Supreme Court Says Patent Holders Can't Shake Down Entire Supply Chain

from the big-win dept

Mon, Jun 9th 2008 11:52am — Mike Masnick

The Supreme Court continues to bring a bit of common sense back to the patent system. While most of the tech world was sitting around paying attention to whatever Steve Jobs has to say this morning, the really big news in the tech industry may be the Supreme Court's decision that patent holders can't shake down the entire supply chain, by forcing each level of the supply chain to also license the patent (even if they bought a product from someone who had licensed the patent).

This the LG v. Quanta case that the Supreme Court agreed to hear last fall. Basically, LG had some patents that it licensed to Intel. Intel then sold products based on those patents, which its customers used to build other products. LG demanded license fees from those customers as well, even though they bought fully licensed products from Intel. LG insisted that since its contract with Intel said that the license didn't cover any additional products, then the patents had to be relicensed by each player down the supply chain. To some extent, this question of "patent exhaustion" is similar to questions about first sale doctrine when it comes to copyright, in determining if you have a right to actually resell a product that was legally purchased. And, thankfully, the Supreme Court agrees that patent exhaustion is an important concept.

This is yet another very important limitation on patent holders, preventing them from stifling innovation at every step of the product process, and double-, triple- and quadruple-dipping off a product based on a single use of their patented invention. Hopefully this will lead to the quick dismissal of a bunch of cases that were filed last fall against a ton of companies up and down various supply chains. A lot of patent hoarders, fearing this exact decision, tried to just sue everyone at once, hoping for quick settlements before the Supreme Court stepped in. It's great to see the Supreme Court taking such an active interest in rolling back massive abuses of the patent system. Update: The EFF has a good take on the ruling, noting some of the holes in it, suggesting that it's unfortunate the the Supreme Court wasn't as clear as it could/should have been.

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Filed Under: contracts, first sale, patent exhaustion, patents, supply chain, supreme court
Companies: lg, quanta

39 Comments

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MLS, 9 Jun 2008 @ 12:09pm

LG
Your characterization of the facts is so off the mark that I have to wonder if you have actually followed this case from its inception, and especially the associated facts. The same can be said of the law, but in this case I direct my comments to the Supreme Court that is apparently unaware of the substantive provisions in Title 35 that contradict its decision. Importantly, these provisions pertaining to contributory infringement were never even noted in the decision, at oral argument, and in virtually all of the merit and amicus briefs.
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Anonymous Coward, 9 Jun 2008 @ 12:18pm

Re: LG
MLS, if every single person involved in the case, including the lawyers for both sides, all of the amici, and the Justices, didn't include the part that you thought was important, isn't it possible that (just maybe) you were wrong, and it wasn't actually important? Isn't it possible that others have a better handle on the case then you seem to have?
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Bubbles McLawyer, 9 Jun 2008 @ 12:26pm

need a job
Whose payroll are you on?
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Anonymous Coward, 9 Jun 2008 @ 12:30pm

MLS it sounds like this decision really hurt your firm.
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Jason, 9 Jun 2008 @ 12:37pm

Re: LG
MLS,

What is Title 35? Where is it written? How does it contradict the Supreme Courts decision? More importantly though, how does Title 35 overturn the authority of the Supreme Court who has final say over what is/isn't legal inside of the United States?
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Danthrax, 9 Jun 2008 @ 12:38pm

Good Decision!
MLS: A Unanimous decision by the Supreme Court, and you think they failed to grasp even the fundamentals of the case? Wow, what an ego you have. Your opinion is "not even wrong" it's so wrong.
A decision in LG's favor would have been a disaster. LG licensed their patents to Intel. Everyone knows that Intel is a chip manufacturer. What do you do with a chip? Put it on your desk and look at it? Intel paid LG to use LG technology to make chips--which of course would be used as components in subsequent products. You appear to think it's fair to sell a thing for an agreed upon price, get paid fully for it, and then start suing people if the thing is ever actually used for anything!
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Anonymous of Course, 9 Jun 2008 @ 12:43pm

Title 35
Intel licensed the patent from LG then built a part
under that license. How does Title 35 apply?

Title 35 U. S. S 271(c)
"Whoever imports into the United States a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially made or especially adapted for in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringng use, shall be liable as a contributory infringer."

I'm curious.
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MLS, 9 Jun 2008 @ 12:45pm

Re: Re: LG
The AIPLA brief is the only one I recall that raises the issue. Unfortunately, it was not raised by any of the actual parties.

An excellent analysis of the issue can be found at:

http://www.morganfinnegan.com/news/articles_publications/0119/_res/id=sa_File1/OsborneArticle _re_Quanta-v.-LGE.pdf

Of course, none of the actual parties took the time to study the issue, focusing instead on arguments virtually guaranteed to result in a 9-0 opinion. Much of the "hosed up" state of Supreme Court jurisprudence regarding patent law would not exist if cases such as these were argued by subject matter experts, and not generalists who limit their practice to practice before the Supreme Court.
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Wyatt Ditzler, 9 Jun 2008 @ 12:54pm

hmmm
Now if we could get the court to decide on first sale of digital content.
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MLS, 9 Jun 2008 @ 12:56pm

Re: Title 35
LG's patents do not cover anything made by Intel. The patents do cover various aspects of a computer once a microprocessor, Intel or otherwise, is installed in a computer.

Intel was obviously concerned that under 271 it could be deemed a contributory infringer, so it worked out a deal with LG. Importantly, Intel could never have been deemed a direct infringer because it is not an importer of computers for sale to the public.

While the decision is contradicted by federal legislation, its import will prove largely academic by the more judicious selection of language in licensing arrangements.

I just hate to see a decision go off the deep end that adds more confusion to the current patent system. It is confusing enough without the Supreme Court's "help".
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Jason, 9 Jun 2008 @ 1:00pm

Re: Re: Re: LG
MLS,
From reading the abstract of the link you gave, it seems (at least to me), that the document supports the Supreme Court's decisions.

"...The statute provides a right to recovery for a component embodying the essential features of a system or method patent and exhaustion precludes a further recovery for the same invention."

Notice how it says it precludes further recovery. Of course, I didn't read the full thing, so I'm taking what I read from just the abstract.

Secondly, you did not answer how the Supreme Court is the one who decides what is right and what isn't, over what some document says.

Thirdly, you didn't answer what "Title 35" is, and, doing a quick search for "Title 35" and "Title XXXV", I didn't see anything in the document linked that mentioned it. I never heard of Title 35, that's why I am asking what it is and what it says.
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Jason, 9 Jun 2008 @ 1:13pm

Re: Re: Title 35
I want to play Devil's Advocate for a minute. This example may not be the best, but I think it makes sense for this decision.

Imagine buying pasta from a supermarket. Say you pay $1 for a pound of pasta. When you buy it, it's understood that the pasta and what you do with it is your business. You can make it that night, a month from now, even throw it out if you want, no big deal. But, let's say that you want to take that pasta, make a dish, and sell the dish for $2 per serving. How would you act if the supermarket learned of this and wants an extra $0.50 for this since you are now making a profit? What about the company that made the pasta in the first place? Do they deserve money since they first sold it to the supermarket?

I know this might be a bad example, but in other walks of life, if you buy something, it's yours. You are liable for what happens with/to it, and you don't owe anyone else upstream anything. This is the first sale doctrine. What shouldn't this apply to licensing technology as well? I agree that the person who made the tech should get paid (while at the same time, I don't see the use of patents when we would seem to get there anyway). Just because Intel, who happened to buy LG's product is making money off of it, they should be forced to let LG double dip for more profit?
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zcat, 9 Jun 2008 @ 1:15pm

Microsoft Software Patents?
Does this defang any patent threat Microsoft has over open source? Particularly I'm thinking mono and moonlight. If Miguel works for Novell and Novell has a patent deal with Microsoft, everyone downstream cannot be sued?

That would be nice.
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silentsteel (profile), 9 Jun 2008 @ 1:19pm

Re: Title 35
IANAL, nor have I read any comments past this one quoting the pertinent portion of Title 35; however, based upon what it says, and what was being argued before SCOTUS, the key term I see is "infringement". Intel was not infringing on this patent as they had licensed the technology from LG to begin with.
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MLS, 9 Jun 2008 @ 1:25pm

Re: Re: Re: Re: LG
It is a legal article I linked, so it is not something that readily admits to a casual reading. Once it and the caselaw are assimilated, it should be clear why I made my above admittedly generalized comments.

The Supreme Court is tasked with interpreting the law. This was not a case involving a constitutional issue. It was one involving statutory construction. Unfortunately, the Court was not directed to that portion of Title 35, which is where one finds the statutes comprising US patent law, that is an important part of situations such as this.

In all fairness, the Supreme Court does not comprise mind-readers. It takes cases as presented in briefs, and then attempt to render a decision consistent with judicial precedent. If a pertinent statutory section is not brought to its attention, it is not addressed.
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sonofdot, 9 Jun 2008 @ 1:34pm

Re: LG
If you're so fucking smart, why aren't you on the Supreme Court? Could it be because you have no clue how the court works? The issues you cite have nothing to do with the case argued before the court, even tangentially. Maybe, just maybe, that's why everyone involved ignored Title 35.
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MLS, 9 Jun 2008 @ 1:42pm

Re: Re: LG
From the tenor of your comment I assume you are rather weak in your knowledge of civics and civility.
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Anonymous Coward, 9 Jun 2008 @ 1:42pm

Wouldn't it stand to reason then, if LG had a leg to stand on with Title 35 it would have referenced it in it's briefs?
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sonofdot, 9 Jun 2008 @ 1:52pm

Re: Re: Re: LG
Almost as weak as you, except that I can see that this case had nothing to do with contributory infringement, and everything to do with patent exhaustion. Thus, no ruling on contributory infringement, no matter you much you pout and whine.
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Anonymous Coward, 9 Jun 2008 @ 1:57pm

Re: Re: Re: Re: Re: LG
MLS,

After a quick perusal of that particular article, it appears to support the Supreme Court's decision. In particular the article spells out that a patent's claim is exhausted after a single licensing but that does not preclude that it may infringe on a distinct separate patent (ie one that is not covered by the licensed patent). The article states that Title 35 also follows this pattern.

Though, the real issue here is that this is not the decision of the court but merely an article discussing a case before the court.
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MLS, 9 Jun 2008 @ 2:03pm

Re:
Wouldn't it stand to reason then, if LG had a leg to stand on with Title 35 it would have referenced it in it's briefs?

One would like to think that. Unfortunately, it is a fact of life that many times weak arguments are presented and strong arguments overlooked.

This case was the subject of much discussion by attorneys, and one of the important parts of the discussion was befuddlement why LG went off in the direction it did in its brief to the USSC.
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dorpass, 9 Jun 2008 @ 2:48pm

Re: Re:
I am sure there is just as much befuddlement as to why anyone thins Article 35 would've helped LG.
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Eliot, 9 Jun 2008 @ 2:49pm

@ MLS...
MLS, I'm honestly curious. You sound like you might know what you're talking about versus being a troll, so I'm hoping, since I'm not a lawyer, you would explain to me what, specifically, in the Title 35 provisions contradict the court's decision.
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Anonymous Coward, 9 Jun 2008 @ 2:52pm

Re: Re:
Funny how you worded it earlier though, that Title 35 contradicts the SCOTUS. AFAIK, aside from the Constitution *nothing* contradicts SCOTUS legally. Though this could be a misnomer.
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WebMind, 9 Jun 2008 @ 2:54pm

MLS's opinion redirected.
MLS, your opinion goes counter to my sense of moral outrage. It is now fact that you are wrong and must be condemned. Please keep all opinions not matching mine to yourself.

--The WebMind
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Vincent Clement, 9 Jun 2008 @ 3:51pm

Re: Re: Title 35
I just hate to see someone be a sore loser.
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Jorge, 9 Jun 2008 @ 4:39pm

MLS, You Misunderstand Title 35
1) Title 35 does not allow a company to demand multiple levels of patent licenses. Indeed, it says quite the opposite.

2) LG spent months on its legal defenses. It spent millions of dollars. Its law firm(s) had dozens of lawyers research *every* relevant and possibly relevant case, law, and legal doctrine. They didn't use Title 35 *because it hurts their case.*

3) If Title 35 applied, *every* patent lawyer in the legal world would be up in arms. The fact that they aren't speaks volumes.
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Perry Masonary, 9 Jun 2008 @ 5:33pm

Ahhh, yes.
Not everyone agrees with Supreme Court rulings, it is not their job to please everyone. They ruled on the matter before them, end of story.
Now if you have a worthy case to bring, have at it. But saying that they did not perform their duty is a bit over the top dont ya think ?
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NotPerryMason, 9 Jun 2008 @ 6:33pm

MLS, I need your legal expertise!
I just spray painted my LG phone. Will they sue me? Will Title 35 apply?
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IANAL, 9 Jun 2008 @ 8:01pm

Re: MLS, I need your legal expertise!
Better check the EULA to see if they allow that sort of thing. Also, depending upon what color you chose, T-mobile may have something to say about it. Oh ya, Orange too.
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Did I not see something?, 9 Jun 2008 @ 8:02pm

The forest for the trees.
First of all, MLS you reference a legal document. I would like to point out that a legal document is an argument and nothing more. It is not a ruling or holding by a court. It may be or may not be a good argument, but it's just an argument. It is not case law. It may cite case law, but like any legal document it may at times use case law incorrectly. A courts holding is always the last word.

Second, you claim the ruling has no basis in case law. Have you read the ruling? The court referenced multiple cases to lay the foundation in case law all the way back to 1917.

Third, patents arise out of the Constitution and thus SCOTUS certainly has broad powers over patents just as they do in copyright to set the foundation of case law in this matter.

Last of all, nothing you cite supports your position anyway. Your argument is moot.
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Chiropetra, 9 Jun 2008 @ 9:32pm

Re: Re: Re: LG -- Osborne cite
I'd suggest anyone who's interested in this case read this article -- at least the first few pages and preferably all of it.

Basically what the author is arguing is that neither side was right in this case. The plaintiff wanted to greatly restrict the doctrine of exhaustion from its traditional limits and the defendant wanted to extend it all the way to the wall.

IANAL, but what follows is my interpretation of what's going on.

The problem is that traditionally, patent holders have had some ability to restrict what a particular licensee can do with their patent. IE you could license a device for medical applications, say, but not for agricultural applications. Kind of like assigning exclusive sales territories. In general that's worked pretty well since it lets a licensee save money by licensing a patent for a specific field of use, presumably at a lower cost than a broad general license.

Anyway, read the article. You probably won't agree with it (I don't), but it's enlightening.
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MLS, 9 Jun 2008 @ 10:12pm

Re: The forest for the trees.
First, I never said there is no case law. There is a wealth of case law dating back to the 1800's. Suggesting otherwise is inaccurate.

The "document" you mention is of course not a court decision, but it is noteworthy reading because of its thorough treatment of the concepts "patent exhaustion", "patent misuse" and "contributory infringement". These are not separate and distinct issues. They are thoroughly joined at the hip, and to understand one requires understanding the others. A failing in my view of the opinion is that by not noting and reconciling these concepts, a door has been left ajar for future litigation that will test the boundaries of the LG opinion.

Also of particular note is a footnote in the opinion suggesting that the court may countenance certain contractual arrangements where one may be able to overcome patent exhaustion and achieve substantially the same result as was attempted by LG in its arrangements with Intel.

The headline to this article concerns a patentee's attempt to control downstream users in the supply chain. In my view the decision does not slam this door shut. It closes it a bit, but not very much.
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Chris Caffee, 10 Jun 2008 @ 6:06am

It would seem to me that a process patent would be in conflict to this decision where an apparatus patent would make this decision correct. Am I correct? Lawyers only response please.
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Anthony Kuhn, 10 Jun 2008 @ 8:46am

No more blackmail!
This is a good development for those whose products relies on primary sourced parts that contain IP of some sort. Complex products could contain thousands of such pieces, yet with this ruling, the end manufacturer is no longer responsible for thousands of potential lawsuit. Hip hip hooray!
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Joe Mullin, 11 Jun 2008 @ 12:11pm

I'm going to ask around, but on first glance I'm not sure this decision will prevent the type of mass-defendant lawsuit described in Mike's link, unless the original manufacturer has a license (as Intel did).

In many cases, including the 92-defendant case Mike linked to, the manufacturer does _not_ have a license, and is also an alleged infringer. It's just more lucrative to go after the retailer clients than the manufacturer of the device. Not sure that Quanta v. LG will stop that.
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stv, 12 Jun 2008 @ 6:01am

dissembling
Call it what you will...patent troll, patent hoarder, etc. It all means one thing: “We’re using your invention and we’re not going to pay”. Stop the dissembling.

When corporate America agrees to not use our inventions without consent, American inventors and small entities will agree to stop suing them.
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By Stander, 12 Jun 2008 @ 11:07am

Patent Blather
By the way, whose bill are ya'll padding why having this discussion?
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