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Supreme Court Expands Exhaustion Doctrine

BUSINESS NEWS

In June, the U.S. Supreme Court issued its decision in Quanta Computer Inc. v. LG Electronics Inc. (LGE), thereby limiting the ability of patent owners to demand downstream royalties from customers of licensees. The ruling has implications for medical device manufacturers, many of whom routinely incorporate components purchased from outside vendors into their final products.

At the heart of Quanta were two general issues: the exhaustion doctrine and conditional sales agreements. The exhaustion doctrine maintains that the initial unconditional sale of a patented article by a patent owner (or its licensee) exhausts all patent rights to that item. Thus, the purchaser of the patented article can use or resell the article as it pleases.

On the other hand, under a conditional sales agreement, a patent owner can attach restrictions on the use or resale of its patented article. Thus, a conditional sale enables a patent owner to sue a downstream purchaser of its patented item if the conditions of sale are breached.

In its ruling on Quanta, the Supreme Court expanded the applications of the exhaustion doctrine, yet left questions hanging with regard to the legitimacy of conditional sales agreements designed to negate the exhaustion doctrine.

In Quanta, LGE granted a license to Intel to make and sell microprocessors and chipsets. Quanta built computer systems by combining computer parts with Intel's specialized components.

In its ruling, the Supreme Court unanimously ruled that LGE had exhausted its patent rights and could not control Quanta's use of the licensed microprocessors and chipsets. The Quanta decision also implies that exhaustion is not limited to the licensed patent covering the component, but that the doctrine also will apply to any patent that is "substantially embodied" by the purchased item.

Implications of the decision extend to the medical device, biotechnology, and research communities. For example, medical device companies may purchase components from vendors that have licensed patents from third parties for the purposes of building their components.

For now, a purchaser of components will be insulated from liability under Quanta, so long as the license agreement between its vendor and the patent owner is unconditional. However, in many commercial settings, a medical device company will not have access to the details of such patent license agreements.

--Jason Honeyman, shareholder and chair of the medical device practice group, Wolf Greenfield (Boston)

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