Solicitor General Recommends Certiorari in Quanta Computer, Inc. v. LG Electronics, Inc.

August 29, 2007
Late yesterday, the Solicitor General filed a brief recommending that the Supreme Court grant review in Quanta Computer v. LG Electronics, 06-937. The case raises questions of considerable practical importance concerning the permissible scope of patent licenses. Historically, the Supreme Court always grants certiorari in a patent case following a Solicitor General grant recommendation. So that our clients are equipped to anticipate the latest in patent law developments, we offer the following description and analysis of this development.

LG Electronics owns several patents that relate to systems and methods for receiving and transmitting data in computer systems. Intel Corporation is authorized by a license agreement with LG Electronics to "make, use, sell (directly or indirectly), offer to sell, import and otherwise dispose of" specialized microprocessors and chipsets that are essential to the patented invention. There are no other uses for these specialized components. But, consistent with the agreement, Intel was required to inform its customers that the license with LG Electronics "does not extend, expressly or by implication, to any product that you may make by combining an Intel product with any non-Intel product." Quanta Computer built computer systems by combining computer parts with Intel's specialized components. LG Electronics sued Quanta Corporation for patent infringement, alleging that the "licensed Intel products" when "combined with other components" infringe its patents.

The dispute implicates the important doctrine of "patent exhaustion," more accurately referred to as the "first sale doctrine." Until now, the leading first-sale case has been Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (1992). Under Mallinckrodt and subsequent cases, the first-sale doctrine does not apply to a "conditional" sale of a patented invention. Thus, a patentee may attach license restrictions on products embodying its patented invention and bring patent infringement actions to enforce those restrictions against downstream purchasers. Applying this rule here, the Federal Circuit ruled that because the sale to Intel was "conditional" LG Electronics could sue Quanta Corporation for patent infringement, even though Quanta Corporation engaged in the authorized use of a licensed Intel component and used that component for its intended and sole purpose.

In the view of the Solicitor General, the first-sale doctrine "has evolved in the Federal Circuit in a manner that appears to depart from [Supreme Court] cases." The Solicitor General emphasized that the Supreme Court's most recent case on the issue, United States v. Univis Lens Co., 316 U.S. 241 (1942), provides that a patentee who sells a machine embodying the invention cannot bring a patent infringement suit against purchasers who use the machine for its only reasonable use. The Solicitor General stated that the Federal Circuit's "broad understanding" of conditional sales — and thus the broad inapplicability of the first-sale doctrine — is "not reflected" in Supreme Court case law.

As the Solicitor General notes, "[w]hether, and under what circumstances, patentees can avoid the effects of the first-sale doctrine by agreement or unilateral notice are issues of substantial ongoing practical importance." The Solicitor General emphasized the various policy problems with the Federal Circuit's approach, such as permitting patentees to "employ the patent law to extract royalties on articles embodying their invention at multiple downstream points in the channels of commerce, even after they have parted (or a licensee has parted in an authorized sale) with title to the article."

From a broader patent law perspective, this case confirms the Supreme Court's abiding interest in reforming the Federal Circuit's judicial method. As set out by the Solicitor General, the Federal Circuit has once again adopted a formalistic rule that does not advance the interest of patent law as articulated by Supreme Court precedent. Indeed, there seems little doubt that the Solicitor General's views will prevail on the merits, and that the Supreme Court will again reverse the Federal Circuit. There is also little question that the expert Supreme Court practitioners who now represent Quanta were able to set forth the doctrinal conflict between Mallinckrodt and Univis Lens Co. in a way that got the Court's attention. Finally, as with other recent Supreme Court patent cases, we expect that numerous interested parties will submit amicus curiae briefs with the Court. Indeed, given the substantial practical importance of the first-sale doctrine, the Court is likely to rely heavily on such "real world" filings.

The Supreme Court will decide whether to grant review the week of September 24, 2007.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Mark Samuels, an O'Melveny partner licensed to practice law in California, Darin Snyder, an O'Melveny partner licensed to practice law in California, and Mark Davies, an O'Melveny counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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