LG Electronics v. Quanta and others--patent infringement claims

This is a patent infringement case. I don't know if anyone in the United States really understands patent infringement law (though many will tell you that they do). I know that I don't fully understand it. Indeed, the petition for certiorari filed by Quanta and others in this case suggests that the Federal Circuit Court of Appeals (which has exclusive jurisdiction over patent appeals) has fully misconstrued the doctrine of "patent exhaustion," and that it has "eviscerated" it (a favorite word in Supreme Court circles). It might not be so bad if a court is claimed to misunderstand a doctrine; in this case, however, Quanta and others claim that if the Federal Circuit's case does not get examined (and reversed) by the Supreme Court, we will have a new day in computer sales which will end up costing consumers many hundreds of dollars more for simple computer purchases. Are they just crying, "The sky is falling"? Maybe not. Here are a few facts.

Understanding the Dispute

In May 1999 LG Electronics ("LGE") purchased a series of patents which are used in the assembly of the components of computers. With these patents, LGE entered into a licensing agreement with Intel in exchange for the complete and unrestricted right for Intel to "make, use, and sell" (traditional terms in patent law) LGE's patented products in its microprocessors. We don't know how much Intel paid LGE for this privilege but we can assume it was a bundle. So, Intel combines the LGE material with its material, and the combination becomes a microprocess or microchip that is then sold to what are called "OEMs"--or original equipment manufacturers. But, because Intel doesn't tell its trade secrets, the LGE patented material cannot be identified or disentangled from the Intel microprocessors. These microprocessors are then placed by the OEM's in each computer sold in America, and the computers are sold under the known names of Dell or Gateway or others. So far so clear (I think).

What happened in this case, however, is that LGE and Intel entered into a second written agreement, whereby Intel agreed to send a "notice" to its own customers (the OEM people in this suit) which told them that they, the OEM people, did not receive any "license" from LGE to use products purchased from Intel in any product made "by combining an Intel product with a non-Intel product."

I highlighted the last paragraph because I think it is crucial for the case. The purported meaning of this second agreement between LGE and Intel was that any downstream computer assembler had to work out its own license agreement with LGE, probably paying them millions of dollars to use the product. Whether LGE's agreement with Intel, which purportedly binds OEM's, in fact does bind OEM's, is the heart of this case.

What happened in real life is that once OEM manufacturers began putting Intel microprocessors into their computers, LGE sued the OEMs, alleging that they can't use the computer chips they bought from Intel in any computer without infringing LGE's patents. LGE now is suing or threatening to sue more than 70 companies whom it insists must pay it a second round of royalties before they may use Intel chips in computers.

The Case in the Courts

The federal district court, and the Court of Appeals for the Federal Circuit looked at the patents one by one (there were five of them which LGE claimed were infringed). The district court, in 2002, concluded that LGE's license agreement with Intel and Intel's subsequent sale of microchips to OEM's exhausted LGE's rights to recover royalties with respect to these chips. Thus, for the district court, LGE's demand for additional royalties from OEM's was an impermissible attempt to obtain a double royalty on the same patents. The Federal Circuit, however, reversed the district court, concluding that the exhaustion doctrine in patent law only applies to "unconditional" sales, and that LGE's license agreement with Intel didn't comprise such a sale.

In an issue that frankly confused me, the court distinguished between "method" claims of GLE, which were not exhausted, and system claims, which may have been exhausted. Any help?

An Illustration

I think that computer sales have placed a unique problem on patent law, a problem which we still haven't solved. Patent law was originally meant to deal with a clear line of demarcation between "sales" and "licenses." Schwinn, for example, put together bikes in accordance with certain patents it owned, and when it "sold" the bike, its rights completely ended in the bike. Owners could re-sell the bike for as much or little as they wanted. But licenses are mere permissions to use. A company pays a certain fee to use a product, but the licensing company still "owns" the product. Thus, other people who want to use the product must also purchase a "license." A most obvious example of use of licenses is in the franchising of restaurants. You can only open up a KFC if you are a licensee of the company. But where do computer programs and equipment "fit" into this rather old and tidy system? I think we are still trying to figure that out. The old doctrine of licensing and sales may simply not "fit" into our brave new world of computer sales.

Conclusion

The Supreme Court is being asked to decide if LGE's patent rights were exhausted by its license agreement with Intel (which would give them no claim to license revenues against OEM's). The case that seemingly will bulk large in the Supreme Court's decision is Mallinckrodt, Inc. v. Medipart, Inc, 976 F2d 700 (Fed. Cir. 1992), which the Federal Circuit court read to LGE's advantage. A lot rides on this one...

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