The Potential Effects of Quanta on Patent Exhaustion

The Potential Effects of Quanta on Patent Exhaustion

by Paul Filon

Patent Attorney

Moxon & Spriegel, LLC

Patent and Trademark Attorneys

            The United States Supreme Court has recently granted certiorari in Quanta Computer v. LG Electronics[1] to determine whether patent owners may maintain patent rights through licensing even after the sale of those products to third parties.  This issue of “patent exhaustion[2]” may significantly affect the rights of current patent holders and purchasers of those products if the Court upsets the current understanding of the law.  Specifically, innovation in the Biotechnology industry will be inhibited if the Court finds that patent monopolies may be extended beyond the original intended scope through creative licensing.

            The constitutional purpose of patent law is “[t]o promote the [p]rogress of . . . useful [a]rts, by for securing for limited [t]imes to . . . [i]nventors the exclusive right to their . . . [d]iscoveries.[3]  The Supreme Court has interpreted this monopoly to include “the exclusive right to make, use, and vend the invention or discovery.”[4]  Moreover, when the patentee may no longer control the use and disposition of the creation, such as by sale, the patent monopoly in that object is exhausted.[5]  Therefore, the Supreme Court has held for over a century that the first sale of a patented manufactured product places that particular product outside of the monopolistic protection that the patent originally conferred.[6]  Once someone purchases a product, patented or not, the buyer is free to do use it as he sees fit.  The policy behind this principle is that the inventor has received the reward for invention, which is a rational for the Patent Act, when he receives a consideration from the original sale, and he deserves no more.[7]  Therefore, he has received every benefit that patent law provides through the purchase price, and the monopoly is ended.[8]

            The Supreme Court has not addressed the issue of patent exhaustion again until the present case pending before it.  However, the U.S. Court of Appeals for the Federal Circuit (CAFC) began to erode existing Supreme Court jurisprudence in 1992.  In Mallinckrodt, Inc. v. Medipart, Inc., the CAFC determined that despite a sale, a patented product sold with a restriction was subject to a remedy under patent law.[9]  This appears to be in conflict with the prior Supreme Court jurisprudence.  In Mallinckrodt, the patented device was a medical nebulizer kit inscribed “Single Use Only.”[10]  The alleged infringement occurred when Medipart “reconditioned” the units and sent them back to the original purchasing hospitals for reuse.[11]  The petitioner asserted that the label restriction specifying only a single use was a valid license restriction with in the scope of the patent monopoly.[12] 

            The CAFC determined that, unless other laws are violated, the right to exclude others is subject to contract law, just as it is for other areas of business.[13]  The CAFC distinguished the existing Supreme Court cases by reasoning that in the prior cases, the original sales were made without any conditions.[14]  Therefore, the CAFC reasoned, since private parties are free to contract unless another law or policy is violated, if a sale is conditional, contract law allows parties to place conditions on the sale of patented commodities.[15]  They decided that just because patent owners have a right to exclude, that benefit should not place them in a worse position that other types of property owners.[16] 

            This apparent conflict in rational is the basis for the current dispute before the Supreme Court.  In 2003, LG Electronics Inc. (LG), a Korea-based electronics company brought patent infringement suits in the federal district court in California alleging infringement of several systems and methods patents relating to computer memory that it owned.[17]  Defendants bought the patented products in question from a prior purchaser, Intel, and integrated those purchased products into their own computers.[18]  LG permitted Intel to sell the products to the defendants as long as Intel notified them that Intel’s licensing agreement with LG prohibited the defendants from using them with non-Intel products.[19]  LG’s suit alleges that the combination with non-Intel products is where the specific infringement lays, not the patents specifically in the sold products.[20] 

            The district court found there to be no patent infringement and granted summary judgment to the defendants because there was no implied license to the defendants, therefore, LG was barred from asserting contract rights against them.[21]  However, the CAFC took a different view and reversed the district court on the patent exhaustion issues for the system claims.[22]  The CAFC view on patent exhaustion, or the first sale doctrine, was that it only applies to unconditional sales, because when a sale is unconditional, the patentee has received the full value of the goods that they bargained for.[23]  However, when the bargain included a sales condition, such as the court felt in this case, the CAFC reasoned that the full value was not obtained, and that the discounted price was reflected by making the sale conditional.[24]  Therefore, the CAFC concluded that LG was entitled to impose conditions on the sale of its patented products and that those rights were not exhausted after the first sale.[25]

            Quanta Computer, one of the defendants, was granted certiorari to resolve the issue of whether the Intel license agreement between Intel and LG exhausts the patent rights of LG against future purchasers of the original products if that use is in conflict with the upstream license agreement.  Quanta is likely to argue that the petitioners bought the product from Intel; that the sales were permitted by the license without restrictions; and consequently, the patent rights that LG owns, are exhausted.[26]  Quanta’s concern is that although “a patent owner can place conditions on a licensee’s right to make or sell, . . . it cannot authorize the licensee to sell an article without exhausting the patent monopoly in that article.”[27]  Quanta fears that the entire computer industry will be held hostage by LG when Intel has already adequately compensated them by purchasing an unrestricted license.[28]

            On the other hand, LG argues that Intel made an economic choice by accepting a cheaper license that would not protect Intel’s customers, and consequently, LG has not received the full compensation that it should expect from the patent protection.[29]  The notice from Intel to downstream customers is an indication, according to LG, that the sale by Intel should be considered subject to restriction.[30]  As a result, “[when there [are] no patent misuse or notice concerns,] parceling out of the exclusivity rights is simply a matter for negotiation in the marketplace, not for a legal override of commercially fashioned terms.”[31]

            This conflict will require the Supreme Court to decide whether patent rights or contract rights should control.  Although the decision will affect patent law in general, there will be potentially significant effects on the biotechnology industry specifically should the Court affirm the CAFC.  Several Amicus Curiae briefs were submitted to address some of those effects.

            Gen-Probe, a biotechnology company specializing in nucleic acid probe-based products, submitted a brief in support of the Petitioner.  They disclose that their product research and development requires buying and licensing patented products and technologies, and that reliance on the expectation that those purchases protect them from future patent liability is paramount to success in that industry.[32]  Further, Gen-Probe fears that creating the potential for this type of infringement creates uncertainty in a field where this potential never before existed.[33]  This new type of infringement would necessarily have profound implications for an economy that is heavily dependent on scientific innovation, which typically takes years and millions of dollars to develop a single marketable commercial product.[34]  Gen-Probe’s concern focuses heavily on this significant investment of time and money.  Legal uncertainty, especially where there is a threat of infringement penalties, is likely to undermine future investment in biotechnology that is already speculative for investors.

            The primary concern is that the CAFC is expanding the patent monopoly by creating a new enforceable right under patent law.  Under patent law, the sale of a patented article places it outside “the limits of the monopoly.”[35]  That is not to say that there are not contract issues, but there is no enforceable right under patent law.  Similarly, even if the seller is a licensee, when they sell patented technology within the capacity of the license, there is still not an enforceable right under patent law because there was an authorized sale.[36]

            Biotechnology products characteristically include multiple patented technologies and rely heavily on patent exhaustion to protect them from infringement liability once they have made an authorized sale.[37]  A change in the law would significantly hinder biotechnology companies’ ability to function, because with out unambiguous law that the patentee receives its full royalty from its licensees due to the fear of infringement suits, they will be at risk of those infringements.[38]  Furthermore, since the biotechnology industry is a long-term risky proposition to begin with, this new obstacle proposed by the CAFC could jeopardize this industries research and development efforts in this area for the foreseeable future.[39] 

            Another effect on the biotechnology industry will be the potential disruption of commercial alliances that companies foster to improve their chances for successful innovation.  Unlike most other parts of the economy, biotechnology, which expends millions of dollars prior to realizing any return, is heavily dependent on patents.[40]  Even the pharmaceutical industry cannot match the research expenditures of the biotechnology industries.[41]  Who will invest in these companies if the courts remove the protection and certainty that the Supreme Court has provided for the last century?  Advancement in biotechnology does not hinge on the outcome of one patent; it requires multiple patents in cooperation with one another.  These patents are unlikely to be owned by the same entity, so cooperative alliances must be carefully negotiated and obtained with the certainty that you own what was purchased.[42]  These companies need the “freedom to operate” so that they are able to develop marketable products that can cure disease without the fear that their actions will infringe the rights of others thereby putting their own company at risk of a lawsuit.[43]

            The Biotechnology Industry Organization (BIO) submitted another Amicus Curiae brief on behalf of neither party.[44]  BIO presents many of the same concerns as the Gen-Probe brief especially the apprehension about the effect of the CAFC decision on research and development efforts in the field of biotechnology.[45]  Similarly, BIO argued that the certainty of legal protection for an industry that relies so heavily on patents is critical to protect companies that rely on multiple entities to innovate new products.[46]  These protections are paramount if biotechnology companies are to survive, let alone to grow and succeed.[47]

            BIO’s purpose in submitting a brief was not to take a position on Quanta, but to help the Court understand the complexity and difference between the biotechnology industries and the industries involved in the case at bar.[48]  They argue that even if patent exhaustion should apply to the electronic or other industries that it be limited to those applications because of the negative effect that patent exhaustion would have on the biotechnology arena.[49]  Although BIO does not itself take a stand on the issue as it applies to computer technology, it is clear that they feel that biotechnology’s special considerations should be given great weight in limiting any holding that may affect patent exhaustion.

            Biotechnology is different from any other industry when it comes to patent use and the protection that it relies on from patent exhaustion.  The Supreme Court’s elucidation of the first sale doctrine has provided consistent and dependable law for over a century.  The Court has determined that purchasing a patented invention immediately ends the constitutional monopoly created under patent law.[50]  The Court has already distinguished between sales and licenses.[51]  Additionally, they have created a balance between the rights from common law property and the rights protected by statutory patent law.[52]  Therefore, a patented invention that someone purchases in an authorized sale would no longer protected by the patent monopoly.[53] 

            The Supreme Court has already decided that even a restricted sale where that buyer violates the condition subjects the buyer only to contract liability and that patent exhaustion still applies.[54]  There is no later Supreme Court jurisprudence deviating from the Keeler position.  The CAFC is attempting to expand the Patent Act to include a remedy under patent law in addition to the available remedy that currently exists under contract law. 

            The CAFC opinion, if affirmed, will cause irreparable harm to the biotechnology industry.  The certainty of the past one hundred plus years will be undone causing research and development in a vital industry to wither from a lack of funding which is likely to occur should the Court add additional liability under patent law.  Patent policy limits the monopoly granted under the patent act.[55]  The Court has previously determined that a restricted sale is merely a contract that limits what the buyer may do with the product after the sale, and the restrictions are not due to patent exclusivity, but from the contract.[56]  Therefore, even if the Court determines to expand the existing rights under patent law in Quanta, they should consider limiting that holding to exclude the biotechnology industry due to the significant implications to a field that is so important to the well being of our country.


[1] Quanta Computer, Inc. v. LG Elecs., Inc., (06-937) (certiorari granted in LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F. 3d 1364 (2006).

[2] Once a patented product is sold, the purchaser is able to sell or use that product any way that they want because the first sale exhausts the patent right.  Bloomer v. McQuewan, 55 U.S. (14 How.) 539 (1853); Adams v. Burke, 84 U.S. (17 Wall) 453 (1873); U.S. v. Univis Lens Co., Inc. Et Al., 316 U.S. 241 (1942).

[3] U.S. CONST. Art. 1, § 8, Cl. 8.

[4] Univis, 316 U.S. at 250.

[5] Bloomer, 55 U.S. (14 How.) at 549-50; Adams, 84 U.S. (17 Wall.) at 453; Hobbie v. Jennison, 149 U.S. 355 (1893).

[6] Univis, 316 U.S. at 252.

[7] Id. at 251.

[8] Id. at 252.

[9] Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (1992).

[10] Id. at 702

[11] Id. 

[12] Id. at 703.

[13] Id. 

[14] Id. at 707.

[15] Id. at 708.

[16] Id.

[17] LG Elecs., Inc. v. Bizcom Elecs., Inc., 2004 U.S. Dist. LEXIS 29906 (N.D. Cal., Nov. 30, 2004); LG Elecs., Inc. v. Asustek Computer Inc., 248 F. Supp. 2d 912 (N.D. Cal., 2003).

[18] LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F. 3d 1364 (2006).

[19] Id. at 1368.

[20] Id.

[21] Id. at 1368-69.

[22] Id. at 1369.

[23] Id.

[24] Id. at 1369-70.

[25] Id. at 1370.

[26] PatentlyO, Patent Law Blog, Patent Exhaustion at The Supreme Court, http://www.patentlyo.com/patent/2007/04/patent_exhausti.html (last viewed Apr. 20, 2008).

[27] Sarah Craven, Quanta v. LG from ScotusWiki, http://www.scotuswiki.com/index.php?title=Quanta_v._LG (last viewed Apr. 14, 2008) (quoting from Quanta’s brief).

[28] Id.

[29] PatentlyO, Patent Law Blog, Patent Exhaustion at The Supreme Court, http://www.patentlyo.com/patent/2007/04/patent_exhausti.html (last viewed Apr. 20, 2008).

[30] Craven, supra FN 27.

[31] PatentlyO, Patent Law Blog, Patent Exhaustion at The Supreme Court, http://www.patentlyo.com/patent/2007/04/patent_exhausti.html (last viewed Apr. 20, 2008).

[32] Brief for Gen-Probe Inc. an Amicus Curiae in support of the Petitioners pg 1, No. 06-937 (Nov. 13, 2007).

[33] Id. at 2.

[34] Id.

[35] Bloomer, 55 U.S. (14 How.) at 549.

[36] Brief for Gen-Probe Inc. an Amicus Curiae in support of the Petitioners at 3.

[37] Id. at 4. 

[38] Id. at 6.

[39] See generally, id. (warning that this disruption to the current system will throw the entire biotechnology industry in turmoil).

[40] See NIH: Moving Research from the Bench to the Bedside: Hearing Before the Subcomm. on Health of the House Comm. on Energy and Commerce, 108th Cong. 47 (2003) (testimony of Phylliss Gardner, M.D.) (informing Congress that $20.5 billion was spent on biotechnology research and development in 2002 making that industry “the most research and development-intensive and capital-focused industry in the world).

[41] See id. at 15-16 (explaining that biotechnology R & D is on average twice the expenditures of the pharmaceutical industry).

[42] See, e.g., Gen-Probe, Corporate Collaborations and Strategic Alliances, available at http://www.gen-probe.com/corp_overview/collab.htm (last visited Nov. 11, 2007) (enumerating the partnerships that are required to cure diseases).

[43] Brief for Gen-Probe Inc. an Amicus Curiae in support of the Petitioners at 11.

[44] Brief of the Biotechnology Industry Organization as Amicus Curiae in support of neither party pg. 1, No. 06-937 (Nov. 13, 2007).  BIO is a trade organization composing of more than eleven hundred biotechnology businesses, biotechnology centers, and academic institutions that represents this industry.  Id.

[45] Id. at 4 (citing the Federal Trade Comm’n, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (FTC Report), Ch. 3, p. 21 (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf (last viewed Nov. 12, 2007)).  The FTC noted the fast pace of biotechnology research and development.  Id.

[46] Brief of the Biotechnology Industry Organization as Amicus Curiae in support of neither party pg 8.

[47] Id. at 8-9.

[48] Id. at 9.

[49] Id.

[50] Bloomer, 55 U.S. (14 How.) at 549-50; Adams, 84 U.S. (17 Wall.) at 453; Hobbie v. Jennison, 149 U.S. 355 (1893).

[51] Univis Lens, 316 U.S. at 252 (explaining that as opposed to a license, a sale creates an ownership right in the transferred property).

[52] Brief for Gen-Probe Inc. an Amicus Curiae in support of the Petitioners at 15.

[53] See Richard H. Stern, The Unobserves Demise of the Exhaustion Doctrine in US Patent Law, 15 Eu. Intel Prop Rev. 460, 62 (1993) (explaining that patent exhaustion doctrine “is based on property law, which the Court considered to supervene over patent law once the patentee sold the patented article to the customer-owner”).

[54] Keeler v. Standard Folding-Bed Co., 157 U.S. 659, 61 (1895).

[55] Julie E. Cohen & Mark A. Lemley, Patent Scope and Innovation In the Software Industry, 89 Cal. L. Rev. 31 (2001) (explaining that patent exhaustion is one such limit).

[56] Bloomer, 55 U.S. (14 How.) at 549-50.

Paul C. Filon
Associate

Mr. Filon is a patent attorney who earned his Bachelor degree in Chemistry from Case Western Reserve University.  He received his Juris Doctorate degree cum laude and a Certificate in Intellectual Property and Technology from The University of Akron School of Law.  While in law school, Mr. Filon was the Executive Editor of the Akron Law Review and Akron Tax Journal and was the Midwest regional winner of the Saul Lefkowitz Moot Court Competition in trademark law.  He also worked as a judicial extern clerk to the Honorable John Adams in the United States District Court for the Northern District of Ohio and as a Patent Agent prior to completing law school.

Mr. Filon has experience in preparing and prosecuting patent and trademark applications as well as performing legal research in the chemical and mechanical arts.  He has also worked on issues involving intellectual property litigation, licensing, and infringement analysis.  Prior to entering the legal profession, Mr. Filon was a Lieutenant and paramedic for the Strongsville Fire Department where he was a chemistry specialist with the Southwest Emergency Response Hazardous Materials and Bomb Teams.  He has experience in chemical analysis through a variety a methods including photoionization detection and infrared spectroscopy.  

Mr. Filon is a member of the Akron Bar Association, the American Bar Association, the American Intellectual Property Law Association, the Intellectual Property and Trademark Law Association, the International Trademark Association, and the Ohio State Bar Association.  Additionally, he is involved with the Saint Mary’s Catholic Church Men’s Club and the Walsh Jesuit High School Alumni Association.

NOTICE: This website provides general information only, not legal advice. You should not act upon this information without independent legal counsel.

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3 Comments

Filed under business, Federal Circuit, Intellectual Property, intellectual property rights, Inventions, Patent, Patent Attorney, Patent Law, Patent Law Firm, Patents, Spriegel, USPTO, Valuable

3 responses to “The Potential Effects of Quanta on Patent Exhaustion

  1. Great info! I recently came across your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often. http://www.attorney-dwi.info/

  2. That was very informative and well written. Provided below is an excerpt of an article on Patent exhaustion in India.

    “A patent grants the Patent holder exclusive rights to prevent others from making, using, selling, offering for sale in the territory of patent grant or importing an invention into the territory of patent grant. Once an unrestricted sale of the patented invention is made, the rights of the patent holder with respect to the product are exhausted and this is called as the Doctrine of Exhaustion or First Sale Doctrine………to read more please visit:http://indianipinfo.blogspot.com/2010/10/patent-exhaustion-in-india.html

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