Top U.S. court scales back patent royalties

A recent landmark decision by the United States Supreme Court in Quanta v. LG Electronics has effectively restricted patent-holders’ ability to claim infringement for subsequent uses of licensed products. This is the latest step by the top American court to circumscribe the scope of entitlements of patent-holders by limiting the ability of companies to collect multiple royalties on their patents.

The facts of the case are uncomplicated and uncontested: Respondent LG Electronics, Inc. (“LGE”) owns a portfolio of patents related to personal computers. LGE licenses these patents to Intel Corp. (“Intel”), which is permitted under the licensing agreement to make, use and sell chipsets using LGE’s patents. Intel then contracts with the Appellant, a system manufacturer called Quanta Computer, Inc. (“Quanta”), which combines Intel chips with non-Intel components to assemble computers. Subsequently, LGE sues Quanta for patent infringement, arguing that the purchase by Quanta of Intel chips does not constitute an authorization to combine Intel products with non-Intel components.

While LGE’s license agreement with Intel specifically encompasses the sale of chipsets to third parties, the agreement also expressly denies Intel the authority to grant third-party licenses. Ultimately, the legal issue on which this suit turns is whether the licensed sale of components used in a patented invention triggers the “exhaustion” of patent-holders’ rights.

The patent exhaustion (or first sale) doctrine is a longstanding, judicially created rule designed to limit a patentee to a single royalty per patented device. While the U.S. Patent Act grants patent owners the right to exclude others from making, using, offering for sale, or selling any patented invention, patent exhaustion holds that the first unrestricted sale of a patented device terminates a patentee’s control over subsequent uses or sales of that particular device.

After extensive deliberation at the trial and appellate level, the Supreme Court determines that Intel’s sale of chipsets to Quanta exhausts LGE’s control over “a reasonable use of those chips under patent law”, namely, the assembly operations of system manufacturers. Further, the LGE-Intel license agreement was “broadly” crafted, permitting Intel to make, use or sell its products free of LGE’s patent claims.

I strongly agree with the Supreme Court’s ruling in this case.  LGE’s success in this suit would have signified a dangerous expansion of patent monopoly, empowering patent-holders with the legal support to limit competition by controlling the use of patented goods after an authorized first sale. Perhaps more importantly, LGE would not only have been entitled to royalties from Intel, but would have had a claim to extract duplicative licensing fees from any and all users of its patents, no matter how remote. Such claims would be tantamount to highway robbery, and the Supreme Court was, in my opinion, correctly guided in drawing the line of patent exhaustion at the first sale threshold. After all, any reform of the time-tested patent exhaustion doctrine is best left to Congress, which is well positioned to evaluate competing perspectives, represent different stakeholders, and draft an appropriate legislative response.


For a full transcript of the Quanta v. LG Electronics case, please visit: