On June 9, 2008, the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc., unanimously issued a 9-0 decision reversing the Court of Appeals for the Federal Circuit on the scope of patent exhaustion for method patents. Patent exhaustion is a doctrine that limits the patentee's right to claim infringement after the initial authorized sale of a patented invention.
The Court held that: (1) patent method claims may be exhausted; and (2) the authorized sale of a component of a patented invention may exhaust patent rights when the only "reasonable and intended use" of the component is to practice the patent and the component embodies the "essential, or inventive feature" of the invention.
I. Method Claims
The Supreme Court held that method claims, like article claims, may be exhausted by an initial authorized sale. The Supreme Court reasoned that United States v. Univis Lens Co., 316 U.S. 241 (1942), supported the position that the sale of an item that embodied the method could exhaust patent rights. In addition, the Court recognized that holding otherwise might enable patent drafters to evade patent exhaustion by drafting claims for a method even though article and method claims would be substantively indistinguishable.
II. Exhaustion By An Incomplete Item
The Supreme Court held the authorized sale of an incomplete item (or a component part) may exhaust patent rights for both method and article patent claims if the incomplete item substantially embodies the patent claims. An incomplete item substantially embodies the patent claims if the item's "only reasonable and intended use" is to practice the patent and it "embodie[s] essential features" of the patented invention. An item has no other "reasonable and intended use" if it is "without utility" until it is incorporated into a method or article that practices the patent claims. The item embodies an "essential" feature if the item is the inventive feature of the patent. If the only additional steps or components required to practice the patent involve the "application of common processes or the addition of standard parts," then these additional steps or components are not inventive and cannot save the patent from exhaustion. Notably, the Court's holding on exhaustion through the authorized sale of an incomplete item has ramifications for all type of patent claims, including article, system, and method claims.
Under Quanta Computer, the authorized sale of an article under one patent may also exhaust other patents covering the article. The Court held that "if [a] device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B." Accordingly, a license authorizing the use of devices under one patent may also result in the exhaustion of patent rights under a second patent.
III. Authorized Sale
The Quanta Computer decision provides guidance as to what terms of a license agreement authorize a sale for purposes of patent exhaustion. The Court found that the licensee was authorized to sell the products at issue by language permitting the licensee to "make, use, [or] sell the products." The Court left open the possibility that a breach of contract remedy might be possible even though patent exhaustion applied.
Based on this ruling, the patent exhaustion doctrine applies to all types of patent claims - whether to an article, system, or method. In addition, the authorized sale of a component part that substantially embodies a patented article, system, or method may be enough to exhaust patent rights. Finally, application of the exhaustion doctrine may turn on the terms of the licensing agreement or sale.
If you have any questions about this decision, please feel free to contact Dominic Zanfardino (312-321-4715) or Laura Lydigsen (312-321-4894) at Brinks Hofer Gilson & Lione.
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