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Overview Of The Implications Of The Quanta Computer, Inc. v. LG Electronics, Inc. Decision On The Drafting Of License Agreements From A Canadian Perspective

Francois Painchaud

Léger Robic Richard, L.L.P., FP Partner/Lawyer, Montreal, Quebec, Canada

Claire Cébron

Léger Robic Richard, L.L.P., CC Lawyer, Montreal, Quebec, Canada

On June 9, 2008, the U.S. Supreme Court rendered a much awaited decision (the “Quanta decision”) which clarified the uncertainty surrounding the application of the doctrine of patent exhaustion in the United States (which essentially provides that “a patented item’s initial authorized sale terminates all patent rights to that item”) by essentially removing the ability of patent owners to limit the authorized sales of products embodying their inventions. In order to reach such a conclusion, the Court reaffirmed the 150 year old longstanding exhaustion doctrine and its essential role in maintaining competition in the market place. Despite the Federal Circuit’s recent precedent limiting the scope of the exhaustion doctrine and extending the patent owner’s power to control the use of the product after the first sale, the Supreme Court—evoking the risk that patent drafters try to evade exhaustion by drafting method claims—also ruled that exhaustion extended to method patents by the sale of an article that embodied the method.

In this case, LG Electronics (“LGE”), through a License Agreement, licensed Intel Corporation (“Intel”) to manufacture and sell microprocessors and chipsets using three of its computer technology patents. LGE did not limit the downstream sale of Intel products in its License Agreement, but in a separate agreement (the “Master Agreement”), it required Intel to notify its customers that the License Agreement did not extend to combinations of Intel products with non-Intel products. Through said requirements, LGE was apparently planning on collecting downstream royalties from computer manufacturer’s who would combine the patented technology with other components. Despite receiving such notice, Quanta Computers (“Quanta”) purchased microprocessors and chipsets from Intel and manufactured computers using the Intel products in combination with non-Intel products. Once aware of this, LGE initiated proceedings against Quanta for infringement of its patents and breach of the terms of the License Agreement. In trying to determine if patent holders could seek damages from downstream users, both the District Court and the Federal Circuit Court found that the exhaustion doctrine was not applicable to patent methods. The Federal Circuit Court further concluded that LGE had not licensed Intel to sell its products to a customer who was to combine them with non-Intel products and that the exhaustion doctrine could only be triggered by an unconditional sale, which was not the case here.

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