QUANTA VS. LGE

QUANTA VS. LGE: A DECISION CONCERNING LICENSING
FRANÇOIS PAINCAHUD AND CLAIRE CEBRON*
LEGER ROBIC RICHARD, LLP
LAWYERS, PATENT AND TRADE-MARK AGENTS
Generally, when a patent owner sells a patented product to a first buyer, the
purchaser is free to use or sell that patented product without having to worry about
being sued for infringement by the patent holder. This is referred to as the doctrine
of “patent exhaustion”.
In a case opposing the Korean company, LG Electronics (“LGE”), and
Taiwanese company Quanta Computers (“Quanta”), the Supreme Court of
United States recently ruled on the sensitive subject of the applicability of
doctrine of patent exhaustion on method patents (Quanta Computer, Inc. v.
Electronics, Inc., no. 06-937, 2008 U.S. LEXIS 4702 (June 9th, 2008)).
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The Supreme Court unanimously overruled the Federal Circuit’s decision and held
that (i) the doctrine of patent exhaustion applies to method patents, and that (ii) once
a product is unconditionally authorized for sale, and that this product comprises the
essential elements of a patented invention, with no other intended use than to
practice the patent, the doctrine of patent exhaustion applies and the patent owner
can no longer invoke patent law in an attempt to receive additional royalties or limit
the rights of the licensee’s subcontractors and the latter’s clients, since, by doing so,
the patent owner would extend the patent’s scope and the rights which the patent
confers without due cause.
In reaching this decision, the Supreme Court reaffirmed its support of a doctrine
which, according to its advocates, serves to maintian a competitive market.
However, the Court did not rule upon the contractual aspect of the dispute between
the parties as it did not discuss or limit the rights of the patent owners to impose
restrictions/conditions to the sale of their products by way of a license agreement.
Therefore, it follows that when patent law cannot be used to prohibit or limit the use
of a product, contractual law may come into play to achieve the intended result.
The impact of this decision goes well beyond the issue of the scope of applicability
of the doctrine of patent exhaustion, since patent owners will have every interest,
before marketing their product, to review the wording of their license agreements (at
© CIPS, 2008.
With LEGER ROBIC RICHARD, LLP. a multidisciplinary firm of Lawyers, and Patent and Trade-mark
Agents. Published in the Winter 2008 Newsletter of the firm (Vol. 12, No. 4). Publication 068.101.
*
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least with respect to, directly or indirectly, the territory of the United States), for
instance by:
1- drafting license agreements which clearly restrict the right of the
licensee to re-sell patented articles only to purchasers authorized by the
licensor, while preventing anti-competitive practices. As such, (i) the sale
will be deemed conditional and the doctrine of patent exhaustion will not
apply, (ii) every third party purchaser will also have to enter into a license
agreement with the patent owner, allowing the latter to supervise and
restrict the use of the patented article, (iii) the patent owner will thereby
retain a certain degree of control over gains stemming from the use of the
patent by imposing a royalty to be paid by every licensee; or
2- fully negotiating the amount of the royalty to retain the maximum value
of the patented rights, when the license is granted to the first buyer.
Although patent owners appear to be able to limit the impact of the Supreme Court’s
decision by using contractual clauses to their advantage, potential licensees might
be reluctant to enter into a license agreement which imposes substantial obligations
upon them. It will be interesting to see how licensors and licensees will strike a
balance between their respective interests.
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