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

Ses3le 1 30

3TPr No. 06-937

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QUANTA COMPUTER, INC., QUANTA

COMPUTER USA, INC., Q-LITY COMPUTER, INC.,

Petitioners,

v.

- LG ELECTRONICS, INC.,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Federal Circuit

BRIEF FOR WI-LAN Inc. AS AMICUS CURIAE

SUPPORTING RESPONDENT

ROBERT E. GOODFRIEND RODNEY R. SWEETLAND, III

Counsel of Record MICHAEL G. MCMANUS

SASON DLACKSTONE “ICKOOL SMITH, P-C.

MCKOOL SMITH, P.C. 1025 Connecticut Avenue NW

300 Crescent Court Suite 1000

Suite 1500 Washington DC 20036

Dallas, Texas 75201 (202) 828-1272

(214) 978-4000

ROBERT COTE JAMES N. WILLI

McKOOL SMITH, P.C. JOEL L. THOLLANDER

399 Park Avenue GRETCHEN K. HARTING

New York, New York 10022 SETH R. HASENOUR

(212) 402-9400 MCKOOL SMITH, P.C.

300 West 6th Street

Suite 1700

Austin, Texas 78701

(512) 692-8700

Counsel for Wi-LAN Inc.

Wi_SON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D. C. 20002

BEST AVAILABLE COPY

I.

IT.

i

TABLE OF CONTENTS

CONDITIONS ON THE SALE OF

PATENTED ARTICLES AND THE

LICENSE OF PATENT RIGHTS HAVE

CONSISTENTLY BEEN UPHELD BY

SE ET cernsisensvinnietnenienininnntiommmimnnme

A. This Court And The Regional Circuits,

Prior To The Creation Of The Federal

Circuit, Have Consistently Upheld

i

B. Mallinckrodt And This Case Are

Conceptually Distinguishable From

Sail cisnsieicicieacinsesindesiaiteileniaeiinceteaactninstatienteantenititei

THE COURT SHOULD CONTINUE TO

GIVE FULL EFFECT TO ITS DECISIONS

PERMITTING CONDITIONS ON THE

SALE OF PATENTED ARTICLES AND

THE LICENSE OF PATENT RIGHTS............

il

A. Well-Settled Legal Principles

Permitting Conditions Should Remain

NINE viicciiiiictntchesnicieinaiainisitiiedanatiniieibintesaiis 17

B. A Per Se Patent Exhaustion Rule Would

Be In Direct Conflict With 35 U.S.C.

i eee 20

C. Public Policy Considerations Militate

Against A Per Se Rule i sseiieialelbceieiaditalaalabimeiteieg 22

1. The Single Recovery Rule Prevents

Abuse of Patent Rights .......................... 24

2. Treating Licenses Differently From

Releases Of Liability Creates An

Anomaly And An Obstacle To

IIE sen cecensccecssnsenmncrvinnaningresnnienaate 25

3. Petitioners’ Policy Justifications For

Per Se Exhaustion Lack Merit .............. 26

CAPITIS coccnrecrsvvemensesnmtnnnnneminesninnnemnnnenietinit 29

ili

TABLE OF AUTHORITIES

CASES Page

Albright v. Teas,

ET a en rea rE 9

Aro Mfg. Co. v. Convertible Top Replacement Co.,

377 U.S. 476 (1964) ................026 eoneeesuvensepenncese 23, 24

Automatic Radio Mfg. Co. v. Hazeltine Research,

Inc.,

176 F.2d 799 (let Cir. 1949)..........ccccccccccccscsssssseees 12

Bandag, Inc. v. Al Bolser's Tire Stores, Inc.,

750 F.2d 903 (Fed. Cir. 1984)..............cccccsesessseseees 28

Bement v. Nat'l Harrow Co., 7

I I tain ioniatinbeiltidendtiniiai 18

Bloomer v. Millinger,

lal 19

_ Bus. Elecs. Corp. v. Sharp Elecs. Corp.,

I a cic dihtinencileisiniinaeninti 23

Chiuminatta Concrete Concepts, Inc. v. Cardinal

Indus.,

1 Fed. Appx. 879, 885 (Fed. Cir 2001).................. 25

Coats Loaders & Stackers, Inc. v. Henderson,

233 F.2d 915 (Gth Cir. 1966) .................0.............. 13

1V

Page |

Extractol Process, Ltd. v. Hiram Walker & Sons,

Inc.,

153 F.2d 264 (7th Cir. 1946) ................... eee 11, 12

Gen. Talking Pictures Corp. v. W. Elec. Co.,

304 U.S. 175 (1938) ............ eee 8, 9, 10, 11, 12, 13

14, 15, 16, 18, 30

Gen. Talking Pictures Corp. v. W. Elec. Co.,

A Se 7, 9, 10, 14, 18

19, 30

Hilton v. S.C. Pub. Rys. Comm'n,

Ne anlebiaadianiiie 17

Ill. Tool Works Inc. v. Independent Ink, Inc.,

BAT U.S. 28 (2006) oaasccesssssccsccscensssesnnececesneres 10, 21

In re Yarn Processing Patent Validity Litig.,

541 F.2d 1127 (5% Cir. 1976) .................... 13, 14, 16

Int’l Gamco, Inc. v. Multimedia Games, Inc.,

504 F.3d 1273 (Fed. Cir. 2007)...........................00. 16

Leegin Creative Leather Prods. v. PSKS, Inc.,

CI tetciiriitaditsininibiaditnnsntedmenbiones 23

Leitch Mfg.. Co. v. Barber Co.,

I ae eae 27, 28

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

453 F.3d 1364 (Fed. Cir. 2006).....................cceeeeees 29

Page

Mallinckrodt, Inc. v. Medipart, Inc., :

976 F.2d 700 (Fed. Cir. 1992).......... 3, 10, 11, 13, 14

28, 29, 30

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

Se es Ie SNEED accossecnieiitituncodiniedsinddminthdeiessnaadidaiaal 27

Mitchell v. Hawley,

Be ees A ITED evcoccenicnvenaneiiaomiuaniie 5, 6, 7, 8, 10, 14

19, 29, 30

Payne v. Tennessee,

ee ee I OED icectniciccctcncsicncsiinitentendaadamianta 17, 18

Planned Parenthood v. Casey,

ee es PTD vcsiuiscssitscsininntninicitetnieineeititaaile 16, 17, 18

Providence Rubber Co. v. Goodyear,

Fe PII sntisisiseccniidnicepiiiicieniiitsiniatianinaall ts eatata 19

Rock v. Arkansas,

es ED cicicecsctsncncintinnsiniiailisiiitaiaiiiaimsiauainie 22

Shockley v. Arcan, Inc.,

248 F.3d 1349 (Fed. Cir. 2001).......................000000 24

Steiner Sales Co. v. Schwartz Sales Co.,

98 F.2d 999 (10th Cir. 1938) ..........................00000 11

Transclean Corp. v. Jiffy Lube Int'l, Inc.,

474 F.3d 1298 (Fed. Cir. 2007)................ccccccseseeee 24

vi

Page

United States v. Gen. Elec. Co.,

Ce 9, 10, 15, 16

18, 19, 30

United States v. Univis Lens Co.,

a 3, 14, 30

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

incite iatieniicinecnetenitensiinemeniageentans 25

FEDERAL STATUTES

35 U.S.C. § 271(d)(5) EE Loe 4, 19, 20, 21

BOOKS AND ARTICLES

Colonel J. Jeremiah Mahoney & Captain

Christopher C. VanNatta, Jurisprudential

Myopia: Polygraphs in the Courtroom, 43

A.F.L. REV. 95, 140-141 (1997)................ccccccceceees 22

Mehdi Ansari, Note, LG Electronics, Inc. v.

Bizcom Electronics, Inc.: Solving the Foundry

Problem in the Semiconductor Business, 22

BERKELEY TECH. L.J. 137 (2007) ...............ccccceeeeees 22

Peter S. Menell, Bankruptcy Treatment of

Intellectual Property Assets: An Economic

Analysis, 22 BERKELEY TECH. L.J. 733 (2007)...... 14

RESTATEMENT OF TORTS

i cidiindiseniieannmemeoteneumendeseennansennnseneens 24

Page

OTHER AUTHORITY

NEC Electronics America Standard Terms and

Conditions,

http://www.am.necel.com/legal/LegalTC. html .......... 27

Fairchild Semiconductor Corporation Standard

Terms and Conditions of Sale,

http://www.fairchildsemi.com/legal/sale_terms_cond.

I icine tai aha intact areniensatahnmlaniatiithasleneidiietiaiamamtiaaedantam lain 27

IDENTITY AND INTEREST OF THE AMICUS

CURIAE!

Wi-LAN, Inc. (“Wi-LAN”) is a publicly traded

corporation founded to commercialize fundamental

breakthroughs in wireless technology. Wi-LAN’s

technology underlies wireless communication devices

such as the wireless routers ubiquitous in homes,

offices, airports, and elsewhere. The IEEE, the

leading standard setting organization for wireless

networking, has incorporated Wi-LAN’s technologies

into several of its wireless standards that make

reliable, high rate data transmission available to the

public.

Wi-LAN files this Brief in support of

respondent to address important legal issues not

addressed by the parties or previous amici, including

the per se patent exhaustion or “single license rule”

advocated by petitioners, and hecause the relief

requested by petitioners implicates the freedom to

contract of Wi-LAN, its licensees, and others who

have relied upon existing law. Reversal of the

longstanding authority of this Court on patent

exhaustion, and the 15-year-old Federal Circuit

authority expressly based upon this Court's

' The parties have consented to the filing of this Brief.

Pursuant to Supreme Court Rule 37.6, 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.

2

jurisprudence (and consistent with the regional

circuit decisions before the creation of the Federal

Circuit), will throw into doubt the enforceability of

billions of dollars in patent licensing agreements.

This, in turn, will result in extensive litigation to

determine the effect of the reversal on existing

license agreements.

The rule of law advocated by petitioners will

also distort market forces and propel electronic

component manufacturers (conspicuously absent

among the amici supporting petitioners) into conflict

with patent owners because, in many instances,

electronic component manufacturers are unable or

unwilling to pay the full value of a patent license for

both their own use and use by others in the

distribution chain (such as device manufacturers).

Permitting market participants at any point in a

vertical chain of distribution the freedom to enter

into agreements as they see fit is essential to

reaching accord as to the appropriate scope of a

particular licensing agreement.

The per se patent exhaustion or “single-license

rule” advocated by petitioners will eliminate this

freedom of contract. Such a-restriction on the

flexibility of parties at different points in the chain of

distribution is an obstacle to the apportionment of

royalties among those parties and will likely result in

a substantial increase in litigation. Moreover, as the

amount in dispute will represent the entire value of

the royalty, the ratio of the potential damages to

litigation costs will increase. Accordingly, litigation

will become the optimal means for a patent owner to

3

achieve collection of a full royalty for use of the

patented invention.

SUMMARY OF THE ARGUMENT

Before the creation of the Federal Circuit, the

regional circuits applied this Court’s historical

precedents on patent exhaustion in a fashion similar

to the Federal Circuit’s holding in Mallinckrodt, Inc.

v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992) and

in this case, and did so even after the Court’s decision

in United States v. Univis Lens Co., 316 U.S. 241

(1942). Accordingly, there is nothing revolutionary in

the Federal Circuit’s holding in Mallinckrodt or in

the case sub judice, as petitioners suggest. Pet. Br.?

51. Indeed, the approach by the Federal Circuit in

Mallinckrodt and in this case represents nothing

more than the historical norm.

This Court has traditionally recognized a

patent owner's freedom to contract and upheld

limitations on the scope of patent licenses, permitting

patent owners to divide up the prerogatives of patent

ownership with licensees as desired and agreed upon

by the parties to the licensing agreement, without

triggering patent exhaustion. The Court should

continue this line of authority, rejecting petitioners’

efforts to disregard this gradation of the patent

exhaustion doctrine created over a century ago.

Well-established legal principles affecting |

property rights should also be upheld, including the

body of author:.y from this Court supporting the

2 Petitioners’ Brief.

4

freedom of a patent owner, either directly itself or

indirectly through its licensees, to condition the sale

of a patented article, and, thus, the scope of use

rights conveyed to purchasers in the distribution

chain. A patentee has historically been permitted to

impose such conditions so long as reasonably within

the scope of the patent grant. In a conditional

transaction it is reasonable to infer that the parties

have negotiated a price only for the limited use rights

conferred by the patent owner.

The relief sought by petitioners and some of

their amici allies would create a per se rule of law for

patent exhaustion or a “single license rule” that

would not permit a patent owner to enforce such

conditions on the sale of a patented article or the

license of patent rights and would render irrelevant

whether the patent owner has received full value for

use of the patented invention. Any such per se rule

would be contrary to the Court’s precedents and in

direct conflict with 35 U.S.C. § 271(d)(5), where

Congress pronounced that conditions imposed by a

patent owner on “the sale of the patented product” or

“license of any rights to the patent” shall not be per

se negated or exhausted. § 271(d)(5).

ARGUMENT

I. CONDITIONS ON THE SALE OF PATENTED

ARTICLES AND THE LICENSE OF PATENT

RIGHTS HAVE CONSISTENTLY BEEN

UPHELD BY THE COURT

A. This Court And The Regional Circuits,

Prior To The Creation Of The Federal

Circuit, Have Consistently Upheld

Such Conditions

In support of their argument that conditions

placed on the sale of patented articles are contrary to

legal precedent, petitioners state that the Federal

Circuit misunderstands the Court’s holding in

Mitchell v. Hawley, 83 U.S. 544 (1872). Pet. Br. 18.

According to petitioners, the Federal Circuit has

erroneously read the Mitchell opinion as supporting a

patent owner's imposition of “conditions’ on the use

of sold goods and enforce[{ment of] them with

infringement suits.” Jd. Instead, petitioners argue

that the Court in “Mitchell emphasized that

patentees can engage in ‘conditional sales’ only in the

‘same manner as if dealing with property of any other

kind.” Pet. Br. 19 (quoting Mitchell, 83 U.S. at 548).

This statement is followed by a number of decisions

demonstrating the impropriety of conditions placed

on “property of any other kind.” Jd. According to

petitioners’ argument, because post-sale conditions

involving “property of any other kind” have been

criticized and found improper, conditions placed on

6

the sale of patented articles should, under the Court’s

holding in Mitchell, likewise be found improper.

Petitioners’ entire argument here, however, is

itself based upon a mischaracterization of the

Mitchell holding. In Mitchell, the Court did not

“emphasize” that patentees can engage in

‘conditional sales’ only in the ‘same manner as if

dealing with property of any other kind.” Pet. Br. 19

(quoting Mitchell, 83 U.S. at 548). Instead, it found

that sales of patented implements and machines

“may be made by the patentee with or without

conditions{.J” Mitchell, 83 U.S. at 548 (emphasis ©

added). The Court then found that when a sale is

made “without any conditions . . . [the purchaser]

may repair it or improve upon it as he pleases, in

same manner as if dealing with property of any other

kind.” Mitchell, 83 U.S. at 548. Contrary to

petitioners’ argument, the Court explicitly approved

of conditions placed on the sales of patented articles

to a purchaser and_e£ specifically contrasted

unconditional sales with sales upon which conditions

are placed.

This Court also expressly held that those

conditions or restrictions pass on to purchasers of the

licensed products. In Mitchell, the Court found that a

licensee is not empowered to convey a license to

purchasers beyond the limits of the license grant:

No one in general can sell

personal property and convey a

valid title to it unless he is the

owner or lawfully represents the

owner. Nemo dat quod non habet.

7

Persons, therefore, who buy goods

from one not the owner, and who

does not lawfully represent the

owner, however innocent they

may be, obtain no _ property

whatever in the goods, as no one

can convey in such a case any

better title than he owns, unless

the sale is made in market overt,

or under circumstances which

show that the seller lawfully

represented the owner. . . . Notice

to the purchaser in such a case is

not required, as the law imposes

the risk upon the purchaser’.]

Mitchell, 83 U.S. at 550 (second emphasis added).

Similarly, in Gen. Talking Pictures Corp. v. W. Elec.

Co., the Court found a purchaser and commercial

user of patented radio amplifiers liable for

infringement for violation of “home use only”

restrictions placed on the seller’s license, and, thus,

conditions placed on the sale, holding that it was “in

no better position than if it had manufactured the

amplifiers itself without a license. It is liable because

it has used the invention without [a] license to do so.”

305 U.S. 124, 127 (1938) (“Gen. Talking Pictures IT’).

Petitioners and amicus curiae United States

seek to improperly restrict the holding in Mitchell,

notwithstanding that it unquestionably upholds the

right of patent owners to place conditions on the sale

of patented machines, either directly themselves or

indirectly through their licensees. In an effort to

delimit Mitchell, they narrowly define the term

8

“conditional sale” as a condition precedent or

condition to be performed in advance of the sale, in

which title to the patented article has not passed,

and thus patent exhaustion does not arise. Pet. Br.

19-20 & n.7; Gov. Br.2 20-21. According to

petitioners and amicus curiae United States, because

the Court in Mitchell was focusing on “conditional

sales,” meaning conditions precedent to a sale, the

Court’s holding is inapplicable to conditions of the

sort here at issue. Mitchell, however, did not involve

a “conditional sale’-—as the term is narrowly

construed by petitioners and amicus curiae United

States. Instead, the licensing agreement at issue was

“subject to certain restrictions and limitations,” or

conditions subsequent that would restrict use of the

patented invention, just as in respondent’s licensing

agreements with Intel. See Mitchell, 83 U.S. at 548.

Accordingly, despite petitioners’ and amicus curiae

United States’ arguments to the contrary, when the

Court found in Mitchell that “[s]lales of [patented

implements or machines] may be made by the

patentee with or without conditions|,]” it was not

referencing a “conditional sale” as narrowly defined

by petitioners but, instead, conditions that are placed

on a sale, i.e., conditions subsequent that impose

restrictions on a purchaser's use. See id.

Likewise, in Gen. Talking Pictures Corp. v. W.

Elec. Co., 304 U.S. 175 (1938) (“Gen. Talking Pictures

I’) and Gen. Talking Pictures II, the Court’s use of

“conditions” was again not in the context of a

“conditional sale” meaning a condition precedent as

3 Amicus Curiae United States’ Brief.

9

narrowly defined by petitioners, but rather focused

on conditions placed on the sale, or conditions

subsequent; in this case, conditions were placed on

the purchaser’s right to use the patented radio

amplifiers, restricting such use to home use only. See

Gen. Talking Pictures I, 304 U.S. at 181 (holding that

“fu]nquestionably, the owner of a patent may grant

licenses to manufacture, use or sell upon conditions

not inconsistent with the scope of the monopoly”);

Gen. Talking Pictures II, 305 U.S. at 127 (“That a

restrictive license is legal seems clear. . . . [T]he

patentee may grant a license ‘upon any condition the

performance of which is reasonably within the

reward which the patentee by the grant of the patent

is entitled to secure.”) See also United States v. Gen.

Elec. Co., 272 U.S. 476, 489 (1926) (finding that “the

patentee may grant a license to make, use and vend

articles under the specifications of his patent for any

royalty or upon any condition the performance of

which is reasonably within the reward which the

pateniee by the grant of the patent is entitled to

secure.”); Albright v. Teas, 106 U.S. 613 (1883) (using

the term “unconditional” in the context of conditions

placed on the sale, or conditions subsequent limiting

a purchaser’s use of the patented invention. In

Albright v. Teas, the Court found that because the

patentee had transferred “all his title and interest in

the inventions covered by his patents[, in which t]he

transfer was absolute and unconditional{, hle had no

right to prosecute anyone for infringements of his

patents[.]” 106 U.S. at 617.)

Petitioners assert that “[t]o our knowledge the

only case in which this Court has ever permitted a

patent owner to sell goods while reserving the

10

statutory right to sue for infringement if certain

conditions are not met is A.B. Dick[.]” Pet. Br. 14

(emphasis in original). This assertion is incorrect and

misleading. In 2006, in Ill. Tool Works Inc. v.

Independent Ink, Inc., the Court expressly approved

of a patent owners right to sue for patent

infringement a purchaser of its patented inkheads

and patented ink containers who violated the

condition placed on the sale—the condition restricted

use of the patented article to use only with

unpatented ink purchased from the patentee’s parent

company. 547 U.S. 28, 42 (2006).

In addition, there are numerous cases where,

as in the case at bar, the patentee limited the rights

conveyed to purchasers indirectly through limitations

on the scope of license granted to its licensees. In

Mitchell, Gen. Talking Pictures I and II, and Gen.

Elec. Co., this Court permitted both limitations on

the scope of the grant of a license to a manufacturer

and a subsequent infringement action against

purchasers in the distribution chain who exceeded

the scope of the license granted to the manufacturer.

To say that a patent owner can indirectly restrict the

rights conveyed to a purchaser through its licensees

yet not do so directly would be anomalous. Indeed,

the Court has consistently acknowledged a patentee’s

right to so limit a purchaser’s use to enable full

recovery for use of the patented invention.

Petitioners would have the Court accept the

proposition that the Federal Circuit’s decision in

Mallinckrodt represents a significant departure from

this Court’s jurisprudence. Indeed, amicus curiae

American Antitrust Institute explicitly argues that

11

the Federal Circuit’s Mallinckrodt line of authority

renders it a rogue circuit that must be reigned in by

the Court. AAI Br.4 27 (“This case arrives before the

Court in the line of recent cases in which the Court

has corrected overexpansive readings of patent rights

by the Federal Circuit that impair competition and

innovation.”). The Federal Circuit, however, is not

alone in giving meaning to the line of authority from

this Court. In the era before the consolidation of

patent appeals in the Federal Circuit, those regional

circuits addressing the issue ruled in a similar

fashion, even after the Court’s decision in Univis that

is relied on by petitioners.

In Steiner Sales Co. v. Schwartz Sales Co., the

Tenth Circuit upheld a_ patentee’s licensing

restriction that required “the licensee to purchase the

patented cabinets and patented improvements only

from a manufacturer authorized by the licensor.” 98

F.2d 999, 1010 (10th Cir. 1938). The court held that

“a patentee may condition the right of his licensee to

purchase the patented devices” and that “the license

agreement does not impose restrictions beyond the

lawful monopoly of the patents or that are not

reasonably necessary to protect the rights of Steiner

under its lawful patent monopoly.” Jd. at 1010, 1011;

see also id. at 1008 (“Unquestionably, the owner of a

patent may grant licenses to manufacture, ‘use, or

sell upon conditions not inconsistent with the scope

of the monopoly.” (citing Gen. Talking Pictures I, 304

U.S. at 181)).

4 Amicus Curiae American Antitrust [nstitute’s Brief.

12

Likewise, in Extractol Process, Ltd. v. Hiram

Walker & Sons, Inc., the Seventh Circuit found that

the patent owner had a “clear right to control the

making and disposition of the patented article.” 153

F.2d 264, 268 (7th Cir. 1946). In Extractol Process,

the patent owner had granted the licensee

manufacturer the right to manufacture and sell the

patented machines only to those who were licensed

by the patent owner to use the machines. Id. at 267-

68. The court recognized the patent owner's right to

grant both broad and narrow licenses. Jd. at 268 (“It

was clearly within its right to grant to one party a

license to make an article, and to sell the same, and a

license to use the article to another party: The

patentee is the sole judge of the licensee he shall

select, to make, to sell, or to use his patented

article.”).

In Automatic Radio Mfg. Co. v. Hazeltine

Research, Inc., the First Circuit rejected a patent

misuse defense based on a licensing restriction

imposed by the patent owner that required the

licensee to mark all products manufactured under

the patent with the statement “licensed by Hazeltine

Corporation only for use in homes, for educational

purposes, and for private, non-commercial use.” 176 -

F.2d 799, 801 (ist Cir. 1949) (overruled on other

grounds). The court held that, based on the decision

in Gen. Talking Pictures I, “a license agreement is

not necessarily invalid because the licensee is

granted a restricted right to make and vend a

patented apparatus for use limited to a particular,

described field, and is required by the agreement to

affix to the licensed apparatus a notice of such

restricted use.” Jd. at 803: (discussing Gen. Talking

13°

Pictures I, 304 U.S. at 181). The Federal Circuit,

thus, is hardly alone in its application of the Court’s"

storied precedents. :

In Coats Loaders & Stackers, Inc. ov.

Henderson, the Sixth Circuit held that a restrictive

licensing provision required by a patentee did not

violate the antitrust laws. 233 F.2d 915, 926 (6th Cir.

1956). The licensing restriction at issue stated that

“fllicensee agrees that it will not sell to any

distributor or dealer in which it or any of its

stockholders or officers have any financial interest,

directly or indirectly, unless otherwise mutually

agreed upon.” Id. The court found that “the owner of

a patent may grant licenses to manufacture, use, or

sell upon conditions not inconsistent with the scope

of the monopoly.” Jd. at 927 (citing .Gen. Talking

Pictures I, 304 U.S. at 181).

In In re Yarn Processing Patent Validity Litig.,

the Fifth Circuit upheld,a licensing restriction that

prohibited the sale of patented machines to

unlicensed users. 541 F.2d 1127, 1135 (5th Cir.

1976). The court held that the licensor had the right

to license the use of the machinery separately from

its manufacture and sale, and that the first-sale

doctrine did not apply. /d.

B. Mallinckrodt And This Case Are

Conceptually Distinguishable From

Univis

The Federal Circuit found in Mallinckrodt that

unless the license condition violates some other law

or policy, notably the patent misuse or antitrust law,

14

the patent owner retains the freedom to contract

concerning the conditions of sale. Mallinckrodt, 976

F.2d at 708; see also id. at 704 (“That a restrictive

license is legal seems clear.” (citing Gen. Elec., 272

U.S. at 489)); Peter S. Menell, Bankruptcy Treatment

of Intellectual Property Assets: An Economic Analysis,

22 BERKELEY TECH. L.J. 733, 742 (2007) (“Short of an

outright assignment, a patent owner is generally free

to license rights under the patent as he wishes

(subject to competition policy constraints).”). The

Court in Univis did not hold otherwise, but rather

held that an unconditional sale of a patented product

exhausted the patent owner’s rights in the patent.

The holding in Mallinckrodt is, thus, consistent with

the line of authority ending with Univis.

In Univis, unlike in Mallinckrodt or this case,

the Court was faced with price fixing conditions in

the licensing arrangement imposed by the patent

owner that were not within the protection of the

patent laws. Univis, 316 U.S. at 250-53. The

licensing restriction in Univis prescribed fixed prices

for the resale of the patented products by the

licensees, a condition the Court found outside the

scope of the patent monopoly. Jd. at 245. It is clear

that Univis did not overrule the holdings in Mitchell

and Gen. Talking Pictures I and I, which provide

that the patent owner has the freedom to place

conditions on the sale so long as they are within the

scope of the patent monopoly (e.g., territorial

limitations, field of use limitations, single use

limitations, etc.). See In re Yarn Processing Patent

Validity Litig., 541 F.2d at 1135 (distinguishing

Univis, finding that the restrictions that were found

illegal in Univis “were ... illegal extensions of the

15

patent monopoly. But in this case, . . . the restrictions

on sale were [proper] because they . . . did no more

than to prevent contributory infringement by resale

to unlicensed users.”).

This Court has long recognized a patent

owner's freedom to contract in any manner desired,

including by licensing either an undivided part or a

share of his exclusive right to make, use, and sell his

invention:

The owner of a patent may assign

it to another and convey, (1) the

exclusive right to make, use and

vend the invention throughout

the United States, or, (2) an

undivided part or share of that

exclusive right, or (3) the

exclusive right under the patent

within and through a specific part

of the United States.

Gen. Elec., 272 U.S. at 489. Furthermore, a patent

owner may limit the scope of a license to a defined

field, or on a claim by claim basis, and thereby a

purchaser’s right to use the patented invention, and

may place any condition upon the license that is not

inconsistent with the scope of the patent monopoly.

See Gen. Talking Pictures I, 304 U.S. at 181 (“Patent

owners may grant licenses extending to all uses or

limited to use in a defined field. Unquestionably, the

owner of a patent may grant licenses to manufacture,

use or sell upon conditions not inconsistent with the

scope of the monopoly.”); Gen. Elec., 272 U.S. at 489

(“Conveying less than title to the patent, or part of it,

16

the patentee may grant a license to make,.use and

vend articles under the specifications of his patent

for any royalty or upon any condition the

performance of which is reasonably within the

reward which the patentee by the grant of the patent

is entitled to secure.”); Intl Gamco, Inc. v.

Multimedia Games, Inc., 504 F.3d 1273, 1278 (Fed.

Cir. 2007) (“The claim-by-claim exclusive license in

Pope is indistinguisnable from an exclusive field of

use license insofar as both types of licenses divide the

scope of a patent right by its subject matter.”).

Valid license restrictions include those limiting

the use and the sale of the patented product. See Gen.

Talking Pictures I, 304 U.S. at 181 (upholding a

license that was restricted “[t]o manufacture . . . and

to sell only for radio amateur reception, radio

experimental reception and _ radio broadcast

reception”); Gen. Elec., 272 U.S: at 490 (“The

patentee may make and grant a license to another to

make and use the patented articles, but withhold his

rigit te sell them.”); Jn re Yarn Processing Patent

Validity Litig., 541 F.2d at 1135 (“Leesona had the

right to license the use of the machinery separately

from its manufacture and sale.”).

17

II. THE COURT SHOULD CONTINUE TO GIVE

FULL EFFECT TO ITS DECISIONS

PERMITTING CONDITIONS ON THE SALE

OF PATENTED ARTICLES AND THE

LICENSE OF PATENT RIGHTS

A. Well-Settled Legal Principles

Permitting Conditions Should Remain

Undisturbed

The Court has repeatedly recognized the

importance and obligation of following precedent.

See Planned Parenthood v. Casey, 505 U.S. 833, 854

(1992) (“Indeed, the very concept of the rule of law

underlying our own Constitution requires such

continuity over time that a respect for precedent is,

by definition, indispensable.”); Payne v. Tennessee,

501 U.S. 808, 827 (1991) (“Stare decisis is the

preferred course because it promotes’ the

evenhanded, predictable, and consistent development

of legal principles, fosters reliance on judicial

decisions, and contributes to the actual and perceived

integrity of the judicial process.”).

Oftentimes, the need for well-settled law

outweighs the desire to enforce the correct rule of

law. See Payne, 501 U.S. at 827 (“Adhering to

precedent is usually the wise policy, because in most

matters it is more important that the applicable rule

of law be settled than it be settled right.”). The

concern for well-settled law is even more important

in cases where reliance is a factor. See Hilton v. S.C.

Pub. Rys. Comm'n, 502 U.S. 197, 202 (1991) (“Stare

decisis has added force when the legislature, in the

public sphere, and citizens, in the private realm,

~—=i18

have acted in reliance on a previous decision, for in

this instance overruling the decision would disindge

settled rights and expectations or require an

extensive legislative response.”); Planned

Parenthood, 505 U.S. at 855 (“The inquiry into

reliance counts the cost of a rule’s repudiation as it

would fall on those who have relied reasonably on the

rule’s continued application.”).

These concerns for well-settled law and

reliance become highly relevant in cases in the

commercial context where property rights are at

issue, as in the present case. See Payne, 501 U.S. at

828 (“Considerations in favor of stare decisis are at

their acme in cases involving property and contract

rights, where reliance interests are involved.”);

Planned Parenthood, 505 U.S. at 855-56 (citation

omitted) (“[T]he classic case for weighing reliance

heavily in favor of following the earlier rule occurs: in

the commercial context, . . . where advance planning

of great precision is most obviously a necessity[.]”).

Petitioners, amicus curiae United States, and

amicus curiae International Business Machines

Corporation concede that this Court has expressly

held that conditions or restrictions imposed in patent

licensing agreements are permissible. Discussing the

Court’s holdings in Bement v. Natl Harrow Co., 186

U.S. 70, 91 (1902), Gen. Elec., 272 U.S. at 489-90,

and Gen. Talking Pictures I, 304 U.S. at 180-81,

petitioners admit that “this Court has permitted

conditions imposed on manufacturing licensees,

restricting the terms under which they are

authorized to make, use and sell the product.” Pet.

Br. 28-29 (emphasis in original). However, they

19

incorrectly suggest to the Court that limitations on

the scope of a license are not also imposed as

conditions on the sale to a purchaser, such that the

purchaser can be sued for patent infringement if

operating outside the scope of the license restrictions.

Id. at 21-24.

Indeed, amicus curiae United States concedes

that “this Court has repeatedly held that a patentee

may require licensees to comply with any lawful

restriction to which the parties may agree—including

field-of-use restrictions and even minimum-price

restrictions—on pain of liability for patent

infringement for both the licensee and purchasers.”

Gov. Br. 16 (citing Gen. Talking Pictures II, 305 U.S.

at 127; Gen. Elec., 272 U.S. at 480-90; Mitchell, 83

U.S. at 547-51) (emphasis added).

Likewise, in its’. Brief, amicus curiae

International Business Machines Corporation admits

that “[w]hile the Court has recognized a strong

exhaustion doctrine, it has also recognized, for over a

century, an exception to exhaustion where there is an

express agreement limiting the licensee’s or

purchaser’s rights under a patent.” IBM Br. 14.

Discussing the Court's holdings in Bloomer uv.

Millinger, 68 U.S. 340, 346 (1864), Providence Rubber

Co. v. Goodyear, 76 U.S. 788, 799-800 (1869), Gen.

Talking Pictures IT, 305 U.S. at 127, Gen. Elec., 272

U.S. at 489-90, Mitchell, 83 U.S. at 550, amicus

curiae International Business Machines Corporation

concludes that “[t]his Court has_ repeatedly

5 Amicus Curiae International Business Machines Corporation’s

Brief.

20

recognized the patentee’s ability to restrict licensees

and their downstream purchasers through valid

licensing restrictions.” Id. at 14—16.

B. A Per Se Patent Exhaustion Rule

Would Be In Direct Conflict With 35

U.S.C. § 271(d)(5)

In 1988, Congress enacted the Patent Misuse

Reform Act which placed certain limits on the

defense of patent misuse and made clear that a

patent owner can condition the sale of a patented

article or the license of patent rights so long as

reasonably within the scope of the patent grant. 35

U.S.C § 271(d)(5). Section 271(d)(5) is codified, in

part, as follows:

No patent owner otherwise

entitled to relief for infringement

or contributory infringement of a

patent shall be denied relief or

deemed guilty of misuse or illegal

extension of the patent right by

reason of his having done one or

more of the following: . . . (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 market power in the

relevant market for the patent or

21

patented product on which the

license or sale is conditioned.

\

35 U.S.C. § 271(d)(5) (emphasis, added). That is,

product tying conditions on the sale of patented

articles or the license of patent rights, a persistent

subject of judicial review, is specifically made legal by

Congress in the absence of market power and

anticompetitive effect. Jll. Tool Works Inc. v.

Independent Ink, Inc., 547 U.S. 28, 42 (2006) (finding

that the patent owner’s condition on the sale of

patented inkheads and patented ink containers

restricting use only with unpatented ink purchased

from the patentee “was neither ‘misuse’ nor an

‘illegal extension of the patent right” (quoting

§ 271(d)(5))). Section 271(d)(5) is a clear statement by

Congress that a patent owner can condition the sale

of a patented article or the license of patent rights.

The resulting legislative scheme does not

permit every condition that a patentee may conceive,

nor does it permit, however, the mechanistic

disregard of every condition under the doctrine of

patent exhaustion or any other rule of law. The

petitioners’ proposed rule, that all conditions on the

sale of a patented article are per se unenforceable, is,

thus, in open conflict with the Congressional

pronouncement in § 271(d)(5). The statute provides

that relief for patent infringement shall not be

negated or exhausted due to the patent owner’s

conditioning “the sale of the patented product” or

“license of any rights to the patent[.]” § 271(d)(5)

(emphasis added). Accordingly, § 271(d)(5) indicates a

Congressional intent against any per se rule of

exhaustion.

22

C. Public Policy Considerations Militate

Against A Per Se Rule

While there are instances in the Court’s

precedent where the doctrine of patent exhaustion

has been a useful tool to prevent overreaching by

patentees, there are also many instances where

license conditions have been rationally permitted as

a valid exercise of the patent grant. This is because

the equities and logic weighing in favor of each side

are in substantial equipoise. Because there are many

circumstances, for example, self-replicating

biotechnology, easily copied software, and the so-

called “foundry problem,”® and future circumstances

not yet contemplated, where robust application of the

first sale doctrine, i.e., a per se patent exhaustion rule

will lead to a suboptimal result, a more prudent

course is to maintain the Court's long-standing

acceptance of license conditions reasonably within

the scope of the patent grant. This will continue to

enable parties to freely contract for use of the

patented invention in a flexible and efficient manner.

Any potential harm to purchasers can be (as it

always has been) tempered by continued vigorous

application of the equitable doctrine of patent misuse

in the face of anticompetitive restrictions or

limitations.

a

6 See, e.g., Mehdi Ansari, Note, LG Electronics, Inc. v Bizcom

Electronics, Inc.: Solving the Foundry Problem in the

Semiconductor Industry, 22 BERKELEY TECH. L.J. 137, 137

(2007) (describing the “foundry problem” as a situation “in

which a third-party competitor can free-ride on the licensing

agreements between patentees and foundries to gain access to

technologies without negotiating their own license”).

23

In general, per se rules are disfavored because

they are overly mechanical and eliminate judicial

discretion. See Colonel J. Jeremiah Mahoney &

Captain Christopher C. VanNatta, Jurisprudential

Myopia: Polygraphs in the Courtroom, 43 A.F.L. REV.

95, 140-41 (1997) (“Per se rules are generally

disfavored because of their overly mechanical

application.” (citing Rock v. Arkansas, 483 U.S. 44, 56

n.12 (1987) (“The [per se] rule leaves a trial judge no

discretion to admit this testimony, even if the judge

is persuaded of its reliability by testimony at a

pretrial hearing.”))).

This Court recently discussed the limited

applicability of per se rules for antitrust cases in

Leegin Creative Leather Prods. v. PSKS, Inc., 127 S.

Ct. 2705 (2007). The Court held that per se rules are

confined to restraints “that would always or almost

always tend to restrict competition and decrease

output.” Id. at 2713 (quoting Bus. Elecs. Corp. v.

Sharp Elecs. Corp., 485 U.S. 717, 723 (1988)). The

Court further found that to justify a per se rule, “a

restraint must have ‘manifestly anticompetitive’

effects, and ‘lack . . . any redeeming virtue.” Id.

(citations omitted). The Court concluded that “the per

se rule is appropriate only after courts have had

considerable experience with the type of restraint at

issue, and only if courts can predict with confidence

that it would be invalidated in all or almost all

instances under the rule of reason.” Jd. (citations

omitted). This case further illustrates that per se

rules are only appropriate under limited

circumstances and should not be freely adopted by

courts.

24

1. The Single Recovery Rule Prevents

Abuse Of Patent Rights

Petitioners warn of patent owners’ abuse of the

patent grant if the Mallinckrodt rule is maintained.

Any potential for abuse is, however, further

mitigated by the single recovery rule. The single

recovery rule (or full compensation rule) limits a

patent owner’s potential damages to a single full

recovery:

“Payments made by _ one

tortfeasor on account of a harm

for which he and another are each

liable, diminish the amount of the

claim against the other whether

or not it was so agreed at the time

of payment and whether the

payment was made before or after

judgment{.]”

Aro Mfg. Co. v. Convertible Top Replacement Co., 377

U.S. 476, 503 (1964) (“Aro IT’) (quoting RESTATEMENT

OF TORTS (1939), § 885 (3)). The Federal Circuit has

consistently followed this rule. See, e.g., Shockley v.

Arcan, Inc., 248 F.3d 1349, 1364 (Fed. Cir. 2001)

(finding that “[e]ach joint tort-feasor is liable for the

full amount of damages (up to a full single

recovery)’); Transclean Corp. v. Jiffy Lube Int'l, Inc.,

474 F.3d 1298, 1303 (Fed. Cir. 2007) (holding that “a

patentee may not sue users of an infringing product

for damages if he has collected actual damages from

a manufacturer or seller, and those damages fully

compensate the patentee for infringement by users’).

Thus, under the Federal Circuit rule, a patent owner

25

who has collected a partial recovery in the form of a

royalty is limited in the future judgment that it may

seek from others. Accordingly, petitioners’ concern

that a patent owner may collect a royalty from a

component supplier and then “demand outrageous

royalties from the next level down” is overstated.

Pet. Br. 53.

2. Treating Licenses Differently From

Releases Of Liability Creates An

Anomaly And An Obstacle To

Settlement

This Court’s precedent provides that the effect

of a release “shall be determined in accordance with

the intentions of the parties.” Zenith Radio Corp. uv.

Hazeltine Research, Inc., 401 U.S. 321, 347 (1971)

(finding that “[t]he straightforward rule is that a

party releases only those other parties whom he

intends to release”); see also Chiuminatta Concrete

Concepts, Inc. v. Cardinal Indus., 1 Fed. Appx. 879,

885 (Fed. Cir 2001) (nonprecedentia!) (“It is well

settled that ‘a party releases only those other parties

whom he intends to release.” (quoting Zenith Radio,

401 U.S. at 347)). This rule is appropriate to give

parties the flexibility to resolve disputes in an ad hoc

fashion, but it is not a cure-all as it resolves only past

‘ infringement, forcing patent owners (in the new per

se world proposed by petitioners) to periodically bring

suit as there are additional damages.

Petitioners’ proposed rule, which may be

described as a “single license rule,” lacks the

flexibility of the release rule and thus would create

unnecessary difficulties in the resolution of patent

26

disputes. A certain reluctance to pay for the entire

chain of distribution is to be expected in some

circumstances but not in all circumstances; thus,

there is a need to let the realities of the marketplace

in each situation and the parties’ intentions control

the most efficient licensing arrangement to permit

full recovery for use of a patent invention.

3. Petitioners’ Policy Justifications

For Per Se Exhaustion Lack Merit

Petitioners set forth five policy arguments

intended to show the efficacy of their proposed per se

exhaustion rule. The first argument is that the

Federal Circuit rule “has enabled patent owners to

create a form of property rights—personal property

servitudes—not generally r:cognized in property

law.” Pet. Br. 47. A condition on one’s right to

practice an invention, however, is a property right

created by the patent grant from the United States.

The Federal Circuit has not created a new property

right in patents; rather, it has declined (as has

Congress) to create a per se rule extinguishing in all

cases limitations or conditions imposed by patent

owners that are reasonably within the scope of the

patent grant.’ :

7 Petitioners’ argument regarding increased information costs is

also ill-founded. It is unreasonable to expect a component seller

to serve as an omniscient information clearinghouse. A complex

technical component may literally embody several thousand

patents held by various entities. Neither the buyer nor the

seller would be aware of all relevant patents, despite both being

regularly deluged with notice letters from patentees. Rather,

costs are allocated among the parties through indemnification

27

Petitioners’ second argument is that a rule of

per se exhaustion or “single license rule” “reduces

transaction costs without reducing the patentee’s

reward.” Pet. Br. 49. If this were the case, however,

rational patentees and licensees would have adopted

such a rule by consensus. They have not. For

example, component suppliers, particularly those in

the highly competitive microchip business, are often

unwilling or unable to pay a royalty that would

compensate a patentee for the full value of their use

and use by others in the distribution chain. Indeed,

in practice, most components are sold subject to

indemnification agreements with certain standard

limitations. The suppliers’ indemnification liability is

typically limited to the sale price of the component

and does not extend to liability arising from the

combination of the indemnitor’s component with

other goods.®

Petitioners’ third argument is that the Federal

Circuit rule opens the door to antitrust abuse.

Petitioner warns of a “new era” of ubiquitous

anticompetitive notices and unilaterally imposed

conditions. Pet. Br. 50. Here, petitioners mismatch

the poison and the antidote. The remedy or antidote

agreements. Private agreements permit the parties to allocate

risk in a flexible and efficient manner apart from any externally

imposed rule.

8 See, e.g., NEC Electronics America Standard Terms and

Conditions, available at

http://www.am.necel.com/legal/LegalTC.html; Fairchild

Semiconductor Corporation Standard Terms and Conditions of

Sale, available at

http://www.fairchildsemi.com/legal/sale_terms_cond.htm]. ©

28

for antitrust abuse is the equitable doctrine of patent

misuse, not an inflexible per se rule of patent

exhaustion. See, e.g., Mercoid Corp. v. Mid-Continent

Inv. Co., 320 U.S. 661, 668 (1944) (finding patent

misuse to bar a remedy for contributory infringement

to a patentee who engaged in tying activity); Leitch

Mfg. Co. v. Barber Co., 302 U.S. 458, 462 (1938)

(holding that “[cjontrol over the supply of such

unpatented material is beyond the scope of the

patentee’s monopoly”).

Petitioners fourth argument is_ that

continuation of the Federal Circuit’s longstanding

rule regarding the inexhaustibility of method claims

and patent exhaustion will result in “an explosion of

infringement suits seeking a second round of

royalties from persons who... purchased goods and

paid full price for them expecting that the patentee’s

claims were satisfied.” Pet. Br. 51. Amicus curiae Wi-

LAN gives little credence to petitioners’ warning, as

this rule has been in place since at least 1984. See

Bandag, Inc. v. Al Bolser’s Tire Stores, Inc., 750 F.2d

903, 924 (Fed. Cir. 1984)). No explosion has yet

emerged, and none seems likely.

Petitioners’ fifth argument is that “patentees

have quite effective strategies at their disposal, and

do not need this radical change in existing law.” Pet.

Br. 51. Wi-LAN first takes issue with the notion that

application of the rule of law unambiguously

established no later than 1992 with the Federal

Circuit’s Mallinckrodt decision is a “radical change.”

Nor is it correct that patentees would have effective

nop-litigation strategies in the face of a per se

exhaustion rule or a single license rule. As discussed

29

above, one company in the distribution chain is often

unwilling or unable to compensate the patent owner

for use of the patent invention by others in the

distribution chain. Petitioners further argue that per

se exhaustion rule is consistent with commercial

norms because:

No rational company would pay

LGE. any significant royalty for a

“license” to make and _ sell

products that did not include the

ability to sell those products free

and clear of LGE’s patent

claims—since no rational

customer would pay any

significant price for a product

that cannot be used without

infringing.

Pet. Br. 52. In doing so, petitioners overlook the facts

of the instant case. Intel, a large and sophisticated

intellectual property licensor and licensee, did what

petitioners say no rational company would do—pay

for a license to make and sell that did not inure to

the benefit of its customers. Further, petitioners’

statement that “no rational customer would pay” for

a component subject to such an agreement flies in the

face of its own behavior. Jd. After receiving explicit

notice of the arrangement between respondent and

Intel, petitioners continued to purchase Intel

components. Id. at 9.

30

CONCLUSION

In the decision below, the Federal Circuit

specifically invoked this Court’s seminal decision in

Mitchell and noted the effect of the Federal Circuit’s

decision in Mallinckrodt. LG Elecs., Inc. v. Bizcom

Elecs., Inc., 453 F.3d 1364, 1369-70 (Fed. Cir. 2006).

In formulating its holding in Mallinckrodt, the

Federal Circuit faithfully applied the full history of

this Court’s jurisprudence of patent exhaustion in a

scholarly exposition. Mallinckrodt, 967 F.2d at 706—

09. There is nothing aberrant in the reasoning in

either Mallinckrodt or the decision sub judice.

Petitioners and their amici allies take issue with the

Federal Circuit’s application of this Court’s decisions

to a set of facts clearly distinguishable from the facts

in Univis. While clarification of the interplay

between Univis and Mallinckrodt may. serve the

salutary function of providing guidance to the bench

and the bar, such clarification need not eviscerate the

Mitchell/Gen. Elec./Gen. Talking Pictures I and II

line of authority. The decision below, thus, should be

affirmed.

Respectfully submitted,

ROBERT E.GOODFRIEND RODNEY R. SWEETLAND, III

Counsel of Record MICHAEL G. MCMANUS

JASON BLACKSTONE MCKOOL SMITH, P.C.

McCKOOL SMITH, P.C. 1025 Connecticut Avenue,

300 Crescent Court NW

Suite 1500 Suite 1000

Dallas, Texas 75201 Washington, D.C. 20036

(214) 978-4000 (202) 828-1272

31

-ROBERT A. COTE JAMES N. WILLI

McKOOoL SMITH JOEL L. THOLLANDER

399 Park Avenue GRETCHEN K. HARTING

New York, New York SETH R. HASENOUR

10022 MCKOOL SMITH

(212) 402-9400 300 West 6th Street

Suite 1700

Austin, Texas 78701

(512) 692-8700

' Counsel for Wi-LAN,

Inc.