IP News

Compiled by Matt Berkowitz

Supreme Court Hears Arguments in Patent Exhaustion Case

On Jan. 16, 2008, the Supreme Court heard oral arguments in Quanta Computer, Inc. v. LG Electronics, No. 96-937 (Jan. 16, 2008), a case that puts at issue a patent holder's right to control downstream uses of patented products. The question presented for the Court was: 'Whether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license to petitioners.'

During oral argument, the petitioners, and the United States, as amicus curiae, argued that any sale under a license of a product that directly or contributorily infringes a licensed patent triggers the patent exhaustion doctrine with respect to those patents. The petitioners took the position that a patentee could impose, if it so chooses, restrictions in the license itself for downstream sales, which would prevent application of the patent exhaustion doctrine. The justices seemed troubled by this, noting that such restrictions could raise contract and antitrust illegality issues, thus placing the patentee in an impossible position with regard to downstream uses. Chief Justice John G. Roberts, Jr. inquired as to the situation when a patentee attempted to restrict, through the license, downstream uses to certain applications. Specifically, he queried what the liability would be, and against whom, for a downstream use that did not adhere to the license restrictions. The United States took the position that the patentee was free, in the license itself, to require licensees to obtain contractual obligations from downstream users, and if this were done, only contractual liability against the downstream user would remain for unauthorized uses.

The respondents took a different approach, arguing that the critical fact at issue was that there was never an implied license (as determined by the district court and federal circuit) for downstream users to use the licensed component part as part of the patented system. Respondents stated that the patent exhaustion doctrine would only apply to the component part sold by the licensee to the petitioner, but that it did not extend to the system, which had never been made or sold by the licensee. The justices seemed troubled by the lower courts' finding that there was no implied license to use the component in the patented system, given that the respondent conceded that there were no non-infringing uses for the component itself. Respondents argued that no implied license existed because notice was given to the petitioners prior to the sale of the component, to which Justice Antonin Scalia questioned how conduct subsequent to the license itself could affect the existence of an implied license for downstream uses.

In rebuttal, petitioners argued that the whole question was whether the licensee's sale of the component infringed the licensed system patents, and if so, then such sale constituted an authorized use, triggering patent exhaustion. The petitioners further stated that sale of the component by the licensee, if not for the license under the system patent, would have constituted contributory infringement, and thus patent exhaustion applied with respect to the system patent itself.

Federal Circuit Grants Rehearing En Banc in Business Methods Case

On Feb. 15, 2008, the Federal Circuit, by its own action, granted a hearing en banc in the case of In re Bernard L. Bilski, 2007-1130. The appeal came following a decision by the Board of Patent Appeals and Interferences affirming the final rejection of all claims in Bilski's application as non-statutory subject matter. The invention relates to a method practiced by a commodity provider for managing (i.e., hedging) the consumption risks associated with a commodity sold at a fixed price. Claim 1 of the application reads:

1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

The Federal Circuit requested supplemental briefs from the parties addressing the following questions:

1) Whether claim 1 of the 08/833,892 patent application claims patent-eligible subject matter under 35 U.S.C. '101?

2) What standard should govern determining whether a process is patent-eligible subject matter under '101?

3) Whether the claimed subject matter is not patent eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?

4) Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under '101?

5) Whether it is appropriate to reconsider State Street Bank &
Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc., 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?

Matt Berkowitz is an associate in the New York office of Kenyon & Kenyon LLP.

Compiled by Matt Berkowitz

Supreme Court Hears Arguments in Patent Exhaustion Case

On Jan. 16, 2008, the Supreme Court heard oral arguments in Quanta Computer, Inc. v. LG Electronics, No. 96-937 (Jan. 16, 2008), a case that puts at issue a patent holder's right to control downstream uses of patented products. The question presented for the Court was: 'Whether the Federal Circuit erred by holding, in conflict with decisions of this Court and other courts of appeals, that respondent's patent rights were not exhausted by its license agreement with Intel Corporation, and Intel's subsequent sale of product under the license to petitioners.'

During oral argument, the petitioners, and the United States, as amicus curiae, argued that any sale under a license of a product that directly or contributorily infringes a licensed patent triggers the patent exhaustion doctrine with respect to those patents. The petitioners took the position that a patentee could impose, if it so chooses, restrictions in the license itself for downstream sales, which would prevent application of the patent exhaustion doctrine. The justices seemed troubled by this, noting that such restrictions could raise contract and antitrust illegality issues, thus placing the patentee in an impossible position with regard to downstream uses. Chief Justice John G. Roberts, Jr. inquired as to the situation when a patentee attempted to restrict, through the license, downstream uses to certain applications. Specifically, he queried what the liability would be, and against whom, for a downstream use that did not adhere to the license restrictions. The United States took the position that the patentee was free, in the license itself, to require licensees to obtain contractual obligations from downstream users, and if this were done, only contractual liability against the downstream user would remain for unauthorized uses.

The respondents took a different approach, arguing that the critical fact at issue was that there was never an implied license (as determined by the district court and federal circuit) for downstream users to use the licensed component part as part of the patented system. Respondents stated that the patent exhaustion doctrine would only apply to the component part sold by the licensee to the petitioner, but that it did not extend to the system, which had never been made or sold by the licensee. The justices seemed troubled by the lower courts' finding that there was no implied license to use the component in the patented system, given that the respondent conceded that there were no non-infringing uses for the component itself. Respondents argued that no implied license existed because notice was given to the petitioners prior to the sale of the component, to which Justice Antonin Scalia questioned how conduct subsequent to the license itself could affect the existence of an implied license for downstream uses.

In rebuttal, petitioners argued that the whole question was whether the licensee's sale of the component infringed the licensed system patents, and if so, then such sale constituted an authorized use, triggering patent exhaustion. The petitioners further stated that sale of the component by the licensee, if not for the license under the system patent, would have constituted contributory infringement, and thus patent exhaustion applied with respect to the system patent itself.

Federal Circuit Grants Rehearing En Banc in Business Methods Case

On Feb. 15, 2008, the Federal Circuit, by its own action, granted a hearing en banc in the case of In re Bernard L. Bilski, 2007-1130. The appeal came following a decision by the Board of Patent Appeals and Interferences affirming the final rejection of all claims in Bilski's application as non-statutory subject matter. The invention relates to a method practiced by a commodity provider for managing (i.e., hedging) the consumption risks associated with a commodity sold at a fixed price. Claim 1 of the application reads:

1. A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.

The Federal Circuit requested supplemental briefs from the parties addressing the following questions:

1) Whether claim 1 of the 08/833,892 patent application claims patent-eligible subject matter under 35 U.S.C. '101?

2) What standard should govern determining whether a process is patent-eligible subject matter under '101?

3) Whether the claimed subject matter is not patent eligible because it constitutes an abstract idea or mental process; when does a claim that contains both mental and physical steps create patent-eligible subject matter?

4) Whether a method or process must result in a physical transformation of an article or be tied to a machine to be patent-eligible subject matter under '101?

5) Whether it is appropriate to reconsider State Street Bank &
Trust Co. v. Signature Financial Group, Inc. , 149 F.3d 1368 (Fed. Cir. 1998), and AT&T Corp. v. Excel Communications, Inc. , 172 F.3d 1352 (Fed. Cir. 1999), in this case and, if so, whether those cases should be overruled in any respect?

Matt Berkowitz is an associate in the New York office of Kenyon & Kenyon LLP.