Quanta Computer v. LG Electronics — Patent Exhaustion Applies to Method Patents and Authorized Component Sales

Background

LG Electronics held a portfolio of patents covering computer memory and bus technologies — both system patents (covering the combination of processor, memory, and bus) and method patents (covering the processes by which those components communicate). LG licensed these patents to Intel, one of the world’s largest chip manufacturers. The license authorized Intel to make, use, and sell chips that practiced LG’s patents. The license contained a notable restriction, however: it did not extend to third parties who combined Intel’s chips with non-Intel components.

Intel sold its chips to Quanta Computer and other computer manufacturers, who assembled complete systems — personal computers and servers — using Intel processors and memory and buses from other suppliers. LG then sued Quanta for patent infringement, arguing that by combining Intel chips with non-Intel components, Quanta infringed LG’s system and method patents. LG’s theory was that the exhaustion doctrine did not apply because (a) method patents cannot be exhausted and (b) Intel’s license limited the downstream use of the chips.

The Federal Circuit agreed with LG on both points. The Supreme Court granted certiorari on the exhaustion questions.

The Court’s Holding

Justice Thomas, writing for a unanimous Court, reversed on both points. First, the Court held that the doctrine of patent exhaustion applies to method patents. The Federal Circuit’s contrary rule had no basis in the Court’s precedents: the exhaustion doctrine rests on the idea that once a patent holder has received the reward for an authorized sale, it cannot “double dip” by suing the purchaser for practicing the patent. That principle applies equally to method patents — there is no reason method claims should receive special treatment allowing their holders to perpetually control what purchasers do with lawfully acquired products.

Second, the Court held that Intel’s authorized sale of its chips exhausted LG’s patent rights because the chips “substantially embodied” LG’s patents. A product substantially embodies a patent when the only step remaining to practice the patented method is the “naturally anticipated” and obvious combination of the sold product with other standard components. Intel’s chips were specifically designed to practice LG’s patented methods; adding memory and a bus was an ordinary, expected use of the chips. The fact that this remaining step required non-Intel components did not save LG’s claims.

The Court rejected LG’s argument that the license restriction — barring downstream sales to third parties who combined Intel chips with non-Intel parts — could revive LG’s patent rights. Once Intel made an authorized sale under LG’s license, exhaustion attached and LG’s patent rights in those chips were spent. Contractual restrictions between LG and Intel could bind Intel to payment obligations but could not preserve LG’s ability to sue Quanta for patent infringement.

Key Takeaways

• The doctrine of patent exhaustion applies to method patents — the Federal Circuit’s rule exempting method patents from exhaustion is wrong.
• An authorized sale of a product exhausts the patent holder’s rights if the product “substantially embodies” the patent — i.e., the only remaining step to practice the patent is a naturally anticipated, ordinary use of the sold product.
• License restrictions between a patent holder and a manufacturer cannot preserve the patent holder’s right to sue downstream purchasers who receive an authorized sale.
• Once a patented article is sold with the patent holder’s authorization, the purchaser (and all downstream recipients) take it free of patent restrictions — the first sale exhausts the patent.

Why It Matters

Patent exhaustion — also called the first sale doctrine — is a cornerstone of how commerce works with patented goods. Without it, a patent holder could extract royalties at every link in the supply chain: from the manufacturer, then from the distributor, then from the retailer, then from the end user. Quanta confirmed that once a patentee authorizes a sale, the patent rights in that item are exhausted — the holder gets one bite at the apple.

The decision has been especially important in the semiconductor and electronics industries, where products are assembled from components made by many different suppliers, each of which may be licensed under various patents. By confirming that component-level sales can exhaust system-level patents, the Court prevented patent holders from using method claims or system claims to impose double royalties on the same transaction. The ruling also limited the ability of patent licensors to use license restrictions as a mechanism to preserve infringement claims against downstream buyers — a significant limit on patent leverage in complex supply chains.