Monday, January 14, 2008

Supreme Court To Hear Quanta Case This Week

Reprinted from the Nov. 26, 2007 edition of National Journal's Technology Daily

Tech Case May Shape Rule On Patent 'Exhaustion'
By Andrew Noyes

The Supreme Court will usher in 2008 with a high-profile technology case involving a major patent dispute between a group of Taiwanese computer manufacturers and their South Korean competitor. Oral argument is scheduled for Jan. 16.

The plaintiffs, led by Quanta Computer, want the court to upend a 2006 ruling by the Federal Circuit Court of Appeals that they claim would let patent holders -- like rival LG Electronics -- inappropriately seek royalties from multiple companies.

Consumers Union, the Electronic Frontier Foundation and Public Knowledge recently filed a brief arguing that the court incorrectly interpreted a principle that says patent owners "exhaust" their rights after a product is sold and cannot continue imposing post-sale conditions or filing infringement suits.

The watchdog groups, and numerous other Quanta supporters, claim that letting patent owners impose such use restrictions could harm consumers. They say contract law is the proper tool for protecting a patentee's legitimate interest in restricting post-sale uses.

The brief, authored by EFF staffers Fred von Lohmann and Jason Schultz and outside counsel Marc Bernstein, argues that failing to rule in Quanta's favor could lead to "increased information costs when trying to ascertain restrictions on patented goods."

Cisco Systems, Dell, Hewlett-Packard and the online auction site eBay filed their own brief that elaborates on perceived problems with the current regime. The American Antitrust Institute and Computer and Communications Industry Association also weighed in, urging the justices to overturn the appeals court.

AAI's brief, written by Southern Methodist University law professor Shubha Ghosh, argued that the court's ruling "creates uncertainty for downstream purchasers, allows for enforcement of conditions as a matter of patent infringement that may not be enforceable under contract law, and tends to restrict the proper application of the antitrust laws."

CCIA wrote that the appellate panel's ruling "will create a shadow economy of permissions that advantage opportunists, especially those who own patents outside their core business and so have little need to cooperate in promoting stable and predictable markets in those areas."

U.S. Solicitor General Paul Clement also argued that the judgment should be vacated and remanded, noting that the decision "rests on the same erroneous understanding of patent exhaustion that infuses the federal circuit's approach to this area of the law."

But LG attorney Richard Taranto stated in court documents that the ruling was correct and that "petitioners strain to make a broad doctrinal issue out of a narrow case-specific ruling." He said the case does not have broader industry impact.

In a recent analysis for the Patently-O blog, Fordham University law professor Mark Patterson said it "seems probable that the Supreme Court will reverse or at least vacate the federal circuit's Quanta decision" and likely will hold that "sales of patented products exhaust the ... rights."

He said two questions arise, however: Will the court define the difference between a sale and a license, and does the exhaustion rule apply if a product sold is only a component of an invention?