Quanta v. LG Electronics

Saturday 26 January 2008 at 7:19 pm Patents


The import of technology lies not simply in its immediate pragmatic solutions and identifiable improvements to our quality of life. What is also of profound significance are the ways in which technology may begat new technology and new types of commercial relationships, which keeps the cycle of innovation open and robust. Although conceptually intellectual property law offers creators and inventors legal protections for their innovations, as a practical matter, law both advances and encumbers innovation.

This term the Supreme Court will rule on the future relevance of the so-called doctrine of patent exhaustion. In Quanta v. LG Electronics (06-937), the court will decide whether a license imposed restrictions on (1) the use of purchased products by third parties after an authorized sale or (2) the use, manufacture, or sale of a patented product by a licensee. If a patent holder seeks to enforce a patent license that contains he restriction identified in choice (1), there may be a risk that patent holders may impermissibly expand their rights far beyond the intent of patent law. The doctrine of patent exhaustion is viewed as essentially prohibiting enforcement of a patent license with terms in (1), but allowing enforcement of the terms in (2).

What’s really going on here?

Quanta Computer bought computer chips from Intel and used them to make its laptop computers. LG Electronics had licensed Intel use of its patent to make the chips, but had imposed restrictions in the license that arguably prohibited Intel from allowing licensees like Quanta from using or buying the computer chips (practicing LG’s patent) from Intel.

It is difficult to marshal empathy for LG Electronics; they sound like a greedy patent holder who has been paid once and now wants to be paid again - - in a downstream transaction for which they provide no added value. On the other hand, if patent holders have such rights, it is difficult to fault a right-holder from enforcing them. It seems that the nature of intellectual property rights often leads to such twisted results unless Congress or a judicially-crafted legal doctrine cuts off the firepower of the intellectual property right.

The Supreme Court soon will resolve the patent license conflict between Quanta and LG; but, this contemporary intellectual property conflict goes beyond the immediate dispute between the parties, and, ultimately, may require potential answers from Congress to questions that are likely to tread upon the waters of a larger body of important, interrelated issues: such as reassessing the appropriate balance between vigorous disruptive innovation and the scope of property rights for incumbent intellectual property holders.