Federal Circuit Finds Patent License Limiting Component Combination Prevents Patent Exhaustion and Implied License

In LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3f 1364, 79 USPQ2d 1443 (Fed Cir. 2006), all parties appealed from the District Court for the Northern District of California.  The Court of Appeals affirmed-in-part, reversed-in-part, vacated-in-part and remanded for further proceedings.  

LG Electronics, Inc. (LG) is the owner of patents relating to personal computers including patents 4,918,645; 5,077,733; 4,939,641; 5,379,379; and, 5,892,509.  LG sued the defendants alleging infringement of these patents.  The defendants purchased microprocessors and chipsets from Intel or Intel’s authorized distributors and installed them in computers.  Under an agreement with LG, Intel was authorized to sell the microprocessors and chipsets to all of the defendants.  However, pursuant to the agreement between LG and Intel, Intel was required to notify the defendants that although Intel was licensed to sell the products, they were not authorized to combine the products with non-Intel products.

In 2002, LG brought suit against the defendants asserting that the combination of microprocessors or chipsets with other computer components infringes LG’s patents covering those combinations but did not assert patent rights in the microprocessor or chipsets themselves.  The District Court, after deciphering the patent claims, granted summary judgment of non-infringement for each patent.  The District Court determined that there was no implied license to any defendant, however, with the exception of the ‘509 patent, LG’s rights in any system claims were exhausted.  It also found that LG was contractually barred from asserting infringement of the ‘509 patent against the defendants and found the ‘645, ‘733 and ‘379 patents were not infringed after applying claim construction to the accused methods and devices.

Implied Licensing

Reviewing the District Court’s granting of summary judgment without deference, the Federal Circuit first considered the issue of implied licensing.  “In a suit for patent infringement, the burden of proving the establishment of an implied license falls upon the defendant.”  Bandag, Inc. v. Al Bolser’s Tire Stores, Inc., 750 F.2d 903, 924 (Fed. Cir. 1984).  The Federal Circuit stated that the defendants were required to establish that the products have no noninfringing uses and that the circumstances of the sale…plainly indicate that the grant of a license should be inferred.  Concluding that no implied license existed between LG and the defendants, the Court stated that because Intel expressly informed them that Intel’s license agreement with LG did not extend to any of defendant’s products made by combining an Intel product with a non-Intel product no license could be implied.

Patent Exhaustion

The Federal Circuit next considered the issue of patent exhaustion for each of LG’s patents.  It stated, “an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of the device thereafter…however, the exhaustion doctrine does not apply to an expressly conditional sale or license.  In such a transaction, it is more reasonable to infer


that the parties negotiated a price that reflects only the value of the use rights conferred by the patentee.”

The Federal Circuit found the LG-Intel license expressly disclaimed granting a license allowing computer system manufacturers to combine Intel’s licensed parts with other non-Intel components.  It further found that this conditional agreement required Intel to notify its customers of the limited scope of the license and although Intel was free to sell its microprocessors and chipsets, those sales were conditional and Intel’s customers were expressly prohibited from infringing LG’s combination patents.  As a result, the Federal Circuit held LG’s rights in asserting infringement of its systems claims were not exhausted, reversing the District Court’s holding with respect to the system claims.  With respect to the method claims, the Federal Circuit also found that even if the exhaustion doctrine were applicable to method claims, it would not apply in the LG case because there was no unconditional sale.  It held that a sale of a device does not exhaust a patentee’s rights in its method claims and resultantly affirmed the District Court’s holding with respect to the method claims.

Claim Interpretation Issues

“Control Unit” Term Does Not Invoke 35 U.S.C. 112,Para. 6

The Federal Circuit next reviewed the District Court’s granting of summary judgment of non-infringement on the ground that LG was contractually barred from asserting infringement against the defendants with respect to the ‘509 patent.  The Federal Circuit held that because a genuine issue of material fact existed as to whether the defendants fell within the protection of a contract provision between LG and Microsoft barring LG from suing Microsoft, its suppliers, their subsidiaries or their licensees, it reversed the District Court’s granting of summary judgment of non-infringement.  On remand, the defendants must establish that LG is contractually barred from pursuing infringement claims against them.

Because the parties also disputed the District court’s construction of several claim terms in the ‘509 patent, the Federal Circuit also reviewed the District Court’s finding that claim 35 was a means-plus-function.  LG claimed the District Court erred when it construed the term “control unit” as a means-plus-function limitation.  The Federal Circuit stated “A claim that does not use means will trigger the rebuttable presumption that §112 AP 6 does not apply…but this presumption can be rebutted by showing that the claim element recites a function without reciting sufficient structure for performing that function.”  The Federal Circuit held the claim limitation at issue does not use the term means such that there is a presumption that the claim term is not a means plus function claim.  Additionally, the Federal Circuit found that the claim recited specific structure, including a CPU and a memory, such that the presumption against means-plus-function treatment is not overcome.  Thus, the Federal Circuit held that the recited control unit is not written in means plus function form.

“Requesting Agent” Defined Based On Intrinsic Evidence and Industry Standard

In reviewing the District Court’s interpretation of the recited term “requesting agent,” the Federal Circuit held the District Court erred when it failed to give proper weight to the incorporated industry standard and failed to consider the standard as intrinsic evidence of the meaning to one of ordinary skill in the art as of the filing date.  Thus, the Federal Circuit concluded that LG’s proffered definition based on the standard is correct and thus, the term “requesting agent” meaning “an agent that has entered into the arbitration function for bus access” was entirely consistent with the specification.

The Federal Circuit found that while prosecution history is relevant to claim construction, it often lacks the clarity of the specification and thus is less useful for claim construction purposes.  Further, while it agreed with the District Court that the patentee (LG) did not act as its own lexicographer, the specification made clear that the term requesting agent is properly construed to mean an agent that has entered into the arbitration function for bus access.

Potential Impact on Patent Licensing

In conjunction with Monsanto Company v. Mitchell Scruggs, 459 F.3d 1328 (Fed. Cir. 2006) discussed below, these cases highlight the patent owner’s ability to control the uses of their sold products so long as the patent owner does what the software industry has long done: only grant licenses to the patented technology. Such licenses license the patent for only certain uses, but expressly do not license other uses.  Thus, a patent owner could use these restrictions to prevent duplication, reverse engineering, reconstructions, or other behavior detrimental to the product.  It should be noted, however, that, while there is no per se rule that the patent confers market power, any such restriction may come under antitrust scrutiny where the restriction ties the patented product to another service/product and there is market power in the patented product.  See Supreme Court Finds Existence of Patent Does Not Confer Market Power Sufficient to Find Antitrust Injury, pp. 1-2 of Stein, McEwen & Bui Newsletter (Vol. 2, Issue 1)(2006) discussing Illinois Tool Works Inc. v. Independent Ink Inc., 77 U.S.P.Q.2d 1801, 126 S.Ct 1281 (2006).



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