Supreme Court Ruling Means New Precautions for Patent Owners

By Kathleen T. Petrich
June 11, 2008

If there was ever a time for a patent attorney to think like a business person, that time is now. The Supreme Court handed down its anticipated decision in Quanta Computer, Inc. v. LG Electronics, Inc. (No. 06-937) on June 9, 2008. LG, owner of a purchased portfolio of patents, sued a downstream user of LG’s patented technology, which Quanta had acquired by sublicense from LG’s licensee Intel. LG lost due to the otherwise archaic doctrine of patent exhaustion.

Patent exhaustion extinguishes patent rights after the first sale. But such a doctrine had been held to be limited to patented devices. The claims in this case were method claims, related to ways of doing things, not physical devices. The Federal Circuit Court of Appeals had earlier held that the doctrine of patent exhaustion did not apply to method claims. The unanimous Supreme Court overruled the decision of the Federal Circuit Court of Appeals. But the rub here is that the patent claims at issue were in the form of method claims that “substantially embodied” the product, (microprocessors and chipsets obtained from Intel under license from LG). Because the licensee’s microprocessors and chipsets substantially embodied the LG patents and had “no reasonable noninfringing use and included all of the inventive aspects of the patented methods,” exhaustion applied to the post-license use.

In other words, the Supreme Court’s decision was very good news for licensees’ downstream customers -- particularly in the high-tech sector, where most patent claims have been method ones -- and a bad one for patent owners. Lawful downstream users now cannot be sued for patent infringement if the product they buy embodies--(and now substantially embodies)--the method claims in the license under the patent exhaustion doctrine. And if the licensee did not breach any license agreement, that leaves a patentee without a remedy.

Coupled with the earlier Supreme Court decision in MedImmune, Inc. v. Genentech, Inc., 549 U.S 118 (2007), in which the licensee no longer needs to breach the license agreement to sue for declaratory judgment that the licensed patent is invalid, licensees (and their customers) now have more leverage than ever before, and patentees appear to face greater challenges to commercializing their patents through licensing programs.

So what is a company that wants to protect its technology supposed to do?
While it may be too early to fully understand the implications of this case--particularly whether the case should be interpreted broadly or is limited to the facts at hand--here are some early take-away recommendations:

Patent attorneys must understand the business goals of the technology to be patented. Will the invention as claimed be licensed? If so, the patent attorney should have some idea of the intended licensing revenue stream and come up with creative claims that cover what the patentee intends to license. Patent attorneys may need to be even more creative in the type and scope of the claims depending on the anticipated use and commercialization of the technology. For example, patent attorneys may want to consider claims in which the anticipated licensed use may itself have a noninfringing use, as an effort to cover downstream users under the patent claims while avoiding a defense of patent exhaustion by the downstream users. Further, the Supreme Court appeared to give consideration to the final step of the method as a means of determining if the licensee is substantially practicing the invention. Of course, caution is urged to make sure that the licensee’s activities are covered by the patent claims, so that the license is necessary in the first place.
Patentees need to consider drafting patent licenses to impose restrictions on downstream users that make the downstream activity unlawful. The Supreme Court noted that, despite a notice requirement in the master agreement, there were no such downstream restrictions in the LG-Intel license agreement limiting downstream users’ used Intel-licensed products in combination with non-Intel memory and buses. However, the master agreement further stated that “a breach of the [master] agreement shall have no effect on and shall not be grounds for termination of the Patent License.” Thus, neither party alleged that a breach occurred, but was required to challenge that the downstream users’ claimed lawful use of the patented technology.
Patentees may want to consider obtaining a greater return for licensing their patents when downstream users will be immune from patent infringement (even if breach of contract remedies may be available with the licensee).
Now is a good time to conduct a review of existing patents and licensing agreements to determine if there are downstream user limitations. If not, when the license is negotiated, add such limitations. Also, if a patent specification supports broader claims and the patent is still within the two-year broadening-reissue window, the patentee would be wise to determine if there is a way to claim something broader than a mere form of the license grant that may capture downstream users’ products.

On the whole, the patentee is still not without leverage. But this most recent Supreme Court decision makes it more difficult to control downstream users without carefully considering the licensing objectives both from a patent and contractual perspective. Otherwise, the use of a patented technology through a lawful license that is substantially embodied in the downstream user’s product (and without a reasonable noninfringing use) can leave the downstream user safe from patent infringement claims by the patentee-licensor.

The U.S. patent landscape is changing at a rapid rate. If you have questions about the implications of new patent case law, statutes, and rules, please contact Kathleen T. Petrich (206.340.9672 or kpetrich@grahamdunn.com) or other members of the Graham & Dunn Intellectual Property Team of the Emerging Companies & Entrepreneurs Team.