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SCOTUS rules on patent exhaustion case

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The U.S. Supreme Court has limited the ability of companies to collect royalties after the first sale of a patented product. The case tackled an issue of patent exhaustion that hasn't been ruled on in 66 years.

In a unanimous opinion this morning in Quanta Computer, et al. v. LG Electronics, No. 06-937, the nation's highest court said that longstanding patent law precedent extends to method patents that are often part of high-technology components and products.

"For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item," Justice Clarence Thomas wrote in the 22-page opinion. "Because the exhaustion doctrine applies to method patents and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted all patents."

Justices reversed a decision by the Federal Circuit Court of Appeals, which came in a case focusing on whether South Korean company LG could sue to force the computer suppliers to pay royalties on components they legally purchased from Intel, even though Intel already paid royalties to LG in a technology licensing agreement.

One of those companies sued was Quanta, which argued that it didn't have to pay royalties to the original patent holder because of the patent exhaustion doctrine that only applied to the first sale.

In its ruling, the court rejected arguments that patents are never exhaustible. It relied on precedent that it described as supplying "solid footing" and focused heavily on the one last tackling this issue, U.S. v. Univis Lens Co., 316 U.S. 241 (1942) that involved patents for finished eyeglass lenses.

Indianapolis attorney Todd Vare with Barnes & Thornburg, who wasn't involved in this case but has watched it closely, urged other intellectual property lawyers to carefully review this opinion, whether they represent patent-holders, licensees or those offering patent indemnification.

"This could dramatically change patent licensing programs," he said, though he noted the ruling wasn't a surprise given the court's history in recent years of scaling back patent rights.
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