Chipping Away at the Quanta v. LG Electronics Patent Decision

[WSJ_law_blog]

It’s June, which in our minds means a few things: cloudy mornings in southern California, golf’s U.S. Open and a spate of highly-anticipated Supreme Court decisions.

Earlier today, the Court unveiled four opinions, the most interesting of which, in our opinion, is Quanta Computer Inc. v. LG Electronics Inc. In a 9-0 opinion, delivered by Justice Clarence Thomas, the Court limited a patent-holder’s ability to demand royalties on the use of a product after it’s sold. We checked in with WSJ Supreme Court reporter Jess Bravin to get the skinny on what happened and why it matters in the long run.

Hi Jess. Thanks for taking the time. Mind filling us in on the background of the case?

No problem. LG Electronics bought up a bunch of patents in 1999, including patents for computer chips, which they later licensed to Intel. Intel then used the patents in making chips, which they sold to computer manufacturers. When they sold them, however, they included a provision in the sale agreement — insisted upon by LG Electronics — that said you, the purchaser, can’t combine these products with any others—that is, you can’t install them in a computer—without an additional license from LG.

They could use them, right, but they’d have to pay an additional royalty back to LG?

Right. Basically LG demanded a royalty, saying to the purchasers, “you may have bought these chips from Intel, but you just can’t use them in computers without paying royalties.” Some purchasers paid the royalties, but Quanta — a Taiwanese manufacturer — didn’t and was sued in federal court.

Okay. So how’d the court handle it?

The district court found, for the most part, for Quanta, but the Federal Circuit, a specialized court that hears all patent appeals, reversed, ruling completely for LG. It said the patent for combining the chip with other components was not included in the sale of the chip. LG won and said Quanta had to pay.

And so Quanta appealed?

Right. The basic argument that Thomas accepted was that, look, this is a product that has no use other than for putting it in a computer. It makes no sense to buy something that you’re forbidden from using. He cites patent precedents, including a 1917 case in which the Court said that the primary purpose of our patent system is “not to create private fortunes for patent users,” but, as the Constitution provides, to “promote the progress of science and useful arts.”

The main precedent he looked to was a 1942 case that involved the manufacturing of lens blanks for eyeglasses. The company that patented the eyeglass lenses sought to control the entire stream to the consumer, dictating the prices down through the company that made the blanks, to the wholesalers who would grind the blanks into lenses, to retailers that sold the finished spectacles. The Court said then “well, there’s really nothing you can do with this product but grind them into lenses for eyeglasses, and furthermore, the method you use for grinding them is not unique to the company’s brand,” so you can’t control it under patent law.

The same thing applies here, the Court ruled. Putting a computer chip [in a computer] is not unique to these companies. That’s the basic holding here.

Great. Can you put it into a broader context for us?

Sure. The ruling relaxes the grip of the patent owner on downstream uses. This could apply to many many other products, even more nowadays when you have much more complicated devices. The Court relied on this notion of patent exhaustion, the idea that once you buy something, you’re entitled to use it, even if there’s a patent on the product. To hold otherwise would place too great a burden on trade.

The Court has made a point of resolving patent disputes in recent years. How does this ruling square with the others made by the Court?

It fits neatly in line with those cases. This case is a part of a series of cases since 2005 where the Supreme Court has reversed the Federal Circuit and its use of formal, abstract rules that essentially gave unfettered power to a patent-holder. In KSR v. Teleflex, the Court expanded its definition of obviousness, making it harder to get a patent. In eBay v. MercExchange, the Court ruled that a lower court did not have to issue an injunction against an infringer, but could adopt a less onerous remedy, such as a mandatory royalty, if economic conditions or other factors suggested it would be too harmful to remove a product from the market.

In these cases, the Court is basically saying that the Federal Circuit has gotten the balance wrong. In striking the balance between patent owner and someone trying to invent a new device, the Court has been finding that the purpose of the patent law has been frustrated by giving patent holders too much power over subsequent innovations or commerce that may be related to patented devices.

Great, Jess. Thanks for taking the time.

No problem.

Photo: AP

The Court is basically saying that the Federal Circuit has gotten the balance wrong. In striking the balance between patent owner and someone trying to invent a new device, the Court has been finding that the purpose of the patent law has been frustrated by giving patent holders too much power over subsequent innovations or commerce that may be related to patented devices.


...and I could not agree more!!!