Supreme Court to rule on patent law — Quanta v. LG

"Patent holder had a right to sue a downstream purchaser," says patent law expert

The U.S. Supreme Court is reviewing Quanta v. LG, a case that could determine the future direction of patent law. “This case is key to ensuring that patent law develops in a way that best promotes innovation and competition,” says F. Scott Kieff, J.D., professor of law at Washington University in St. Louis.

Reversing the longstanding case law would give undue windfall to opportunistic third parties, says Kieff.
Reversing the longstanding case law would give undue windfall to opportunistic third parties, says Kieff.

Kieff, Troy A. Paredes, J.D, professor of law at Washington University, and R. Polk Wagner, professor from the University of Pennsylvania, have filed an amicus brief in the Supreme Court in support of LG, arguing that under contract law the patent holder had a right to sue a downstream purchaser. Kieff will be closely following this case and is available for comment. A summary of the case and amicus brief is below.

In Quanta v. LG, LG Electronics and Intel settled a group of disputes over patents on microchips by giving Intel only a limited license. It made sense for Intel to buy freedom from suit because otherwise Intel might have been guilty of inducing infringement by its customers. Importantly, the license made clear that it applied only to Intel, not to Intel’s customers, and the price Intel paid reflected these modest ambitions.

Quanta, a large commercially sophisticated party, bought chips from Intel with notice of the limited license and an opportunity to negotiate a price that reflected the need to also buy a patent license from LG. When LG demanded that Quanta buy such a license, Quanta argued that the legal doctrine called “first sale” had already given one. The first sale doctrine is a rule that implies patent licenses into certain sales of patented products by patentees. The Supreme Court agreed to hear the case to determine whether the first sale doctrine can fairly be stretched to reach cases like this.

Kieff, Paredes, and Wagner point out that the longstanding cases of the Supreme Court and Federal Circuit have treated the first sale doctrine as merely a default rule governing sales of products by patentees. They note that the doctrine does not even apply to this case because the underlying transaction in this case between the patentee, LG, and Intel is not a sale but only a limited license. Furthermore, they explain the “first sale doctrine must not be used to directly conflict with written contract terms negotiated between commercially sophisticated parties to clearly create only a limited patent license.”

Kieff, Paredes and Wagner show why sound public policy requires this result: “Reversing the longstanding case law that respects such licenses would have several related deleterious effects.

“First, it would give an undue windfall to opportunistic third parties who would be able to assert ‘licenses’ beyond those they knowingly purchased. Second, it would frustrate the reasonable expectations of the countless commercial actors who have settled cases and struck patent license agreements in reliance on the reasonable expectation that the limited terms of their contracts would be enforced. Although a transitional issue, the large number of patents licensed and the length of patent term leave its impact both broad and long. And third, it would make settling future disputes significantly more difficult.”

Editor’s note: Kieff is available for phone, e-mail and broadcast interviews using Washington University’s free VYVX or ISDN lines. Please contact Jessica Martin at (314) 935-5251 for assistance.