Tuesday, June 10, 2008

SCOTUS trims patent excesses

The Supreme Court of the United States issued an opinion eliminating one of the more obvious excesses of patent royalty-seekers. Basically it says that if I license a patent to Intel to make a chip, then I shouldn’t be surprised (or seeks additional compensation) when Intel sells that chip to someone to use in a phone or a PC or a router. This is an extension of the existing doctrine of “patent exhaustion,” which in layman’s term means that once you pay for use of a patent, your customers don’t have to pay again.

The decision by Justice Clarence Thomas in Quanta v. LG Electronics was unanimous. The ruling was covered by the WSJ, the WSJ law blog, the SCOTUSblog, and Patently-O, among others.

While this is seemingly a clearcut victory for sanity, there are two dissents from the peanut gallery. An EFF attorney argues that the limited scope of the ruling may encourage further litigation. And Patently-O blogger Scott Crouch argues that the SCOTUS ruling seems to allow contractual restrictions on the principle of patent exhaustion (i.e. to require additional downstream payment; as he quotes from the ruling:

“LGE points out that the License Agreement specifically disclaimed any license to third parties to practice the patents by combining licensed products with other components. But the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion. And exhaustion turns only on Intel’s own license to sell products practicing the LGE Patents.”

“No conditions limited Intel’s authority to sell products substantially embodying the patents. Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products”
Certainly it would be bigger leap for the court to hold that “you can’t grant restricted rights via contract.” Of course, the licensees would find a ready loophole if the licenser's actions implied that full rights were being granted.

So is this a significant patent reform that produces further clarity in patent rights, or merely generate more tightly written contracts by licensors?

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