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LG Electronics, Inc. v. Bizcom Electronics, Inc.: Guidance on Extending a Patent Holder's Rights to Reach Downstream Parties Who Assemble Components into a Patented Combination

By Charlene M. Morrow and Karen Server
February 28, 2007

In LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364 (Fed. Cir. 2006), the Federal Circuit held that a license to a patent covering a combination of elements, that authorized the licensee to sell components of the invention, but disclaimed a downstream license or implied license to the licensees' customers to practice the combination, constituted a conditional sale, thus defeating the application of the patent exhaustion doctrine. It further held that a downstream point of sale notice that no implied license was conveyed similarly defeated the first sale doctrine. In addition, it held that no implied license could be found on those facts. As a result, the patent holder was free to assert a claim of patent infringement against parties who were authorized purchasers of components of its invention, when such parties assembled the resulting combination. This decision provides the clearest guidance to date on how a patent holder whose patents cover a combination of components can extend its rights to reach downstream parties who assemble those components into the patented combination. This article discusses this case in the context of pre-existing authority on patent exhaustion and implied license, and highlights some of the considerations associated with drafting agreements to avoid patent exhaustion and implied licenses.

Patent Exhaustion

During the course of licensing or selling an invention, or components of it, a patentee can surrender its exclusive rights. One way a patent owner can surrender its rights is to make an unconditional and authorized sale of a patented article in the United States. This is called the 'patent exhaustion' or 'first sale' doctrine. Once an unconditional and authorized sale has been made, the purchaser can use, sell, or dispose of the article as it wishes, and the patent owner can reap no further benefit from it, either from that purchaser or one downstream from the purchaser. Jazz Photo Corp. v. International Trade Commission, 264 F.3d 1094, 1105 (Fed. Cir. 2001).

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