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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0514%3A18

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2008
- **Citation:** 553 U.S. 617

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0514%3A18. Public record. Not legal advice.