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An Update on "Exhaustion"—Supreme Court Decides Quanta Case

November/December 2008 (vol. 28 no. 6)

pp. 57-54

1. "Supreme Court to Hear Semiconductor Chip Patent 'Exhaustion' Case," IEEE Micro, vol. 27, no. 6, Nov./Dec. 2007, p. 11. The last time the Court had issued a significant opinion interpreting the effect of the so-called exhaustion doctrine on patent license agreements was in 1942, in United States v. Univis Lens Co., 316 U.S. 241 (1942).
2. Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008).
3. See, for example, Lincoln Engineering Co. v. Stewart Warner Corp., 303 U.S. 545, 549–50 (1938) ("the improvement of one part of an old combination gives no right to claim that improvement in combination with other old parts which perform no new function in the combination").
4. See Radio Steel &Mfg. Co. v. MTD Products, Inc., 731 F.2d 840, 845 (Fed. Cir. 1984). The Federal Circuit's predecessor court, the Court of Customs and Patent Appeals, had made similar suggestions. See, for example, In re Bernhardt, 417 F.2d 1395 (Ct. Cus. &Pat. App. 1969).
5. See Minebea Co. v. Papst, 444 F. Supp. 2d 68 (D.D.C. 2006).
6. LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364 (Fed. Cir. 2006), reversed sub nom. Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008).
7. 316 U.S. 241 (1942).
8. 304 U.S. 175, 182 (1938) (upholding as legitimate field-of-use limitations on scope of patent licenses to make and sell amplifiers only in "non-commercial" field), affirmed on rehearing, 305 U.S. 124 (1938).
9. For the fussy, the exact words were: "'We are the Federales. You know.... Badges? We ain't got no badges. We don't need no badges! I don't have to show you any stinkin' badges!" See http://en.wikipedia.org/wikiThe_Treasure_of_the_Sierra_Madre_(film) .
10. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).
11. Henry v. A.B. Dick Co., 224 U.S. 1 (1912).
12. See, for example, Motion Picture Patents, 243 U.S. at 516 ("the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it"); Bloomer v. McQuewan, 14 How. 539, 549 (1853) ("when the machine passes to the hands of the purchaser, it is no longer within the limits of the monopoly").
13. See, for example, Motion Picture Patents, 243 U.S. at 516.
14. See, for example, United States v. Glaxo Group Ltd., 410 U.S. 52 (1973). But see Continental T.V., Inc. v. GTE Sylvannia, Inc., 433 U.S. 36 (1977) (unpatented goods).
15. Restrictions are enforceable under contract law when they are ancillary to the lawful main purpose of a contract and are reasonably necessary to the accomplishment of the purpose. See, for example, Rothery Storage &Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224 (D.C. Cir. 1986); Los Angeles Mem'l Coliseum Comm'n v. NFL, 726 F.2d 1381, 1395 (9th Cir. 1984) ("some agreements which restrain competition may be valid if they are subordinate and collateral to another legitimate transaction and necessary to make that transaction effective"). See also Restatement (Second) of Contracts§§187–188.
16. 976 F.2d 700 (Fed. Cir. 1992).
17. The Federal Circuit used the term "conditional sale" to mean a sale in which title passed, but was subject to a condition—a restraint on alienation or post-sale restraint. The more conventional sense of the term "conditional sale" is an installment sale transaction in which title does not pass; the buyer gets possession of the goods but the seller retains title, because the buyer has not yet made full payment, and the seller conveys title only when the buyer pays the last installment on price that is due.
18. See Richard H. Stern, "Post-Sale Patent Restrictions After Mallinckrodt—An Idea in Search of Definition," Albany Law J. Science and Tech.vol. 5, no. 1, 1994.
19. The doctrine that a contract can be instinct with an obligation that a party perform certain things, even though the contract does not say so in so many words, comes from the decision in Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88 (1917). In this case, New York's highest court, per Judge (later Supreme Court Justice) Cardozo, found a promise to use best efforts in promoting a line of fashion goods to be implied by the rest of the relevant contractual document, saying: "A promise may be lacking, and yet the whole writing may be 'instinct with an obligation,' imperfectly expressed." Id.at 91.
20. See Dr. Miles Medical Co. v. John. D. Park &Sons, 220 U.S. 373, 404 (1911) ("The right of alienation is one of the essential incidents of a right of general property in movables, and restraints upon alienation have been generally regarded as obnoxious to public policy, which is best subserved by great freedom of traffic in such things as pass from hand to hand."). The opinion then goes on to discuss the commentary of Lord Coke on 15th century property law (Coke on Littleton).
21. 84 U.S. (17 Wall.) 453 (1873).
22. Id.at 456.
23. Continental T.V., Inc. v. GTE Sylvannia, Inc., 433 U.S. 36, 67 (1977) (White, J., concurring).
24. Univis, 316 U.S. at 249.
25. 377 U.S. 476, 484 (1964) [citing Adams v. Burke, 84 U.S. (17 Wall.) 453, 456 (1873)] internal quotation marks omitted.
26. Brief of U.S. Solicitor General in support of certiorari in Quantaat 13-14 (emphasis added), 2007 WL 2425785.
27. See Brief of U.S. Solicitor General on merits in Quantaat 17-18, 2007 WL 3353102.
28. See Armstrong v. Motorola, Inc., 374 F.2d 764, 774-75 (7th Cir. 1967); Armstrong v. Emerson Radio and Phonograph Corp., 179 F. Supp. 95, 128 (S.D.N.Y. 1959).