that person should, and obviously does, have the right to use and resell those items. Under doctrine of patent exhaustion, the rights of a patent holder and a patented item purchaser become less clear when dealing with multiple patents and/or patents directed to methods rather than tangible items.

In Quanta Computer, Inc. v. LG Electronics, Inc., the Supreme Court was faced with an interesting issue regarding the exhaustion of patent rights for method patents. LG Electronics (LGE) held title to certain method patents that it had licensed to Intel Corp. (Intel). Through the license agreement LGE authorized Intel to manufacture and sell microprocessors and chipsets using the LGE patents. Accordingly, Intel manufactured and sold the products to Quanta which then manufactured and sold computers using the Intel parts in combination with other non-Intel parts. Quanta did not modify the Intel components. LGE then sued Quanta for infringing on the method patents which disclosed the internal methods by which the Intel components processed information and interacted with the computers non-Intel components. The District Court determined that the affirmative defense of patent exhaustion could not be asserted by Quanta because patent exhaustion does not apply to method patents. The Federal Circuit affirmed and, ultimately, the Supreme Court was faced with the issues of whether the doctrine of patent exhaustion applies to method patents and, if so, under what circumstances a method patent is exhausted.

LGE argued that because method patents are not linked to a tangible article, but rather to a process, method patents can never be exhausted by through a sale. LGE further argued that practicing the patent is permissible only to the extent that rights are transferred through licensing or assignment contracts. The Court took note that practicing a method patent takes place any time a product is used that embodies that method patent, and that under LGE’s contention Quanta would be unable to use the products it had purchased because the products themselves utilized the methods at issue. Quanta counter argued that a ruling that patent exhaustion does not apply to method patents would allow patent holders to avoid patent exhaustion completely by adding method claims to all patents. The Court found Quanta’s arguments to be more persuasive and ruled in its favor.

As far as the first issue, the Court held that the doctrine of patent exhaustion does apply to method patents, and the Court went on to cite numerous precedential opinions holding the same. With regard to the issue of when a method patent is exhausted, the Court held that a method patent is exhausted by an authorized and unconditioned sale of an item which embodies the patented methods. In this case, the Court found that the microprocessors and chipsets purchased by Quanta substantially embodied the method patents held by LGE. Further, because Intel was licensed to manufacture and sell the parts and the license mentioned no restrictions as to the methods at issue, the sale to Quanta was authorized in the required sense. Therefore, the method patents at issue were held to have been exhausted and Quanta’s use of the components was unrestricted.

Ruttler Mills PLLC
One Union Square, 1730, 600 University Street, Seattle, Washington 98101 US
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Phone: (206) 838-6400

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