How the Quanta decision is good for patent owners

The Supreme Court handed down its decision in Quanta v. LG Electronics today.  Already some commentators have concluded that the decision was harmful to patent owners.  Not so fast.

There were two issues before the Court in Quanta:

• Whether exhaustion doctrine should apply to method claims
• Whether on the facts of this case, the patent owner (LGE) had exhausted its enforceable patent rights against Quanta by Intel's sale to Quanta of goods covered by LGE's patents

On my view, on both counts the Supreme Court has helped patent owners by clarifying both the scope of the rights of patent owners and of the obligations of patent licensees.

First, by unifying the exhaustion rules for product and process claims, the Supreme Court is saving everybody time and money.  The procedural posture of the case only highlights the problem with having different rules.  Recall that the holding by the district court that gave rise to the appellate jurisdiction over the first issue arose only after the district court issued a second order clarifying that its summary judgment of exhaustion was based on the product claims of the patents-in-suit.  The reason that a second order was necessary is because the parties were still bickering over whether the distinction between product and process claims might provide some loophole in the summary judgment.  It's not so hard to imagine patent owners and prospective licensees bickering over the same thing in the future had the Supreme Court not unified the exhaustion rules so that they applied, unambiguously, to both product and process claims.  Not to mention the prosecution games that would result.  As the Court was acutely aware in writing this opinion, such distinctions exalt form over substance.

Second, even though Quanta effectively got a free pass in this case, patent licensees like Intel are NOT off the hook because of this opinion.  One thing that's unusual about this opinion is that the activities of Intel, a third-party, feature more prominently in the recitation of facts than do the activities of Quanta, a named party.  The reason there are so many facts about Intel is that the Court knows that this lawsuit (and others like it) could have been avoided had the patent owner (LGE) and licensee (Intel) sorted things out without dragging downstream firms (like Quanta) into their fight.  The lawsuit against Quanta resulted only after Intel refused to play ball with LGE.  At the end of its opinion, the Supreme Court practically begs LGE is to sue Intel for breach of contract.  And they should!  If the understanding between LGE and Intel was that Intel's customers were going to pay part of the royalties due LGE, and those customers didn't come through, then Intel absolutely should be required to make good for the shortfall.

Under Quanta, the Supreme Court did nothing to hurt (and probably helped) patent owners' ability to contract for a fair royalty.  But Quanta does give patent owners a strong argument for demanding higher royalties from their licensees.  Specifically, patent licensees can no longer tell patent owners, "Go and get  the rest of the royalties you want from each of our customers."  Patent owners have a definite answer to that one now: "I can't."

Thus, on my view, this is a modest victory for norms of cooperation.

UPDATE: Prof. Robert Merges from Berkeley Law also reads the holding as limited to situations in which the licensee is not contractually bound to give notice to downstream customers. If Intel had been required to give notice as part of each sale, the licensor's remedies would not have been exhausted. Patent owners, make sure you have a good licensing lawyer working for you when you have leverage with a licensee!