Watermark

26 June 2008
The US doctrine of patent exhaustion provides, in essence, that the first sale of a patented item ends all patent rights to the item, such that the purchaser of a patented item is free to use and sell the item without requiring a licence from the patent owner.  The doctrine extends to sales of products by a licensee under a patent within the scope of the patent licence.

In Quanta Computer Inc v LG Electronics Inc, No.06-937, the US Supreme Court recently considered the scope of this doctrine in the context of a patent licence where the licensor sought to impose restrictions on the rights of the licensee’s customers to use patented products purchased from the licensee. 

LG Electronics owns patents covering certain microprocessors and chipsets, and licensed Intel to make and sell Intel microprocessors and chipsets under those patents.  LG wanted to prevent Intel’s customers from building computers using the Intel microprocessors and chipsets without a licence from LG.  It was therefore a requirement of the patent licence that Intel notify its customers that Intel’s patent licence does not cover any product made by Intel’s customers that combines Intel’s products with any non-Intel components.  LG insisted on this term in the licence as LG intended to require Intel’s customers to pay royalties to LG when they built computers using the components purchased from Intel.   Some of Intel’s customers paid royalties to LG, but a company named Quanta refused to do so, and LG sued Quanta for patent infringement.

LG lost the case.  The Supreme Court held that LG’s patent rights were exhausted when Intel sold the patented microprocessors and chipsets to its customers, and Intel’s customers such as Quanta were free to use those products to build computers without requiring a licence from LG.
However, the Supreme Court left open the possibility that LG could have achieved its desired aim by structuring its patent licensing in different manner.  For example, LG might have been successful if Intel’s patent licence had clearly prevented Intel from selling licensed products to customers who intended to combine those products with non-Intel products.

Australian law has traditionally not adopted an “exhaustion of rights” approach, and instead has treated the rights of the purchaser of a patented item as being the subject of an implied licence.  However, Australian law in this area is not settled.  Competition law issues, in particular the restrictions on exclusive dealings and other anti-competitive conduct under the Trade Practices Act 1974, will also impact on the type of post-sale restrictions in relation to patented items that might be enforceable.  The message for patent owners seeking to impose restrictions on their licensee’s customers is to be very careful how they go about it.
Peter Hallett