The Kenneth J. Germeshausen Center, created in 1985 through the generosity of Kenneth J. and Pauline Germeshausen, is the umbrella organization for Pierce Law's intellectual property specializations. Today the Germeshausen Center is a driving force in the study of international and national intellectual property law and the transfer of technology. It acts as a resource to business as well as scientific, legal and governmental interests in patent, trademark, trade secret, licensing, copyright, computer law and related fields.

The Center bears the name of its benefactor Kenneth J. Germeshausen, one of New England's pioneering inventors and professor of electrical engineering at Massachusetts Institute of Technology. Germeshausen was also co-founder of the international high technology firm of EG&G.

Latent Traps in Patent Exhaustion after Quanta by Saurabh Vishnubhakat

            The doctrine of exhaustion reflects an enduring public suspicion of the patent system.  The very existence of the doctrine reveals a belief that legislative requirements such as disclosure, enablement, and a limited term of enforceability are inadequate as the public's reward for the granted patent monopoly and that a supervening common law restraint on the patentee's rights must also be available.  The doctrine of exhaustion achieves this by restricting a patentee's post-sale rights over the use of her patented article.  Once she has sold the article, goes the argument, she has reaped the benefit of her patent and may not double-dip with an infringement suit against downstream users.

            This article examines the immediate future of the exhaustion doctrine as it applies to method patents after the Supreme Court's recent decision in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S. Ct. 2109 (2008).

A Brief History of Quanta

            The dispute in Quanta was whether Quanta Computer had infringed three method patents owned by LG Electronics (LGE).[i]  LGE had licensed Intel Corporation to make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of the three LGE patents.[ii]  The license expressly excluded Intel's customers from manufacturing computers which combined licensed Intel components such as microprocessors and chipsets with non Intel components such as buses and memory chips.  Nevertheless, Quanta combined microprocessors and chipsets it had purchased from Intel with non'‘Intel buses and memory chips in ways that practiced LGE's patents.[iii]  In addition to holding that exhaustion applies equally to method patents as to apparatus patents, the Court also stated that the Univis standard of embodiment governs exhaustion.[iv] 

            Prior to Quanta, the last time the Supreme Court had addressed exhaustion was in United States v. Univis Lens Co., Inc., 316 U.S. 241 (1942).  In that case, Univis Lens Company owned method and apparatus patents on multifocal eyeglass lenses and respectively licensed wholesalers, finishing retailers, and prescription retailers to purchase lens blanks, grind and polish them, and finally sell them as prescription eyeglasses.[v]  The Court held that the sale of an unfinished article which embodies essential features of the patent and which is destined . . . to be finished by the purchaser in conformity to the patent exhausts the patent with respect to that article.[vi]  As to what embodies essential features, the Court looked for an unfinished article which is capable of use only in practicing the patent.[vii] 

            Just as the lens blanks in Univis were capable of use only in grinding and polishing into prescription eyeglasses, then, so were the microprocessors and chipsets in Quanta capable of use only when connected to buses and memory chips.[viii]  Just as the sole intended use of the lens blanks was to be finished into prescription eyeglasses, so was the sole reasonably apparent use of the microprocessors and chipsets to be integrated with buses and memory chips to produce a functional computer.[ix]  Thus, LGE failed as had Univis Lens before it.

            The Quanta Court's application of Univis is significant in two ways.

1. The Conflated Elements of Exhaustion

            First, where Univis separately addressed the utility of the unfinished article and the purpose of the exhausting sale, Quanta collapsed them into a single inquiry.[x] 

            Univis had begun as a Sherman Act prosecution to which Univis Lens had asserted its patent rights as a defense to alleged antitrust violations.[xi]  The underlying issue was the tripartite licensing scheme that Univis Lens had created for wholesalers, finishing retailers, and prescription retailers, a scheme based on resale price-fixing provisions that were improper under the Miller-Tydings exception to the Sherman Act.[xii] 

            Beyond the utility of the lens blanks, then, the Court looked directly to the licensing scheme and concluded that the sole intended use of the lens blanks was to be finished into prescription eyeglasses.[xiii]  Specifically, the district court found that each of the eight relevant apparatus patents owned by Univis Lens described a finished lens and that the wholesalers and finishing retailers, in grinding and polishing each lens, partially practiced the patents.[xiv] 

            Indeed, the Univis Court explicitly treated the two inquiries'”the utility of the unfinished article and the purpose of the exhausting sale'”as separate, referring to the only use to which [the unfinished article] could be put and the only object of the sale. [xv] 

            Quanta, however, recast these two prongs of Univis into a causal chain.[xvi]  Thus, rather than a separate factually supported finding, as in Univis, sole intended use may now be inferred a priori where the unfinished article is without utility.  Traditionally, the party asserting exhaustion, i.e., the alleged infringer, has borne the burden of proof as to each element.[xvii]  This new causal framework, however, does more than merely shift the latter burden'”it removes it altogether, for a patentee may now be foreclosed even from proposing alternate intended uses.  The battle may now be won or lost solely on the utility of the unfinished article.

2. Utility of an Unfinished Article

            This front, too, has a changed landscape after Quanta.  The Court in Univis found that the lens blanks essentially embodied Univis Lens's patents because they were capable of use only in practicing the relevant patents.[xviii]  The capable of use standard, in turn, was satisfied because the lens blanks were without utility until ground and polished as finished lenses.[xix] 

            Quanta, however, recast this stringent, virtually binary, standard of capable alternate use into one of merely reasonable alternate use.[xx]  This alone would seem a dramatic shift in favor of alleged infringers.  Yet though Quanta's analysis of alternate use rests solely on Univis, and Univis never refers to reasonable alternate uses, the softer standard was not new, but merely unsettled.[xxi] 

            More telling is the Quanta Court's application of its own standard.  Though the Court looked for reasonable alternate use, its underlying finding was that Intel's microprocessors and chipsets cannot function until [they are] connected to buses and memory.   128 S. Ct. at 2119.  This mirrors the lens blanks of Univis, which were without utility until ground and polished as finished lenses.[xxii] 

            Logically, of course, any fact scenario which satisfies the stricter capable standard necessarily satisfies the softer reasonable standard.  Thus, while Quanta purports to settle upon a standard of reasonable alternate uses, it remains to be seen whether this standard will bear a substantive body of interpretation or reasonable will simply be defined as capable by limiting Quanta to its facts.

            As to the burden, too, the Quanta Court noted that LGE could suggest no reasonable alternate uses for the Intel microprocessors and chipsets.[xxiii] At best, this makes explicit a shifted burden upon the patentee to show non-exhaustion rather than upon the alleged infringer to show exhaustion.

Conclusion

            The sum of these changed approaches is that alleged infringers asserting exhaustion now enjoy a lower threshold of excluding alternate uses of a patented article and need only do so prima facie, after which the patentee assumes a burden to the contrary.  If the patentee fails to meet this shifted burden, the failure is more potent, for the purpose of the sale may now be adversely inferred a priori.  As a result, Quanta has tilted the litigation balance of patent exhaustion significantly in favor of alleged infringers.

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Saurabh Vishnubhakat (JD/LLM-IP '10) earned a B.S. in Biochemistry with a minor in Spanish from Georgia Tech and was a Ph.D. student in Chemistry at Vanderbilt.  Upon graduation, he plans to practice intellectual property litigation with a focus on patent infringement.

[i] Id. at 2113.

[ii] Id. at 2114.

[iii] Id.

[iv] Id. at 2118, 2120.

[v] Id. at 243'“44.

[vi] Id. at 250'“51.

[vii] Id. at 249.

[viii] 128 S. Ct. at 2119.

[ix] Id.

[x] 128 S. Ct. at 2119.

[xi] 128 S. Ct. at 2116.

[xii] 316 U.S. at 244, 247.

[xiii] Id. at 247.

[xiv] Id.

[xv] Id. at 249 (emphasis added).

[xvi] See 128 S. Ct. at 2119 ( The lens blanks in Univis met this standard because they were '˜without utility until [they were] ground and polished as the finished lens of the patent.'  Accordingly, '˜the only object of the sale [was] to enable the [finishing retailer] to grind and polish it for use as a lens by the prospective wearer.' ) (emphasis added) (citation omitted).

[xvii] Minebea Co. v. Papst, 444 F. Supp. 2d 68, 162 (D.D.C. 2006) (citing Bandag, Inc. v. Al Bolser's Tire Stores, Inc., 750 F.2d 903, 924'“25 (Fed. Cir. 1984)).

[xviii] 316 U.S. at 249.

[xix] Id.

[xx] 128 U.S. at 2119.

[xxi] See, e.g., Glass Equip. Dev., Inc. v. Besten, Inc., 174 F.3d 1337, 1342 (Fed. Cir. 1999) (a legally acceptable noninfringing use need only be reasonable ) (emphasis added).  But see, e.g., Anton/Bauer, Inc. v. PAG, Ltd., 329 F.3d 1343, 1349'“50 (Fed. Cir. 2003) (exhaustion requires the sale of an article which is capable of use only in practicing the patent ) (emphasis added).

[xxii] 316 U.S. at 249.

[xxiii] 128 S. Ct. at 2119.

Saurabh Vishnubhakat (JD/LLM '10) earned a B.S. in Biochemistry with a minor in Spanish from Georgia Tech and was a Ph.D. student in Chemistry at Vanderbilt.