More on Last Week’s Grant in No. 06-937, Quanta Computer v. LG Electronics

The following summary was written by Dennis Butler, an intellectual property associate at the Akin Gump office in Washington, DC.

The Supreme Court granted certiorari last week in a patent infringement conflict between LG Electronics, Inc., a Korea-based electronics company and Quanta Computer, Inc., a Taiwan-based computer assembler, among other computer assemblers (Quanta). The issue to be resolved in Quanta Computer v. LG Electronics (06-937) is whether LGE’s license agreement with Intel exhausts LGE’s patent rights with respect to downstream computer assembler Quanta following Intel’s authorized sales of computer chips to Quanta, who combines the Intel chips with non-Intel components to assemble a computer.

LGE sued Quanta and other computer manufacturers for infringement of five different patents directed to systems and methods that increase the efficiency of a computer’s memory system. The district court granted summary judgment to Quanta and the other defendants based upon exhaustion of the patent rights in at least four of the five patents-in-suit, non-infringement and/or LGE’s contractual bar of asserting infringement against Quanta. The Federal Circuit reversed the district court’s patent exhaustion ruling finding that LGE’s patent rights were not exhausted but were properly conditioned through a notification sent by Intel to Quanta warning Quanta that the combination of the Intel chip with other computer components may result in infringement of the LGE patents.

The LGE patents-in-suit, some of which were purchased from Wang Laboratories in the late 1990’s, are directed to a memory control apparatus and a method for controlling the apparatus that increase the efficiency of a computer’s memory system. LGE licensed the patent, among others, to Intel in a cross-licensing agreement. Under this license, Intel manufactures computer chips and sells these chips to computer assemblers, such as Quanta. Quanta assembles the final computers under contract to some of the world’s largest computer companies – including Dell, Gateway and Hewlett-Packard – by combining the licensed Intel chips with various non-Intel components, such as busses and memory.

In the cross-license agreement between LGE and Intel, LGE granted Intel the right to “make, use and sell” Intel products licensed under the LGE patents, but specifically excluded third parties who combine the licensed components with “items, components, or the like acquired (directly or indirectly) from sources other than a party hereto, or for the use, import, offer for sale or sale of such combination.” In addition, the cross-license agreement states, “the parties agree that nothing herein shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products.”

As a result of these license terms, Intel sent notice letters to its customers, including Quanta, indicating that the license agreement between Intel and LGE “insures that any Intel product that you purchase is licensed by LGE and thus does not infringe any patent held by LGE or any of LGE’s subsidiaries,” but qualified Intel’s license by indicating, “while the patent license that LGE granted to Intel covers Intel’s products, it does not extend, expressly or by implication, to any product that you may make by combining an Intel product with any non-Intel product.” Quanta responds to the restriction by indicating in their brief that “a patent owner can place conditions on a licensee’s right to make or sell, but it cannot authorize the licensee to sell an article without exhausting the patent monopoly in that article.”

Further, Quanta states that LGE is attempting “to hold the entire international computer industry hostage for billions of dollars in royalties for incorporating LGE chips into their products – even though Intel has already paid LGE for an unrestricted license.” LGE responds, “a patentee may condition its manufacturer-licensee’s sales and thereby preserve its patent rights against purchasers from the licensee-manufacturer”, thereby collecting patent license fees from chip maker Intel and downstream computer assembler’s, such as Quanta.