Major Headaches Possible for Tech Patent Holders
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The U.S. Supreme Court on Tuesday agreed to hear a technology patent case that has the potential to throw the entire technology supply chain into upheaval -- or prompt closer adherence to technology licensing terms.
Those disparate outcomes are both possible from a case involving two parties that aren't even U.S. companies. In 2000, LG Electronics of Korea sued Quanta Computer and several other Taiwanese PC makers, claiming the firms were violating LG's U.S. patents by using them without authorization -- courtesy of Intel.
When the justices hear the case in coming months, they'll be confronted with the question of how far down the supply chain a patent extends from the point it is licensed, and how much control a company can exert on companies further down that chain.
LG's suit claims that a technology licensing deal with Intel restricted the technology from being used by Quanta, an Intel customer. The Taiwanese manufacturer, on the other hand, maintains that once LG licensed its patents to Intel, its patent protection ended and Quanta could use the technology as it saw fit.
The concept at the core of the debate is patent exhaustion: The idea is that a patent owner cannot dictate how others use its product down the supply chain. Without patent exhaustion rules, the hundreds of patent owners whose intellectual property make up the modern PC theoretically could all have a say in how that computer is used.
In many cases, "once a patentee authorizes someone to make, sell or use a product, they can't control what happens after that first sale," Rob Lech, a visiting professor of law and technology at the University of Dayton told InternetNews.com. "For subsequent sales, they can't control what other people do with it. They lose their right to prevent other sales after the first sale."
However, companies do have some ability to specify terms in certain licensing cases. In a non-explicit license, the licensee can do pretty much what they want with intellectual property, while an explicit license allows the patent holder to dictate some terms.
"The exhaustion issue does not apply when you have an explicit restrictive license," said Daniel Henry, a lawyer in the firm of Honigman, Miller, Schwartz & Cohn PLLC. "LG can tell Intel, 'We don't want our products used in certain other products.' LG said its license was conditional, not unlimited. An exhaustion only applies when there's an unconditional grant."
Intel is caught in the middle, since it licensed PCI-related technology from LG and then sold chips with that technology to Quanta and other parties. However, Intel is not named in the suit, nor would it be affected by the decision -- at least not directly.
No other American firms are named, although most don't want to touch the issue. Intel, AMD, HP and Dell all declined to comment publicly on the case.
"Getting in the middle of this is like getting into a pissing contest with a skunk," said one source, speaking on condition of anonymity. "Even if you win, you're going to end up stinky."
The initial court case took place in Dec. 2004 in the Northern District of California, where the court judge ruled in favor of the Taiwanese computer makers. The ruling said that claims in all but one of the patents had been exhausted when LG licensed the patents to Intel.
The Korean consumer technology giant appealed, and the resulting Appellate Court decision found Intel's agreement with LG did not cover companies combining the products purchased from Intel with other technology -- therefore, an explicit license. When the case went before the U.S. Court of Appeals, it also ruled in favor of LG.
"The [LG-Intel] license expressly disclaims granting a license allowing computer system manufacturers to combine Intels licensed parts with other non-Intel components. Moreover, this conditional agreement required Intel to notify its customers of the limited scope of the license, which it did. Although Intel was free to sell its microprocessors and chipsets, those sales were conditional, and Intel's customers were expressly prohibited from infringing LGEs combination patents," the court wrote in its July 2006 decision.
Muddying matters, some of the case law cited in the Appellate Court's decision dates back decades and involves medical equipment. Clearly, there hasn't been a similar modern, computer-era case like this -- which is why Henry was happy to see the Supreme Court take the case.
"It's a tough case because both parties have some merits," he said. "The history of patent exhaustion cases covers machines, apparatuses. We don't see a lot of exhaustion cases on methods and systems because courts have always focused on a mechanic device, not a high-tech computer chip."
Nevertheless, some believe the ramifications could be dire.
"If this goes against LG, there's going to be complete pandemonium," said Thomas Appledorn, also with Honigman, Miller, Schwartz & Cohn. "You will undermine every patentee that has licensed a product for someone else to make it. If LG doesn't win here, competitors will start buying products they never had access to. The whole purpose of the patent is to provide the right to exclude others."
Robert McCutcheon, an attorney at the law firm Munck Butrus PC, agreed, adding that a decision for Quanta could cause "havoc" in the tech sector and its accustomed supply chain.
"If you get that exhaustion flowing through to any end customer, then the royalty owner [i.e., LG] might want a larger royalty since they can't control what happens after the sale," he said. "If they can't get a higher royalty, they may not even give the license and wait for the end systems [i.e., Quanta] to come out and seek licenses from them."
Patent holders "would then go and get royalties from them," he added. "They would skip the middle man of Intel."
But Lech is a little more optimistic.
"It's not like they would shut down the industry -- people would just have to find alternatives," he said. "I don't think it will have a huge impact It'll mean that OEMs will have to find alternatives to the LG chipset combination if they find it unreasonable. Either they pay the license fees and use them as LG insists, or they find another chipset."