Quanta v. LG Electronics: Frustrating Patent Deals by Taking Contracting Options Off the Table?

Abstract:     
The Supreme Court's unanimous decision in Quanta v. LG Electronics may make it significantly more difficult to structure transactions involving patents. While this decision does make a group of players into winners in the immediate term for existing patent deals (this group includes any customer who, like Quanta, buys patented parts without buying a patent license), almost everyone is likely to come out a loser going forward.

The Court in Quanta decided that a patent license that LG Electronics sold only to Intel - and explicitly limited to exclude Intel's customers, like Quanta, and priced to reflect these modest ambitions - would be treated by the Court as extending permission under the patent to those Intel customers. The legal "hook" on which the Court hung its decision is the patent law doctrine called "first sale" or "exhaustion."

The Quanta decision is likely to have a serious negative effect on the nuts and bolts of patent licensing agreements. On one reading, it stands for little more than the unremarkable proposition that the actual patent license contract at issue was just badly written. But that would be a simple matter of applying state contract law to the underlying facts of the contract - not the type of issue that typically gains the Supreme Court's attention. So the real motivating force behind the Court's decision to take the case is probably something else. The extensive briefing and commentary, as well as the opinion's colorful dicta, all suggest that the true import of the case is the way it speaks about what patent contracting can be done - as a matter of Court-created policy for federal patent law.

If this view of Quanta is correct, then the decision may be remarkably important in several respects. It may greatly frustrate the ability of commercial parties to strike deals over patents. It may also stand as an example of a seemingly conservative Court acting in direct contravention of clear congressional action.

Number of Pages in PDF File: 17

working papers series