The suit is between Quanta Computer Inc. (allied with other Taiwanese computer manufacturers) and a South Korean firm LG Electronics Inc. LG licensed some patents to Intel in 2000, requiring that it tell its customers not to combine Intel chips with non-Intel components, which it did. Some of Intel's customers ignored the restriction, however, so LG sued them for infringement.
LG lost in district court (hooray!), which said that, since LG had granted Intel an unrestricted license to sell its technology, its patents were therefore "exhausted," and apparently (I haven't read the decision) had no further claims on Intel's customers. Unfortunately, the Federal Circuit Court of Appeals reversed the decision (boo!), claiming that the patents weren't exhausted because of the notification Intel had to send its customers.
As is usually the case in these matters, a slew of amicus briefs have been filed, and interested parties are lining up on both sides. (But who speaks for liberty and free markets, the unspoken third corner in this trianglar tussle? Well, this blog for one.)
On one side are the major patent monopolists and patent licensors Qualcomm Inc. and Wi-LAN Inc., which argue that an expansive interpretation of exhaustion could thwart their patent "rights" and restrict their ability to profit from their patents. On the other side are what I'll call minor patent monopolists, Hewlett-Packard Co., Dell Inc. and Cisco Systems Inc.--which are representing the interests of patent licensees in this case. They argue that a narrow interpretation of exhaustion could result in conditional license agreements that enable patentees to obtain royalties up and down the value chain--upstream and downstream from a patentee's customer(s). (That cheer you hear in the background is from the IP lawyers' bar. "You won the case? We win! You lost the case? We win!")
Jim Skippen, the CEO of Wi-LAN, a Canadian wireless patent troll, er licensor, says a broad view of the matter might induce patentees to foist high royalty demands on downstream licensees to compensate for not being able to license upstream firms, such as semiconductor and component manufacturers. Since upstream firms generally indemnify downstream firms against infringement liability, this could lead to conflict between the two groups.
Mr. Skippen is quoted saying: "What will happen is you won't be able to license down the chain so you'll go after the highest-value guy, and guess what, the component guys have all given indemnities."
But Mr. Skippen, what is the ultimate cause of the conflict, or to put it another way, who exactly are you trying to kid, kiddo? Who has the dirty hands here? Forget where the customers' yachts are, where are the customers' rights?
The article notes that "[t]he doctrine of patent exhaustion, also known as first-sale doctrine, is triggered when the first authorized, and unrestricted sale of a patented article takes place." Dell, HP, Cisco, and eBay Inc. jointly filed a brief arguing that it should be incumbent upon a patent holder to assess the economic value of its invention, and that its "first purchaser" should pay full royalty, and pass along the cost of a license to its customers.
A lawyer for IBM hopes the SCOTUS takes a "balanced" view of exhaustion. He says, "We don't think anyone [should] be able to sell, or license someone to sell, a product and then go out and tell the [licensee's] innocent customers who buy that product, "Gee, we got some more news for you, you need a patent license in order to do anything with that product."
The case will be heard Jan. 16.
Here is an interesting take on patent exhaustion with some basic history: The Patent Prospector.
Here is the Intellectual Property Law Blog on the case.
Here is the Wikipedia article on First Sale Doctrine.
Here is an article on pill splitting from Howrey LLP.
This stuff is giving me a headache already. Does anyone have an aspirin? Just don't split it--I don't want you to get sued by some IP legal hotshot for violating a patent, even though it's your property and your idea.
