Quanta Computer, Inc. v. LG Electronics, Inc.
filed June 9, 2008
Cite as 06-937

IP Doctrine of Exhaustion: Applies to Method Patents.

This case is a petition for certiorari filed before the Supreme Court by Quanta Computer, Inc. (Quanta for brevity), et. al. Quanta seeks the reversal of the judgment, entered by the District Court, as affirmed by the Court of Appeals in favor of LG Electronics, Inc. (LGE for brevity).

The facts are as follows:/

LGE owns the computer technology patents in issue. LGE licensed these patents to Intel Corporation (Intel) in a License Agreement authorizing the latter to manufacture and sell microprocessors and chipsets using the LGE Patents; Intel does not purport to alter patent exhaustion rules. Also, in the Master Agreement, LGE required Intel to give its customers written notice informing them that license does not extend to a product made by combining an Intel Product with a non-Intel product. They have also stipulated that breach of the agreement would not affect the License Agreement.

Intel sold several microprocessors and chipsets to Quanta. Subsequently, Quanta manufactured computers using Intel products and combining them with non-Intel products. It did not modify the Intel components. LGE filed a suit against Quanta claiming that the latter committed infringement on the LGE Patents.

The District Court granted the summary judgment of Quanta but on reconsideration, the said court denied the summary judgment on the patents ruling that they had method claims. The Federal Circuit partly affirmed the decision of the District Court ruling that the doctrine of patent exhaustion does not apply in the case at bar because:

1. The doctrine does not apply to method patents; and


2. LGE did not authorize nor license Intel to sell the products to Quanta to combine it with non-Intel products.

Hence, this petition for certiorari.

There are three main issues in this case. They are the following:

1. Whether or not the doctrine of patent exhaustion applies to method patents;


2. Up to what extent must a product embody a patent to trigger patent exhaustion; and


3. Whether or not the sale to Quanta of the Intel products exhausted LGE’s rights.

On the first issue, LGE contended that the doctrine is inapplicable to cases involving method claims. LGE’s argument is premised on the idea that method patents are connected to a process and not to a tangible article. Hence, it can never be exhausted.

On the other hand, Quanta asserted that there is no reason not to apply the doctrine. Following precedence, both the District Court and the Federal Court applied the exhaustion doctrine to cases involving method claims. Quanta stressed that non-observance of the doctrine would allow other patent holders to circumvent the law and in the end to avoid the exhaustion by inserting method claims in their patent specifications.

The Supreme Court sided with Quanta, explaining that patented methods may also be included in a product, although not in the same way as a tangible device, and the sale of such product exhausts the patent rights. The Court agreed with Quanta explaining that the elimination of exhaustion on method patents would undermine the doctrine. Other patent holders would simply construct their patent specifications by describing a method rather than an article, and in the end, could entirely prevent exhaustion.

On the second issue,  Quanta, by following the doctrine laid down by the Court in the Univis case, contended that although the sale of incomplete products does not necessarily exhausts the patent in a product, the sale of the microprocessors and the chipsets exhausted the patents of LGE.

On the contrary,  LGE insisted that the doctrine in Univis cannot be applied in the case at bar, under the following arguments:

1. For Univis to apply, the subject must be limited to products that contain all the needed physical aspects to apply the patent;


2. The articles involved in the Univis case are subjects of only one patent, whereas, the Intel products in the case at bar are under independent patents; and


3. By allowing the sale of Intel products to exhaust the patent would mean ascribing to one element of the combination patent the status of the patented invention in itself.

Again, the Court sided with Quanta. The Court ruled that the sale of the microprocessors and chipsets triggered the exhaustion of the patent because the reasonable and intended use of the said articles was to practice the patent and because they form as essential parts of the entire product.

First, LGE suggested that the only reasonable and intended use of its patented products was to be incorporated in the computer system that practice its patent. The only intended purpose of the sale between Quanta and Intel was to permit the former to incorporate the latter’s products in the computers.

And secondly, the Intel products, which are considered essential parts of the entire product, embody and practice the patent because the last necessary step in practicing the patent is to apply the processes or to insert the additional parts.

On the last issue,  it is LGE’s contention that there is no authorized sale. According to LGE, the License Agreement did not authorize Intel to sell the Intel products in combining with the non-Intel products, in order to practice the patent.

The Supreme Court disagrees. Nothing in the License Agreement prohibits Intel from selling its products to be used with non-Intel products. As a matter of fact, the License Agreement make such selling free from LGE’s patent claims.

LGE only required Intel to notify its clients that the former had not licensed the practice of the clients of its patents.  Also, none of the parties contended that Intel committed that kind of breach in the agreement.

Further, the condition which requires Quanta to give notice appeared not in the License Agreement but in the Master Agreement. LGE does not allege that commission of a breach in the Master Agreement constitutes a breach in the License Agreement. Thus, Intel’s right to sell its products is not premised on its duty to notify its clients on LGE’s condition.

Conclusively, the sale of the article totally exhaust LGE’s patent rights and prevents it from invoking violation of his intellectual property right. The License Agreement did not limit the authority, given by LGE to Intel, to sell the products practicing patents. When Intel sold the products to Quanta, the patent rights of LGE is deemed exhausted and thus, the latter has no more patent rights which can be violated and be exercised.