US Supreme Court: Patents are for promoting progress not creating private fortunes

The US Supreme Court ruled yesterday in an important patent case that will be unfamiliar to all but IP and Supreme Court geeks, LG Electronics Inc. v Quanta Computer Inc. The WSJ has the story (unfortunately behind a pay wall) but it is worth scanning the decision itself as there are some real gems from Justice Thomas (who delivered the unanimous opinion of the Court) in there. The WSJ says:

"The Supreme Court relaxed the grip that patent owners hold over third-party uses of their inventions, continuing a recent recalibration of intellectual-property law intended to foster competition and innovation.

The opinion delivered Monday involved a U.S. patent for computer chipsets, which South Korea's LG Electronics Inc. licensed to Intel Corp., of Santa Clara, Calif. Intel made the chips and sold them to computer manufacturers. When one of those manufacturers, Quanta Computer Inc. of Taiwan, used them in its products, LG sued for infringement, arguing Quanta needed a separate license from LG to install them in computers."

The Court essentially disagreed with LG Electronics and said the company was not entitled to control downstream use of the patent due to the doctrine of patent exhaustion. Justice Thomas said:

"For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item...

The longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item. This Court first applied the doctrine in 19th-century cases addressing patent extensions on the Woodworth planing machine. Purchasers of licenses to sell and use the machine for the duration of the original patent term sought to continue using the licenses through the extended term. The Court held that the extension of the patent term did not affect the rights already secured by purchasers who bought the item for use "in the ordinary pursuits of life." Bloomer v. McQuewan, 14 How. 539, 549 (1853); see also ibid. ("[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly")...

Although the Court permitted postsale restrictions on the use of a patented article in Henry v. A. B. Dick Co., 224 U. S. 1 (1912),² that decision was short lived. In 1913, the Court refused to apply A. B. Dick to uphold price-fixing provisions in a patent license. See Bauer & Cie v. O'Donnell, 229 U. S. 1, 14-17 (1913). Shortly thereafter, in Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U. S. 502, 518 (1917), the Court explicitly overruled A. B. Dick. In that case, a patent holder attempted to limit purchasers' use of its film projectors to show only film made under a patent held by the same company. The Court noted the "increasing frequency" with which patent holders were using A. B. Dick-style licenses to limit the use of their products and thereby using the patents to secure market control of related, unpatented items. 243 U. S., at 509, 516-517. Observing that "the primary purpose of our patent laws is not the creation of private fortunes for the owners of patents but is 'to promote the progress of science and useful arts,' " id., at 511 (quoting U. S. Const., Art. I, §8, cl. 8), the Court held that "the scope of the grant which may be made to an inventor in a patent, pursuant to the [patent] statute, must be limited to the invention described in the claims of his patent." 243 U. S., at 511. Accordingly, it reiterated the rule that "the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it." Id., at 516."

That a Supreme Court Justice in a 2008 patent decision should find the need, in a unanimous decision, to cite historical Court doctrine from 1853 ("[W]hen the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly") and 1917 ("the primary purpose of our patent laws is not the creation of private fortunes for the owners of patents but is 'to promote the progress of science and useful arts,' ") is really interesting.

The court was also particularly wary of patent holders voiding patent exhaustion doctrine through the use of patents on methods:

" LGE argues that the exhaustion doctrine is inapplicable here because it does not apply to method claims, which are contained in each of the LGE Patents. LGE reasons that, because method patents are linked not to a tangible article but to a process, they can never be exhausted through a sale. Rather, practicing the patent--which occurs upon each use of an article embodying a method patent--is permissible only to the extent rights are transferred in an assignment contract. Quanta, in turn, argues that there is no reason to preclude exhaustion of method claims, and points out that both this Court and the Federal Circuit have applied exhaustion to method claims. It argues that any other rule would allow patent holders to avoid exhaustion entirely by inserting method claims in their patent specifications.

Quanta has the better of this argument. Nothing in this Court's approach to patent exhaustion supports LGE's argument that method patents cannot be exhausted. It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be "embodied" in a product, the sale of which exhausts patent rights...

Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Patentees seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus.⁵ Apparatus and method claims "may approach each other so nearly that it will be difficult to distinguish the process from the function of the apparatus." United States ex rel. Steinmetz v. Allen, 192 U. S. 543, 559 (1904). By characterizing their claims as method instead of apparatus claims, or including a method claim for the machine's patented method of performing its task, a patent drafter could shield practically any patented item from exhaustion.

This case illustrates the danger of allowing such an end-run around exhaustion. On LGE's theory, although Intel is authorized to sell a completed computer system that practices the LGE Patents, any downstream purchasers of the system could nonetheless be liable for patent infringement. Such a result would violate the longstanding principle that, when a patented item is "once lawfully made and sold, there is no restriction on [its] use to be implied for the benefit of the patentee." Adams, 17 Wall., at 457. We therefore reject LGE's argument that method claims, as a category, are never exhaustible."