Amicus Curiae Brief — Quanta Computer, Inc. v. LG Electronics, Inc.

45 PEP No. 06-937

Supreme Court of the United States

2.2

QUANTA COMPUTER, INC. et al.,

Petitioners,

—_—vV.—

LG ELECTRONICS, INC.,

Respondent.

eae ee

COURT OF APPEALS FOR THE FEDERAL CIRCUIT

BRIEF OF AMERICAN INTELLECTUAL

PROPERTY LAW ASSOCIATION AS AMICUS CURIAE

IN SUPPORT OF RESPONDENT

JAMES POOLEY JEFFREY I. D. LEWIS

President Counsel of Record

AMERICAN INTELLECTUAL PATTERSON BELKNAP

PROPERTY LAW WEBB & TYLER LLP

ASSOCIATION 1133 Avenue of the Americas

241 Eighteenth Street, South New York, New York 10036

Arlington, Virginia 22202 (212) 336-2000

(703) 415-0780 Counsel for American

Intellectual Property

Law Association

TABLE OF CONTENTS

IE Ae II cccccciesitcctcccctenssctoccieccastessinnens 1

I i sialansntensibotidaidindiiaianlsi 2

hiatal esttibanidiitadidahiigcagshaiias 11

ae ee a SER ENERO AAMT 12

EESTI ee eRe Ne ME Rae oe 12

A. Patent Licenses......... ag ee MR OMEN so 13

D, BORN RABIIIID. .....cccccccccccecccscess 14

ii. Patent Exhaustion - First

shar hcsnaiceiaeiialidalateendiachiacihbaehcelbiniaii 16

Il. Contributory Patent Infringement and

i as sitcieneniniceinnecestace 18

A. Contributory Infringement................. 18

I, acelin 22

lll. The Government's Position in McFarling....27

2. Application of Law to This Case ........................ 31

I. Negative Effects of a Blanket

I as satiiaieneinieinl 31

li. This Court Should Continue to Protect the

Legal Doctrines at Issue ............................06. 34

Fe I Bo ccsndccctvevccticnctsacnestess 35

Be NR RN IID iccinsiscncscnssnsncussunceas 36

SEE LEE LE EOLA TE ROE SOTO A ETE 36

ii

TABLE OF AUTHORITIES

CASES

Adams v. Burke,

I 12, 13, 16

Am. Securit Co. v. Shatterproof Glass Corp.,

268 F.2d 769 (3d Cir. 1959) 2.0... ccecccceeeceeeeeeeeeeee 10

AMP Inc. v. United States,

I ee Be i irrcccscncencstiniecccnesesnmecessensconnennen 15

American Indus. Fasiener Corp. v. Flushing

Enters., Inc.,362 F. Supp. 32 (N.D. Ohio

I i te 9

Arizona Cartridge Remanufacturers Assoc. V.

LexMark Int’ Inc.,

431 .348 961 Gth Cir. 3008)............................... 20

Armstrong v. Motorola, Inc.,

374 F.2d 764 (7th Cir. 1967) ............0..cce cece eeeeeeeeeee 9

Atar1 Games Corp. v. Nintendo of America, Inc.,

897 F.2d 1572 (Fed. Cir. 1990) .0......... cece eeeeee eens 4

B.B. Chem. Co. v. Ellis,

I 22

Bement v. Nat’ Harrow Co.,

I 30

Bloomer v. McQuewan,

EE a ae M eT MES MBE BID 12

Carborundum Co. v. Molten Metal Equip.

Innovations, Inc.,

72 F.3d S72 (Fed. Cir. 1906) ................ccccccccccoseee 15

Car! Schenck, A.G. v. Nortran Corp.,

713 F.2d 762 (Fed. Cir. 1963) ....................0..2..... 12

Continental Paper Bag Co. v. Eastern Paper Bag

i ichaoaciones passim

C.R. Bard, Inc. v. M3 Systems, Inc.,

157 F.3d 1340 (Fed. Cir. 1998) ...........000....cceee 28

Dawson Chem. Co. v. Rohm and Haas Co.,

I i ctaanil passim

De Forest Radio Tel. Co. v. United States,

SL ae Ree ae 13, 14, 15

Dickerson v. Colgrove,

TTL EO 15

Duplan Corp. v. Deering Milliken, Inc.,

444 F. Supp. 648 (D.S.C. 1977),

affd, 594 F.2d 979 (4th Cir. 1979).................0005 10

eBay Inc.v. MercExchange, L.L.C.,

US... 1966. Ce. 1887 GOG6).......................... 13

General Talking Pictures Corp. v. Western

Elec. Co., 305 U.S. 124 (1938)..........0.c:ccceeseeeeeees 13

Goss v. Henry McCleary Co.,

BF o_O 15

iV

Hartford-Empire Co. v. United States,

TEE 29

Henry v. A.B. Dick Co.,

EERE IE a a RDO IS 9

Hobbie v. Jennison,

I 13

Illinois Tool Works Inc. v. Indep. Ink, Inc.,

a si siisadeala passim

Int'l Mfg. Co. v. Landon,

336 F264 723 th Cir. 1064) ..................00..0.2...2.. 10

Keeler v. Standard Folding Bed Co.,

I alii cncnnnendedevien 14, 16, 17

Kieruff v. Metro. Stevedore Co.,

315 F.2d 839 (9th Cir. 1963) .000.. eee eeeeeee 15

LG Elecs., Inc. v. Asustek Computer, Inc.,

Nos. C01-00326 CW et al., 2002 WL

31996860 (N.D. Cal. Aug. 20, 2002) «0.000.000.0000. 7

LG Elecs., Inc. v. Asustek Computer, Inc.,

248 F. Supp. 2d 912 (N.D. Cal. 2003)............. 7, 36

LG Elecs., Inc. v. Bizcom Electrics, Inc.,

453 F.3d 1364 (Fed. Cir. 2006) ........................0.... 6

Lear, Inc. v. Adkins,

fit © ) el eee uadieaneeiaail 10

Lisle v. Edwards,

777 F.2d 693 (Fed. Cir. 1985) ............00.... 16, 17

Mercoid Corp. v. Mid-Continent Inv. Co.,

ee iisseseseiteiiietacimnadaadaaien’ 24, 25

Mercoid Corp. v. Minneapolis-Honeywell

Regulator Co.,

Nk ENDS 24, 25

Minnesota Mining & Mfg. Co. v. EI. du Pont.

de Nemours & Co.,

448 F.2d 54 (7th Cir. 1971)...................ccccecceeeeeee 15

Mitchell v. Hawley,

Bs Fe TE cn cecsusiessitbiosiensousesinniciihicenienaiasmunaaia 16

Monsanto Co. v. McFarling,

363 F.3d 1336 (Fed. Cir. 2004) .............ccece eee 27

Motion Picture Patents Co. v. Universal Film

pe me OS ty ee 9

Pennock v. Dialogue,

hf SY NURSES Brom wc 12

Special Eqm't Co. v. Coe,

BEG TRAE, BD iecieesosinciviceecenlnbcashicaacpuialeasian 13, 31

St. Joseph Iron Works v. Farmers Mfg. Co.,

106 F.2d 294 (4th Cir. 1939)... eeeceeeee eee 15

Stickle v. Heublein, Inc.,

716 F.2d 1550 (Fed. Cir. 1983) ......0........eeeeeeeee 15

vi

United States v. Univis Lens Co.,

It passim

U.S. Phillips Corp. v. Int'l Trade Comm'n,

424 F.3d 1179 (Fed. Cir. 2005) ..............ccccecceeeees 10

Wang Labs., Inc. v. Mitsubishi Elecs. Am.

Inc., 103 F.3d 1571 (Fed. Cir. 1997) .............000... 15

In re Yarn Processing Patent Validity Litig.,

541 F.2d 1127 (5th Cir. 1976)................. 20, 21, 34

Zenith Radio Corp. v. Hazeltine Research, Inc.,

GE 12

CONSTITUTION AND STATUTES

Ic cindenianintlie 11

i nsec cmaatineniennnene 12, 28, 29

a csieatsenetinl passim

TE EITID crcccccccceseccecnsecsscsssocccersessesssest passim

ET passim

Ic cnencniatnesio’ 12

FT 8

Vil

MISCELLANEOUS

Contributory Infringement: Hearings on HR

3866 Before Subcomm. No. 4 of the H.

Comm. on Judiciary, 80th Cong. (1949) ............ 26

Contributory Infringement in Patents,

Definition of Invention: Hearings Before

Subcomm. on Patent, Trade-Marks and

Copyrights of the H. Comm. on Judiciary,

ERASER cack See 25, 26

P.M. Dunn, The Chamberlen Family (1560-

1728) and Obstetric Forceps, 81 ARCH. Dis.

CHILD FETAL NEONATAL ED. (1999) ............00.006. 11

Hearings on H.R. 3760, Subcomm. No. 3 H.

Comm. on Judiciary

ee Se, SD. ceneemiansininnneesn 24

Brief for United States as Amicus Curiae

Supporting Petitioners, McFarling v.

Monsonto Co., No. 04°31 ............0000... 27, 28, 29, 30

Jean Tirole, The Theory of Industrial

aime 32

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N,’

ANTITRUST ENFORCEMENT AND INTELLEC-

TUAL PROPERTY RIGHTS (2007).............00000000000002- 21

U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N,

ANTITRUST GUIDELINES FOR THE LICENSING

OF INTELLECTUAL PROPERTY (1995) ............. passim

INTEREST OF AMICUS CURIAE!

The American Intellectual Property Law

Association (AIPLA) is a voluntary bar association of

over 17,000 members who work daily with all

manner of intellectual property, eg, patents,

trademarks, copyrights and trade ‘ecrets, and the

legal issues that they present. Members include

attorneys in private and corporate practice as well as

government service. AIPLA's membership is

intimately involved with the legal and business

issues underlying the development, commer

cialization and exploitation of intellectual property,

including enforceability, antitrust, and licensing

issues.

AIPLA members are often on both sides of any

matter, representing both plaintiffs and defendants

for litigation and both licensors and licensees for

transactions. As part of its central mission, AIPLA

'The parties have consented to the filing of this brief. No

counsel for a party authored this brief in whole or in part, and

no counsel or party made a monetary contribution intended to

fund the preparation or submission of this brief. No person

other than amicus curiae, its members, or its counsel made a

monetary contribution to its preparation or submission.

After reasonable investigation, AIPLA believes that no member

of its Board or Amicus Committee who voted to prepare this

brief on its behalf, or any attorney in the law firm or corpora-

tion of such a Board or committee member or attorney who

aided in preparing this brief, represents a party with respect to

this litigation. Some committee members or attorneys in their

respective law firms or corporations may represent entities

which have an interest in other matters which may be affected

by the outcome of this litigation.

is dedicated to encouraging the healthy development

of intellectual property law. Accordingly, AIPLA has

a vital interest in the issues presented by this case,

which will have a far-reaching impact on intellectual

property rights and their exploitation.

SUMMARY OF ARGUMENT

AIPLA believes that a patentee may, with ade-

quate notice, require separate licenses at various

stages along the downstream chain of sophisticated

purchasers and users of its patented invention. Not

only does this create market efficiencies, but it also

allows for the appropriate and proper exploitation of

intellectual property rights. There is no per se anti-

competitive effect in allowing licensors and licensees

the freedom to create such agreements.

The parties and Amuci have characterized the re-

lationship between LG and Intel as essentially that

of licensor and licensee. And while that is literally

correct, and frames much of the analysis set forth be-

low, AIPLA submits that it mischaracterizes a sig-

nificant portion of the transaction at issue. More

fundamentally, it skews the analysis and even the

Question Presented to this Court for review by ignor-

ing the real-world context of what occurred. Any de-

cision must account for the Constitutional balance

between the public's interest in accessing technology

and promoting innovation. AIPLA believes that li-

cense obligations can require an agreed-upon alloca-

tion of burdens to obtain specific additional agree-

ments as between sophisticated parties.

Generally speaking, infringement occurs when a

party makes, uses or sells the invention claimed in a

patent without authorization. 35 U.S.C. §271. As

set forth more fully below, LG sued Intel both for di-

rect infringement (35 U.S.C. § 271(a)) and contribu-

tory infringement (35 U.S.C. § 271(c)). Intel settled

both claims with a set of agreements that have a dif-

ferent impact on each claim (these agreements in-

clude licenses and will be referred to in the singular

as the "LG-Intel License" for convenience). By ex-

press terms, Intel received a license that immunizes

its making, using and selling of components from lit-

eral infringement. But, for contributory infringe-

ment Intel's license is nothing more than a covenant

not to sue Intel (only) for aiding its customers’ in-

fringement. It is through this prism that the trans-

action, and therefore the dispute, must be viewed.

Notably, the submissions in this case to date ig-

nore the statutory segregation of patent infringe-

ment from antitrust and faii to highlight the areas of

contributory infringement and patent misuse. See

35 U.S.C. § 271. There are three discrete yet inte-

grated legal concepts at play here: (i) patent exhaus-

tion (sometimes called first sale), (ii) implied license,

and — based upon citations to this Court — (iii) price-

fixing. The first two must be analyzed under the

Patent Act and are directly addressed by many of the

briefs before the Court; the third is an antitrust is-

sue.

As for this third issue, all filers seemingly agree,

at least implicitly, that this is not a case where anti-

trust analysis is warranted. Nevertheless, patent

and antitrust laws are interrelated and both "share

the common purpose of promoting innovation and

enhancing consumer welfare." U.S. DEPARTMENT OF

JUSTICE AND FEDERAL TRADE COMMISSION ANTITRUST

GUIDELINES FOR THE LICENSING OF INTELLECTUAL

4

PROPERTY (1995)? (the "DOJ-FTC Antitrust IP Li-

censing Guidelines") § 1 (citing Atari Games Corp. v.

Nintendo of America, Inc., 897 ¥ .2d 1572, 1576 (Fed.

Cir. 1990)). AIPLA therefore submits this brief

amicus curiae, in large part, to reinforce each legal

doctrine and explain why they must remain inde-

pendent since each serves its own necessary purpose.

AIPLA, however, demurs on the factual issues due

to the limited public record. AIPLA understands

that Intel was LG's direct, first-instance licensee but

that the license required downstream users to obtain

their own licenses from LG. The decisions below rely

on the notice letter from Intel to its downstream cus

tomers (the so-called "OEMs," which for this brief in-

clude subsystem suppliers) purporting to inform

them of this requirement (the "Intel Notice Letter").

AIPLA does not have sufficient information to

evaluate the effectiveness of that notice nor to dis-

pute or support the findings below on this point, so

AIPLA will not comment on that issue (and does not

believe it to be ripe for consideration by this Court).

Nonetheless, as a general matter AIPLA believes

that where sufficient notice has been given, strong

market efficiencies support allowing a licensor to es-

tablish ruvalty rates at more than one key point in

the distribution chain. This can take into account

many factors, including:

e Possible uses and differences in licensed

inventions,

e Proper allocation of resources,

2 http://www.usdoj.gov/atr/public/guidelines/0558 pdf.

e Incomplete knowledge by the first:

instance licensee of how devices or com-

ponents will be used by downstream pur-

chasers,

e The actual structure of the transaction,

and

e Sophistication of the parties in optimizing

transactions.

The reality is that some items of manufacture, ex-

emplified in this case by electronic components, can

have different value — and therefore rationally com-

mand different royalties — based upon their use.

This becomes clearer when it is considered in a

real-world context. In the biologic field an antibody

can be used either as a diagnostic tool (lower royalty)

or as a therapeutic for treating patients (higher roy-

alty). It would be inefficient to charge the higher

therapeutic royalty rate to the diagnostic market,

and yet that is precisely the result that Petitioners’

proposed doctrine in this case would demand. Simi-

larly, the brief Amicus Curiae of Croplife Interna:

tional at 10-12, explains why limiting licensing ar-

rangements, e.g., those not requiring exhaustion,

avoid "astronomical prices." See also brief Amicus

Curiae of Biotechnology Industry Organization at 5-

6.

These examples reinforce that allowing sophisti-

cated parties to structure transactions with different

royalties for different uses — without attempting to

define all uses and royalty rates in the first-instance

license — is pro-competitive and creates increased

market efficiencies.*

AIPLA accepts for purposes of this brief that there

are two groups of patent claims implicated by the In-

tel-LG License, one group covering "components"

(items manufactured by Intel) and the other covering

"end-products" (methods or devices utilizing those

components such as those made by the OEMs).

AIPLA further understands that the Intel-LG Li-

cense permits Intel to make, use and sell compo-

nents and immunizes Intel for its role in supplying

components used in multiple applications in the end-

products (at least some uses of which are covered by

separate patent claims). What is at issue in this

case is whether or not downstream OEMs are liable

for infringement because they used these Intel com-

ponents in their end-products.

AIPLA also understands that there are two rele-

vant time periods when the OEMs purchased com-

ponent: from Intel: (1) prior to the LG-Intel License

and (2) after the license and receipt of the Intel No-

tice Letter. Each period must be considered sepa:

rately, keeping in mind that the Intel-LG License re-

leased Intel's customers retroactively "from liability

3 See DOJ-FTC Antitrust IP Licensing Guidelines § 2, Ex. 1

(showing example where "chargling] different royalties for ...

different uses" was likely procompetitive).

4 One of the factual confusions AIPLA faces is the role of the so-

called Microsoft License. E.g., LG Elecs., Inc. v. Bizcom Elecs.,

Inc., 453 F.3d 1364, 1371 (Fed. Cir. 2006). For convenience,

AIPLA addressed only the Intel-LG License to the extent nec

essary.

for any claim of patent infringement that arose prior

to the effective date....". LG Elecs., Inc. v. Asustek

Computer, Inc., 248 F. Supp. 2d 912, 917 (N.D. Cal.

2003).

The courts below made much of the difference be-

tween a product patent claim (which covers the

manufacture and general use of components as such)

and a method claim (which covers a specific use of a

component in the larger end-product). E.g., 453 F.3d

at 1370. For purposes of analyzing these legal] doc-

trines, however, AIPLA sees little difference in their

application by these facts: the component is being

used for one of the intended, claimed methods. Thus,

AIPLA does not subscribe to the distinction below

(453 F.3d at 1370) applying the law differently to

these method and product claims on the present

facts.

Another point that the lower courts considered

was whether or not there are substantial non-

infringing uses for the Intel components, ze., are

there uses that do not require additional licenses

from LG? £E.g., LG Elecs., Inc. v. Asustek Computer,

Inc., Nos. C 01-00326 CW et al., 2002 WL 31996860,

at *11-13 (N.D. Cal. Aug. 20, 2002). Although this

issue might be relevant in some cases, such as an

unconditional sale, AIPLA submits that it is a red

herring in the context of this dispute. Intel, the

OEMs and evea LG are all sophisticated consumers

and each knew the intended uses of the components

(even if not the specifics) and that they were covered

by LG’s patents. (This is not a situation where the

components have on/y one possible use each.) Each

of the contracting parties knew there were limita-

tions on any licenses to the components vis-a-vis any

use in end products, having engaged in these trans-

actions with notice to this effect. Therefore, whether

or not there are other uses is not relevant. Reason-

able license terms, such as the allocation of respon-

sibility to obtain licenses between sophisticated par-

ties to a transaction, should not raise fears of ex-

haustion breaking the licensing chain. At issue here

are not "off the shelf" items bought in a storefront

transaction, where the details of sales contracts

among up-stream merchants are unknown; in such

situations the U.C.C. would apply and it is reason:

able and appropriate for the patent rights to be ex-

hausted since the consumer is a bona fide purchaser

free of infringement risk.5 The sophistication and

transparency of the present transaction to all in-

volved therefore renders the issue of non-infringing

uses irrelevant for purposes of this case.

Finally, there are a number of factual issues that

must be accounted for in synthesizing the cases re-

lied upon by Petitioners and Amuci, which render

some arguments inapposite. For instance, this is not

a situation where the patentee is trying to leverage

5 By way of contrast, this case does not involve a sale governed

by the Uniform Commercial Code, such as for an off-the-shelf

commodity. Such sales carry a covenant of non-infringement:

(3) Unless otherwise agreed a seller who is a mer-

chant regularly dealing in goods of the kind warrants

that the goods shall be delivered free of the rightful

claim of any third person by way of infringement ...

U.C.C. § 2-312(3) (2004). A sale by the licensee subject to this

covenant would force the licensee to limit any downstream pat-

ent liability by structuring any license to avoid infringement.

It also allows bona fide purchasers the opportunity to buy goods

without fear of suit.

control over unpatented components by sale of pat-

ented items;* here, the uses and devices are strictly

within the scope of the patents-in-suit.

Principal among the misapplied cases is United

States v. Univis Lens Co., 316 U.S. 241 (1942), a

case that is primarily focused on pricing and distri-

bution controls (and has routinely been recognized

as such’). It is also a case where there was only one

use for the licensed product, as the Court noted the

lens blank and finished lens were essentially the

same for patent purposes. /d. at 248-49, 251. In

Univis the patentee violated the Sherman Act by try-

ing to enforce the patent beyond the scope of the

grant, ze., to control pricing. In doing so, the pat-

© Such tying cases involve the use of a patented invention (such

as a mechanism for playing motion pictures) to control the pur-

chase or use of unpatented work pieces or related objects (like

the rental of motion pictures). See Motion Picture Patents Co.

v. Universal Film Mfg. Co., 243 U.S. 502, 506-07 (1917). Thus,

arguments that this case is a modern-day version of Henry v.—

A.B. Dick Co., 224 U.S. 1 (1912), overruled by Motion Picture

Patents, or that attempt a per se analysis for tying based upon

older cases are misdirected. See /ilinois Tool Works Inc. v. In-

dep. Ink, Inc., 547 U.S. 28, 35 (2006) ("Over the years ... this

Court’s strong aisapproval of tying arrangements has substan-

tially diminished. Rather than relying on assumptions, 1n its

more recent opinions the Court has required a showing of mar-

ket power in the tying product.").

7 See Armstrong v. Motorola, Inc., 374 F.2d 764, 775 (7th Cir.

1967) (Univis “was a Sherman Act case in which the patentee

had been using his patent to achieve resale price maintenance

and therefore the case is not in point."); American Indus. Fas-

tener Corp. v. Flushing Enters., Inc., 362 F. Supp. 32, 36 (N.D.

Ohio 1973) ("Univis ... involves price restrictions...."); see also

DOJ-FTC Antitrust IP Licensing Guidelines § 5.2.

10

entee also prevented licensees from challenging the

licensed patent, thereby further extending the

grant. Thus, a sigmficant part of the scheme in

Univis not only controlled pricing but also prevented

patent challenges. While the dicta in Univis argua-

bly relates to patent exhaustion, the holding does not

rest on that doctrine nor should the case be extended

to a post-1969 patent license dispute. This is not an

instance where there is an allegation of price fixing;

there is no attempt to control downstream users nor

is there an attempt to mandate minimum price obli-

gations.

8In U.S. Phillips Corp. v Int’ Trade Comm'n, 424 F.3d 1179

(Fed. Cir. 2005), Judge Bryson explained how this Court

changed that law:

The effect of a nonexclusive license was different

before the Supreme Court, in Lear, nc. v. Adkins,

395 U.S. 653 ... (1969), abolished the patent doc-

trine of licensee estaypee. Before Lear, a nonex-

challenaing the validity of the netent, Some of the

early decisions regarding patent-to-patent tying

arrangements appear to have been based, at least

in part, on that feature of pre-Lear patent licenses.

See, e.g, Am. Securit Co. v. Shatterproof Glass

Corp., 268 F.2d 769, 777 (3d Cir. 1959); Int’ Mfg.

Co. v. Landon, 336 F.2d 723, 731 (9th Cir. 1964);

see also Duplan Corp. v. Deering Milliken, Inc.,

444 F.Supp. 648, 699 (D.S.C. 1977), affd in perti-

nent part, 594 F.2d 979 (4th Cir. 1979). In the

post- Lear era, the “acceptance” of a license has no

such restrictive effect on the licensee’s freedom.

424 F.3d at 1190 n.3 (emphasis supplied).

11

Accordingly, AIPLA submits this brief generally

in support of Respondent on the Question Presented

for these facts. AIPLA believes that a licensor may,

with adequate notice, require separate licenses at

various stages within the chain of downstream, so-

phisticated purchasers and users of its patented in-

vention. Not only does this create market efficien-

cies, but it also allows for the appropriate and proper

exploitation of intellectual property rights.

ARGUMENT

The United States Constitution, Art. I, Sec. 8, 48,

authorizes Congress to "promote the Progress of Sci-

ence and useful Arts, by securing for limited Times

to Authors and Inventors the exclusive Right to their

respective Writings and Discoveries." The resulting

patent system has been widely characterized as a le-

gal, limited monopoly which serves as an incentive to

innovation and disclosure such that the public learns

from the disclosure and may even improve upon it.’

This balances the property interest of a patentee

with the public's interest in a fair and legal market-

* Contrast the often-debated example of the infamous Cham-

berlen family, who kept their invention of the obstetric forceps

secret for generations thereby maintaining their income based

upon their successes in child delivery and reduced death-rates.

See P.M. Dunn, The Chamberlen Family (1560-1728) and Ob-

stetric Forceps, 81 ARCH. Dis. CHILD FETAL NEONATAL ED. 232-

35 (1999), http://fn.bmjjournals.com/cgi/content/full/8 1/3/F232.

Presumably, if patents had been available to reward and pro-

tect their invention, the © » #&» en family would have pat-

ented and publicly disclew _ .e@ eby putting the forceps into

wider use to save more lives while still rewarding the inventors

with financial gains.

12

place.'° The role advanced by Petitioners, however,

would upset that balance.

1. REVIEW OF THE LAW

I. Patent Rights

AIPLA begins its analysis with the basic mecha-

nism for exploiting patent rights: the ability to ex-

clude unauthorized users from using the innovation.

The right to exclude is "[t]he heart of [a patentee's]

legal monopoly," Zenith Radio Corp. v. Hazeltine Re-

search, Inc., 395 U.S. 100, 135 (1969), which "en-

able[s the patentee] to secure the financial rewards

for his invention," U/nivis, 316 U.S. at 250. See Pen-

nock v. Dialogue, 27 U.S. 1, 19 (1829) (patentee's

right to exclude provides a "reasonable reward to in-

ventors" for disclosing their inventions)."!

As this Court stated in Adams v. Burke, 84 U.S.

453, 456 (1873), "[tlhe right to manufacture, the

right to sell, and the right to use are each substan-

tive rights, and may be granted or conferred sepa-

rately by the patentee." See Continental Paper Bag,

10 Carl Schenck, A.G. v. Nortran Corp., 713 F.2d 782, 786 n.3

(Fed. Cir. 1983) (‘The antitrust laws, enacted long after the

original patent laws, deal with appropriation of what should

belong to others. A valid patent gives the public what it did not

earlier have."); Continental Paper Bag Co. v. Eastern Paper

Bag Co., 210 U.S. 405, 424-25 (1908).

1135 U.S.C. §§ 154(a)(1), 271, 283; Bloomer v. McQuewan, 55

U.S. 539, 549 (1852) ("The franchise which the patent grants,

consists altogether in the right to exclude every one from mak-

ing, using, or vending the thing patented, without the permis-

sion of the patentee. This is all [the patentee] obtains by the

patent.").

13

210 U.S. at 423-24; accord eBay Inc. v. Merckx-

change, L.L.C., __ U.S. __, 126 S. Ct. 1837, 1840-41

(2006); see also Special Eqm't Co. v. Coe, 324 U.S.

370, 376 (1945) ("[W]e think it plainly is legitimate

to use a patent ... as a means of preventing appro-

priation by others of petitioner's more important

complete invention which he is using ...."). The abil-

ity to sue and thereby exclude others is the pat-

entee's right, cf Continental Paper Bag, 210 US. at

430, such that a patent license is a mere waiver of

the right to sue the licensee, De Forest Radio Tel.

Co. v. United States, 273 U.S. 236, 242 (1927).

A. Patent Licenses

One way to exploit a patent is to make and sell

the patented invention. Another is to license others

to do so. A patentee's refusal to license the patent at

all, however, does not constitute a "misuse or illegal

extension of the patent right." 35 U.S.C. § 271(d)(4);

see DOJ-FTC Antitrust IP Licensing Guidelines

§ 2.2. Similarly, a patentee that decides to license

may limit the licensee to a particular defined field of

use” or to sales in a particular region." These are

12 See, e.g., General Talking Pictures Corp. v. Western Elec.

Co., 305 U.S. 124, 126-27 (1938).

'3 A first-instance licensee is subject to a geographically-

restricted license, but products that are then properly sold by

the licensee can be moved out of the licensed area by the buyer

so long as there is no contractual limitation. See Adams v.

Burke, 84 U.S. 453, 455-57 (1873) (affirming dismissal of a pat-

ent suit against a customer of a licensee with a restricted terri-

tory; the customer had purchased the product within the terri-

tory and moved it outside of the territory); Hobbie v. Jennison,

149 U.S. 355, 361-63 (1893) (affirming dismissal of suit against

(footnote continued ...)

14

not improper actions, and can be procompetitive.

See DOJ-FTC Antitrust IP Licensing Guidelines

§ 2.3 ("Field-of-use, territorial, and other limitations

on intellectual property licenses may serve procom-

petitive ends by allowing the licensor to exploit its

property as efficiently and effectively as possible.").

Typically, a license is stated explicitly in a docu:

ment setting forth what rights are granted, see De

Forest, 273 U.S. at 241, but it also can be created in

other ways. Two examples are:

e implied license, an equitable doctrine that re-

quires examining the totality of the circum:

stances; and

e first sale, also called patent exhaustion, which

is a legal doctrine arising out of policy-

imposed limitations on the rights granted by a

patent that provides bona fide purchasers

with a right to use and resell without fear of

suit.

Both are relevant here.

i. Implied License

An implied license to a patent is a form of estop-

pel. It arises "by acquiescence, by conduct, by equi-

table estoppel (estoppel in pais), or by legal estop-

a geographically-restricted licensee who sold products within

his territory knowing they were to be shipped and used in an-

other licensee's territory); Keeler v. Standard Folding Bed Co.,

157 U.S. 659, 664-67 (1895) (reversing judgment against pur-

chaser of products from licensee who transported them into an-

other licensee's territory and offered them for sale there).

15

pel." Wang Labs., Inc. v. Mitsubishi Elecs. Am. Inc.,

103 F.3d 1571, 1580 (Fed. Cir. 1997); accord Kieruff

v. Metro. Stevedore Co., 315 F.2d 839, 842 (9th Cir.

1963); see St. Joseph Iron Works v. Farmers Mfg.

Co., 106 F.2d 294, 298 (4th Cir. 1939) (finding im-

plied license to make patented article by agreement

to modify production machinery); Goss v. Henry

McCleary Co., 92 F.2d 444, 444-45 (9th Cir. 1937)

(contract to modify machines to practice patented

process granted implied license to practice process

subsequent to a necessary rebuilding of the ma-

chine); see also Dickerson v. Colgrove, 100 U.S. 578,

580 (1880) ("[H]e who by his language or conduct

leads another to do what he would not otherwise

have done, shall not subject such person to loss or in-

jury by disappointing the expectations upon which

he acted.").

An implied license arises from the entire context

of a transaction, particularly the patent owner's con-

duct, and not just from the unilateral expectations of

a party. Carborundum Co. v. Molten Metal Equip.

Innovations, Inc., 72 F.3d 872, 878 (Fed. Cir. 1995):

Stickle v. Heublein, Inc., 716 F.2d 1550 (Fed. Cir.

1983) (citing De Forest, 273 U.S. at 236, 241); AMP

Inc. v. United States, 389 F.2d 448, 451 n.3 (1968)

(patent owner's "motive does not have any probative

weight"). Moreover, since it is equitable in nature,

the implied license may extend to patents not liter-

ally involved in a transaction. E.g., Minnesota Min-

ing & Mfg. Co. v. El. du Pont de Nemours & Co.,

448 F.2d 54, 57-58 (7th Cir. 1971) (addressing undis-

closed dominant patent application that later issues

as patent).

16

ii. Patent Exhaustion - First Sale

Patent exhaustion is a legal doctrine, whereby

certain transactions entered into by the patentee ex-

haust or terminate any patent rights in the item

purchased based upon the unfettered transfer of an

authorized item. See Lisle v. Edwards, 777 F.2d

693, 695 (Fed. Cir. 1985) (sale of tool is complete re-

linquishment even allowing repackaging without

need of a sublicense). It is, in effect, a complete li-

cense to all subsequent purchasers.

The sale of a patented article in the absence of

contractual restraints on the purchaser terminates —

or exhausts — the patent right to exclude:

Where the patentee has not parted, by

assignment, with any of his original

rights, but chooses himself to make and

vend a patented article of manufacture,

it is obvious that a purchaser can use

the article in any part of the United

States, and, unless restrained by con-

tract with the patentee, can sell or dis-

pose of the same. It has passed outside

of the monopoly, and is no longer under

' the peculiar protection granted to pat-

ented rights.

Keeler v. Standard Folding Bed Co., 157 U.S. 659,

661 (1895) (emphasis supplied); see Mitchell v. Haw-

ley, 83 U.S. 544, 547 (1873) (a patentee who sells or

authorizes a sale "without any conditions ... must be

understood to have parted to that extent with all his

exclusive right ... in the patented machine..." (em-

phasis supplied)); Adams, 84 U.S. at 456 (following a

sale by "the patentee or his assignee having in the

17

act of sale received all the royalty or consideration

which he claims for the use of his invention in that

particular machine or instrument, it is open to the

use of the purchaser without further restriction on

account of the monopoly of the patentees" (emphasis

supplied)); Cf Lisle, 777 F.2d at 695 (licensed sales).

Unlike implied license, patent exhaustion arises

solely by the actions of the patentee or those in priv’

ity with him; it does not require detrimental reliance

on the part of another, nor does it even inquire into

the buyer's state of mind. See Keeler, 157 U.S. at

666.

Patent exhaustion allows free commerce of pat-

ented articles, without the excessive "regulation"

caused by patent owners imposing restrictions on

downstream uses and sales, unless the buver has

agreed to them. Its serves the goal of eliminating

uncertainty once a product is bought; sound policy

endorses transactions being free of further obligation

unless there is an agreement to the contrary. On the

other hand, if there is an agreement that limits its

use, such as a geographic restriction or field of use

(see notes 12-13, supra), then that limitation, assum-

ing proper notice to subsequent purchasers, is fol-

lowed. In this way, informed and sophisticated buy-

ers may reach a commercially favorable arrange-

ment that includes restrictions, while bona fide pur-

chasers — such as consumers buying off the shelf —

can purchase items without fear of suit. (See note 5,

supra.) It also eliminates the possibility that remote

purchasers, having purchased patented goods with-

out notice or appreciation of any restraints, will be

unfairly restricted in their ability to use or resell

patented products.

18

Il. Contributory Patent Infringement and

the 1952 Patent Act

Notably, most briefs so far filed have failed to dis-

cuss contributory patent infringement as well as its

interaction with doctrines such as patent misuse.

That, however, is the prism for understanding the

Intel-LG transaction and for understanding (as well

as dismissing) many of the pre-1952 citations relied

on by Petitioners and Amici.

A. Contributory Infringement

Contributory infringement is defined by 35 U.S.C.

§ 271(c). It occurs when there is an unauthorized

sale of "a component of a patented machine ... or ap-

paratus for use in practicing a patented process, con-

stituting a material part of the invention" that is es-

pecially made for that use and is not a staple article

of commerce. /d. (emphasis supplied).

This doctrine can easily be understood by varying

the instant facts for a hypothetical: If there were

no license between LG and Intel, then Intel could be

charged as a direct infringer (35 U.S.C. § 271(a)) for

patent claims covering the components themselves.

Since Intel's component? only constitute a portion of

each end-product, however, Intel could not be

charged as a direct infringer of the end-product or

methods-of-use claims; nonetheless, Intel could be

charged as a contributory infringer of those patent

'4 For simplicity, this hypothetical assumes all activities are

domestic.

19

claims if its components are essential, non-staple

portions of the end-products. '5

The LG-Intel License in the present case, however,

immunizes Intel from an allegation of contributory

infringement. It is this same license that gives rise

to the exhaustion arguments, but in making that ar-

gument Petitioners and their supporters rely on an-

titrust case law that mostly precedes enactment of

§ 271(c). That enactment and its legislation history

are vital to the analysis of the infringement and pat-

ent misuse doctrines.

This Court in Dawson Chemical Co. v. Rohm and

Haas Co., 448 U.S. 176 (1980), noted that "“emergling]

from [a] review of judicial development is a fairly

complicated picture, in which the rights and obliga-

tions of patentees as against contributory infringers

has varied over time." Jd. at 197; see id. at 204 (bal-

ancing contributory infringement and patent misuse).

Based upon this review, the Court clarified that

§ 271(d) immunizes certain sale and licensing re-

quirements from charges of patent misuse, and

"permits patentees to exercise control over non-

staple articles used in their inventions" by being able

to assert contributory infringement. Dawson, 448

U.S. at 200.

15 Although some Amuci have compared the instant factual sce-

nario to tying, in many ways this case is “anti-tying.” Here, the

issue is not that a license to one set of rights requires taking a

license to additional rights. Instead, the Intel-LG license cov-

ers less than it could have. It is, in fact, a separation of rights

requiring further downstream licenses, such that the ty-

ing/bundling analysis is inappropriate.

20

The Fifth Circuit's Jn re Yarn Processing Patent

Validity Litigation decision, 541 F.2d 1127 (5th Cir.

1976), also considered the balance between any ex-

tension of the patent monopoly to additional prod-

ucts and the scope of patent protection. It did so in

the context of contributory infringement, under-

standing that the scope of a license can and should

take infringement into account. As the Fifth Circuit

concluded, "the restrictions on sale were within the

scope of the patent grant because they ... did no

more than to prevent contributory infringement by

resale to unlicensed users." /d. at 1135. The pat-

entee in that case, Leesona, could appropriately re-

quire licenses to “throwsters" at various vertical

stages.

There is no real question that under the

terms of the machinery manufacturing li-

censes, the manufacturers were not al-

lowed to sell to a throwster not licensed by

Leesona. We fail to see how this is an ille-

gal extension of the patent monopoly. The

patents are assumed to be valid. Leesona

had the right to license the use of the ma-

chinery separately from its manufacture

and sale.

Id; see also Arizona Cartridge Remanufacturers

Assoc. v. LexMark Int] Inc., 421 F.3d 981, 986-88

(9th Cir. 2005).

On the facts of this case, it appears that the so-

called license to Intel operates, in fact, as a non-

21

a

assertion clause (also called a covenant not to sue).!*

Intel will not be sued for contributory infringement

but Intel's customers — Petitioners — must seek their

own licenses from LG. (The only difference between

this case and Yarn Processing appears to be the in-

significant Yarn Processing requirement that sales

be only to licensees as opposed to the LG-Intel Li-

cense's silence as to purchasers.) As the Govern-

ment noted in its report Antitrust Enforcement and

Intellectual Property Rights: Promoting Innovation

and Competition,'’ at pp. 88-89:

[Nlon-assertion clauses serve one of the

same functions as a license or cross li

cense, 1e., they permit the contracting

parvies to avoid costly litigation over

the use of an IP right.

For that reason, the Government concluded that

such non-assertion agreements and other variations

of standard licensing "either will not raise any com:

petitive concerns or that the efficiencies of these

types of agreements will be sufficient to alleviate

competitive concerns." Jd. at 99 (listing factors to

consider).

'6 There are, of course, differences between licenses (which re-

quire mutual consideration) and covenants not to sue (which

can be unilateral) that are not material to the instant analysis

but should be recognized.

'7 U.S. DEP’T OF JUSTICE & FED. TRADE COMM'N, ANTITRUST

ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS (2007),

available at www.usdo}j.gov/atr/public/hearings/ip/222655.pdf.

22

B. Patent Misuse

Nothing in the instant facts suggests that the

patentee has overreached. The parties are sophisti-

cated transactors in patents and licenses, and Con:

gress has recognized the importance of immunizing

certain patent-related controls and transactions from

a charge of patent misuse. Nonetheless, misuse has

been injected into this case at least conceptually.

Historically, accused infringers asserted patent

misuse as an affirmative defense to infringement

based upon license terms. The gravamen of the mis”

use allegation was inappropriate exploitation of a

patent beyond its legal bounds.'* In many ways, this

is similar to the exhaustion claim asserted here — the

limiting of exploitation.

In 1952, however, the patent laws were amended

to add 35 U.S.C. § 271(d), which narrowed the equi-

table doctrine of misuse. Section § 271(d) reads, in

its entirety:

No patent owner otherwise entitled to relief

for infringement or contributory infringe-

ment of a patent shall be denied relief or

deemed guilty of misuse or illegal extension

‘8 For instance, in a pre-1952 case, B.B. Chem. Co. v. Ellis, 314

U.S. 495, 495-98 (1942), patent misuse barred relief for in-

fringement even where the infringement had been actively in-

duced by the defendant. The Court said that practical difficul-

ties in marketing a patented invention could not justify patent

misuse. See Dawson, 448 U.S. at 193-94, n.12 (summarizing

B.B. Chem.).

23

of the patent right by reason of his having

done one or more of the following:

(1) derived revenue from acts which if per-

formed by another without his consent

would constitute contributory infringe:

ment of the patent;

(2) licensed or authorized another to per-

form acts which if performed without his

consent would constitute contributory in-

fringement of the patent;

(3) sought to enforce his patent rights

against infringement or contributory in-

fringement;

(4) refused to license or use any rights to

the patent; or

(5) conditioned the license of any rights to

the patent or the sale of the patented

product on the acquisition of a license to

rights in another patent or purchase of a

separate product, unless, in view of the

circumstances, the patent owner has mar-

ket power in the relevant market for the

patent or patented product on which the

license or sale is conditioned.

35 U.S.C. § 271(d) (emphasis supplied). 9

'9 The charging language and subparagraphs 1 to 3 were en-

acted in 1952. Subparagraphs 4 and 5 were added by amend-

ment in 1988 in response to the “migratlion]" of concepts from

patent law to antitrust law. See ///inois Tool Works Inc. v. In-

dep. Ink, Inc., 547 U.S. 28, 38 (2006). Congress therefore

amended § 271(d) to exclude some conduct from attack and un-

(footnote continued ...)

24

As this Court has noted, the legislative history

"strongly reinforceld] the conclusion that § 271(d)

was designed to immunize" patentees from charges

of patent misuse and antitrust violations based upon

licensing conditions. Dawson, 448 U.S. at 204.

"[Tlhe relevant legislative materials abundantly

demonstrate an intent both to change the law and to

expand significantly the ability of patentees to pro-

tect their rights against contributory infringement."

Id. at 203; see Hearings on H.R. 3760 before Sub-

comm. No. 3 of the H. Comm. on the Judiciary, 82d

Cong., Ist Sess., 161 (1951) (1951 Hearings) (testi-

mony of Giles S. Rich).

The statute was designed to prevent patent mis-

use and the antitrust laws from eclipsing the doc-

trine of contributory infringement while Congres-

sionally overruling this Court's two 1944 Mercoid

decisions: Mercoid Corp. v. Mid-Continent Inv. Co.,

320 U.S. 661 (1944) ("Mercoid I) and Mercoid Corp.

v. Minneapolis-Honeywell Regulator Co., 320 U.S.

680 (1944) ("Mercord IT’). See Illinois Tool Works,

547 U.S. at 41; Dawson, 448 U.S. at 213.

The Mercoid cases had effectively abolished the

doctrine of contributory infringement. They held

ravel the doctrines of antitrust and patent law from each other.

Id. at 42.

20 The Government's Brief supporting the Petition for Certio-

rari, at 20 n.7, simply states that § 271(d) is inapplicable be-

cause this case concerns patent exhaustion instead of misuse or

contributory infringement. For the reasons noted above, this is

an oversimplification of the balance created by these legal doc-

trines, as can be seen from the 1952 Act and its legislative his-

tory.

25

that the sale of non-patented goods could not be tied

to a patented combination, even where the goods

were not staple articles of commerce but had been

manufactured solely to assist purchasers in directly

infringing the claims of the patent. In such cases,

patent enforcement for contributory infringement

represented per se misuse (Mercoid J and provided

the predicate for an antitrust violation (Mercoid J).

See Dawson, 448 U.S. at 204-05.

The Government “vigorously opposed” enacting

§ 271(d). Jd. at 204. Its position was that the pro-

posed enforcement of patents to prevent contributory

infringement would create an exemption to the anti-

trust laws. As the proponents told the Committee,

however, the bill:

e “strikes a proper balance between the

field of patent law on the one hand and

the field of general law in which anti-

trust laws operate on the other hand."

1948 Hearings?! at 11 (statement of

Giles S. Rich, representing NYPLA).

e "will eliminate a lot of headaches and a

lot of alleged violations of the antitrust

laws" 1949 Hearings” at 30 (statement

of Giles S. Rich, representing NYPLA).

21 Contributory Infringement in Patents, Definition of Inven-

tion: Hearings Before Subcomm. on Pat., Trade-Marks, and

Copyrights of the H. Comm. on the Judiciary, 80th Cong. (1948)

(“1948 Hearings”).

22 Contributory Infringement: Hearings on H.R. 3866 before

Subcomm. No. 4 of the H. Comm. on the Judiciary, 80th Cong.

(1949) (“1949 Hearings’).

26

e "will be a help not only to the patentee

but to the Antitrust Department be-

cause in this branch of patent law at

least it draws as distinct a law as you

can in language.... [I]t shows the De-

partment of Justice whom they aught

to prosecute and shows the patentee

what he may safely do to enforce the

rights that the Government has given

him." 1948 Hearings at 16 (statement

of Robert W. Byerly, Chairman, Comn.

on Pat., Ass'n of the Bar of the City of

New York).

e "draws 2 sharp line of demarcation be-

tween ..2 patent law and the antitrust

law. This will enable patentees to pro-

tect their property without inadvertent

violation of the Sherman Act, and will

also simplify the work of the Depart:

ment of Justice by defining a field in

which restraint of trade cannot be justi-

fied under the patent law.” 1948 Hear-

ings at 19-20 (statement of Ass'n of the

Bar of the City of New York).

Ultimately, Congress rejected the Government’s op-

position and enacted § 271(d).

In Dawson, this Court expressly recognized that,

although the "policy of free competition runs deep in

our law," "the policy of stimulating invention that

underlies the entire patent system runs no less

deep." -448 U.S. at 221. There was no need to de-

termine “whether the principles of free competition

could justify" the potential reduction of the incentive

to invent by complete eradication of the contributory

27

infringement doctrine. Jd. at 223. The rcason for

this was because "Congress' enactment of § 271(d)

resolved these issues in favor of a broader scope of

patent protection." /d.

Ill. The Government's Position in McFarling

In this case, the Government seemingly is seek-

ing a rule that would prevent patentees from ever

controlling downstream uses or licenses outside of

contract law. Brief for the United States as Amicus

Curiae Supporting Petitioners, at pp. 7, 9, 24, 28-30.

This is at odds with what it recently advocated. The

Petition for Certiorari in McFarling v. Monsanto Co.,

No. 04-31, and more particularly the Government's

brief opposing Certiorari there ("Gov't McFarling

Br.")?3 are instructive (and AIPLA believes correct).

In that case, Monsanto's licensees sold certain

modified, patented seed (called "Round-Up Ready")

to farmers like McFarling with the express license to

each farmer that any harvested seed ("second gen-

eration") would not be saved for replanting. See

Monsanto Co. v. McFarling, 363 F.3d 1336 (Fed. Cir.

2004). Monsanto patents covered both initially pur-

chased and second generation seed. Gov't McFarling

Br. at 11-12. Notwithstanding his express agree-

ment, McFarling saved harvested seed for replanting

and, when sued for infringement, claimed patent ex-

haustion for the second generation seed as well as

patent misuse and Sherman Act violations.

The Government opposed certiorari and told this

Court that limiting the licensee to one-time use,

23 http://www.usdoj.gov/atr/cases/f209200/209268.htm

28

thereby preventing McFarling from replanting har-

vested seed, "did not constitute misuse." Gov't

McFarling Br. at 10 (conflating misuse with exhaus-

tion).24

In order to demonstrate patent misuse, how-

ever, petitioner was required to show that

respondent's restrictions on the use of sec-

ond-generation seeds “impermissibly broad-

ened the scope of the patent grant." CR.

Bard, (Inc. v. M3 Sys., Inc.,) 157 F.3d (1340,

1372 (Fed. Cir. 1998)]. No such showing

could be made here, because included within

"the scope of the patent grant" is "the right

to exclude others from ... using ... the inven-

tion." 35 U.S.C. 154(a)(i). As this case

comes before the Court, respondent's refusal

to license petitioner to plant second:

generation (and hence patented) Roundup

Ready seed merely constitutes an exercise of

that statutory nght, and thus cannot be pat-

ent misuse. See 35 U.S.C. 271(d).

Gov't McFarling Br. at 13-14.2° The Government

said that there was no improper tying in the Mon-

santo license requiring that there be no replanting:

[Pletitioner's "tying" theory reduces to the

notion that he is entitled to purchase re-

24 Seemingly, the Government discusses misuse because any

failure to recognize exhaustion, in the Government's view,

would be misuse.

25 In its brief, the Government does seemingly indicate a sepa-

rate analysis because the invention, seeds, is self-replicating.

Gov't McFarling Br. at 13-14.

29

spondent's patented invention without also

honoring limits imposed on the use of the

product in which that invention finds its use-

ful, tangible expression. Petitioner points to

no authority for that novel proposition, and

for good reason: it is contrary both to the

fundamental nature of the patent grant,

which confers on the patentee the right to re-

fuse to license its invention, see 35 U.S.C.

154(aX(1), 271(d),* and to the fundamental

competitive concerns underlying antitrust

laws.... The patent grant itse/f prohibits pe-

titioner from saving and replanting patented

seed without a license. Respondent's license

restrictions thus do not constitute an unrea’

sonable restraint of trade under Section 1 of

the Sherman Act — just as they do not consti-

tute patent misuse.

* Accord Hartford-Empire Co. v. United

States, 323 U.S. 386, 432 (1945) ("A patent

owner is not in the position of a quasi-trustee

for the public or under any obligation to see

that the public acquires the free right to use

the invention. He has no obligation either to

use it or to grant its use to others."); Bement

v. National Harrow Co., 186 U.S. 70, 90 (1902)

("(The patentee's] title is exclusive, and so

clearly within the constitutional provisions in

respect of private property that he is neither

bound to use his discovery himself nor permit

others to use it.”).

Gov't McFarling Br. at 16-17 (some citations omit-

ted).

More particularly, the Government also argued

that a system which allows purchasers to plant sec-

30

ond-generation seed would not necessarily be eco-

nomically beneficial; 1e., the restrictions make eco-

nomic sense.

[Rlespondent could charge a fee for allowing

farmers to save and replant seed.... More-

over ... requiring respondent to issue such

self-renewing licenses (with attendant moni-

toring costs) could create disincentives for

seed manufacturers to produce Roundup

Ready seed, with the result that the price of

such seed could actually increase, net of the

new fee charged by respondent under peti-

tioner's proposed rule. The absence of any

clear evidence that it would be procompeti-

tive to require respondent to issue a license

on petitioner's desired terms provides further

support for the conclusion that petitioner

cannot assert a valid Section 1 claim.

Id. at 18-19. This is consistent with the position the

Government took in formulating the DOJ-FTC Anti

trust IP Licensing Guidelines:

A non-exclusive license of intellectual prop-

erty that does not contain any restraints on

the competitive conduct of the licensor or the

licensee generally does not present antitrust

concerns even if the parties to the license are

in a horizontal relationship, because the non-

exclusive license normally does not diminish

competition that would occur in its absence.

DOJ-FTC Antitrust IP Licensing Guidelines § 4.1.2.

31

2. APPLICATION OF LAW TO THIS CASE

I. Negative Effects of a Blanket

Exhaustion Doctrine

A per se exhaustion doctrine, like that espoused

by Petitioners (or McFarling), fails to achieve the

appropriate balance between public interest and

marketplace efficiencies. It would create an over-

whelming chill for technology transfer. If, for in-

stance, a patented invention were useful in multiple

technology areas, only one of which was practiced by

the patentee, then under Petitioners' scheme the

patentee would never license the invention for use in

other fields for fear that exhaustion would allow

cannibalization of its primary market. See, e.g.,

Continental Paper Bag, 210 U.S. at 423-25; Special

Eqm't, 324 U.S. at 378-79.

Instead, the public interest is best served by al-

lowing patentees to arrange commercially-

appropriate licenses (based upon the sophistication

of the transaction, for instance) that allow them to

recoup their invest.nents in an efficient manner and

appropriately condition the sale of a patented article

— which may, itself, be useful in a subsequent

method — as part of a limited bundle of patent rights

mandating downstream agreements.

For those reasons, AIPLA believes that allowing

a patentee to collect royalties commensu rate with

the value conferred by the invention from multiple

entities, whether they are in a vertical chain of dis-

tributors or among horizontal manufacturers serving

different end-users, gives sophisticated parties the

flexibility to distribute the royalty burden appropri-

32

ately. This creates mutually-beneficial financial ar-

rangements that ultimately promote competition

and serve the marketplace.

The alternative is inefficient and unacceptable. If

a patentee were required to recoup its entire invest-

ment of potential profit in the first license for sale,

as advocated by Petitioners, first-instance licenses

would be priced for the highest royalty-bearing use

only — at best, weighted for the highest return based

upon diversion. And if there were other uses that

would yield lower royalties, then they could not be

licensed for fear of exhaustion defeating the higher

royalty return. See Jean Tirole, The Theory of In-

dustrial Organization, 134, 141 (1988) (discussing

arbitrage where pricing is different for different sec-

tors or uses). This would obviously have an adverse

effect on any market, but AIPLA submits it would be

magnified for an emerging market where uses may

not be fully known at the outset. Alternatively, al-

lowing the royalty to be established at multiple lev-

els in the distribution chain allows appropriate roy-

alty allocation based upon the chosen use of the pat-

ented invention. This is the most efficient, and rea-

sonable, financial scenario.

Petitioners would have this Court believe that

contracts, and contract remedies, are an appropriate

vehicle to achieve this result. Similarly, the Gov-

ernment stated that "the right to place such down-

stream restrictions should be resolved as a matter of

contract, not patent law." Government Br. Support-

ing Certiorari at p. 18.

In fact, contract remedies are not helpful since

they are often inadequate to accomplish the objec:

tives because they require privity and because of the

33

ineffectiveness of administering multiple contracts

each of which would be dependent upon the one

above it. Patent laws allow the patent owner to en-

force its rights against anyone in the distribution

chain, subject only to doctrines like exhaustion and

license, so there would still be an infrinzement rem-

edy in the absence of agreements linkia,; patentee to

defendant/infringer. In fact, the most market-

efficient standard is one that allows appropriate ap-

plication of governing patent law.

Requiring patent owners to take their entire fi-

nancial reward in the first transaction forces patent

owners and licensees into transactions that are less

efficient. Thus, the first licensee, subject to issues of

contributory infringement or inducement of in-

fringement, will be required to pay a royalty for all

uses of the component regardless of whether, in a

sub-market, there may be a royalty-bearing need.

Instead, allowing direct negotiation between the

patent owner and the user of the patented invention,

the most important economic actor exploiting the

patent, will be more efficient than trying to negotiate

with the initial component manufacturer serving <5

a proxy for the downstream economics. (If transac-

tional costs render sublicenses inefficient, a patentee

can always allow rights to exhaust at first sale.)

It is against this framework that a right of patent

exploitation, such as licensing, must be considered.

There are, therefore, separate yet related concepts

that must be analyzed.

34

II. This Court Should Continue to Protect

the Legal Doctrines at Issue

Petitioners conceded in the court below that the

patent owner "could have granted Intel only the

right to sell Licensed Products to those customers

who had obtained a separate license from LGE."

Combined Petition for Panel Rehearing and Rehear-

ing en banc of Defendants-Cross-Appellants at 7

(Fed. Cir. Jul. 21, 2006), 2006 WL 2351226. This is

consistent with the Fifth Circuit's Yarn Processing

decision, 541 F.2d at 1135 (discussed supra at 20-21).

As a starting point, this Court should reaffirm

that position. It is consistent with Univis. There the

relevant sales, made both by wholesalers to prescrip-

tion retailers and by finishing retailers to consumers,

were authorized sales. The restriction at issue in

Univis, however, was the requirement that they be

done at a mandatory price for a product that only

had one use (as even the Government agreed, see

DOJ-FTC Antitrust IP Licensing Guidelines § 5.2).

!n contrast, in this case there is no pricing condition

or requirement.

Unhke Univis, nothing in the agreement at issue

in this case in any way restrains competition. Here

the accused infringers, Petitioners, are sophisticated

manufacturers (OEMs) who are primary users of the

patented invention. They are the most direct in-

fringers of the patent at issue. Thus, it is neither

unfair nor would it interfere with downstream prod-

uct distribution, if they were required to separately

license any patented invention. It appears that LG's

licensing program is limited to principal implemen-

ters of the patented area. Its efforts are focused on,

35

for purposes of the patents-in-suit in this case, a po-

tential contributory infringer (Intel) and direct in-

fringers (the OEMs). Intel, in effect, received a

covenant not to sue for contributory infringement; its

components are now licensed to the extent direct in-

fringers separately obtain a license, but Intel is free

from threat of litigation.

For purposes of Univis, there appears to be a dis”

tinction in language between “unauthorized sales"

and "conditional sales.". AIPLA submits these dis-

tinctions are largely semantic. LG could just as eas-

ily achieve the same result by drafting its license to

Intel prohibiting sales to unlicensed purchasers as

what actually occurred, requiring purchasers to ob-

tain a separate license. And to the extent some sug”

gest that Univis should be read to state that LG

would have preserved its rights to obtain royalties

from Petitioners had its license to Intel been royalty

free, this option should be dismissed as irrational.

On the facts of this case, AIPLA respectfully

submits that the issue of exhaustion and implied li-

cense should be decided as follows:

A. Pre-License Sales

AIPLA's understanding of the facts, based upon

the limited record available, indicates that pre-

license sales were released in the Intel-LG License.

See 248 F. Supp. 2d at 917 (quoted supra at 6-7) If

that is the case, then AIPLA sees this as a complete

release and all claimed uses of the components are

licensed to LG's patents.

36

B. Post-License Sales

As noted above, AIPLA is unable to say whether

the Intel Notice Letter was sufficient to put purchas-

ers on notice that they required additional licenses.

If the Notice Letter is deemed sufficient, which is

presumed for these purposes, then patent exhaustion

should not apply. Petitioners, all sophisticated pur-

chasers, would have had adequate notice that they

required additional licenses to use the Intel compo-

nents and purchased them with that understanding.

Moreover, if the Notice Letter is deemed sufficient

then based upon the circumstances as a whole there

would be no reason to imply an equitable license.

CONCLUSION

The Court should decide this case in a manner

that preserves the principles that hae been devel:

oped for each doctrine. Exhaustion does not pre-

clude an infringement action against a purchaser

where the sale made clear that downstream licenses

are not being granted but rather must be separately

negotiated. Thus, when an accused infringer has

clear notice before entering into any purchase of po-

tential liability as an infringer, his actions should

not be exculpated. The effect of any such restrictions

or conditions imposed by the patent owner or its li-

censees is not violative of the artitrust laws.

Where these notice provisions are met, it should

not matter whether the patent owner chose to

maximize return by charging the parties at each

level of supply an individualized royalty or by requir-

ing a complete royalty payment from the first licen:

see (thereby exhausting patent rights). Whether the

first transaction is a sale or license or covenant not

37

to sue, it should not change these conditions or ren-

der a sale unauthorized.

Respectfully submitted,

JAMES POOLEY JEFFREY I. D. LEWIS

President Counsel of Record

AMERICAN INTELLECTUAL PATTERSON BELKNAP WEBB &

PROPERTY LAW ASSOCIATION TYLER LLP

241 Eighteenth Street, South 1133 Avenue of the Americas

Arlington, VA 22202 New York, NY 10036

(703) 415-0780 (212) 336-2000

Counsel for American

Intellectual Property Law

Association