Posted on July 17, 2008 9:21 AM |Permalink |TrackBacks (0)

The U.S. Supreme Court's recent ruling in Quanta Computer, Inc. v. LG Electronics, Inc. (553 U. S. __, Dkt. No. 06-937, June 9, 2008) limits the ability of patent holders to demand royalties from companies at each stage of the production process. In this case, LG Electronics (LGE) licensed its computer component patents to Intel Corp., which then sold microprocessors and chipsets produced using those patents to computer manufacturers. Both Intel and non-Intel components were used in combination in the computers. The manufacturers did not modify the Intel components and followed Intel's specifications when incorporating the parts into their systems.

LGE unsuccessfully argued that the manufacturers' combination of Intel and non-Intel products infringed upon its patents. The Court determined that the doctrine of patent exhaustion applies to method patents. Even though a patented method cannot be sold in the same way as an article or device, methods can be embodied in a product, and patent rights are exhausted upon the sale of that product. Because LGE's license agreement authorized the sale of components that substantially embodied the patents at issue, consummation of that sale terminated its patent rights with respect to the components. The terms of the license agreement did not restrict Intel's right to convey its products to third parties for use in combination with non-Intel parts.

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