An Expressly Conditional Sale Cannot Exhaust Patent Rights: LG Electronics v. Bizcom Electronics
By Scott Tobias
On July 7, 2006, the U.S. Federal Circuit Court of Appeals handed down their decision in LG Electronics, Inc. v. Bizcom Electronics, Inc. The court found that computer manufacturers Bizcom Electronics and others had infringed patents owned by LG Electronics by combining LG-manufactured computer components with third-party components. In an opinion by Judge Mayer, the panel ruled that the exhaustion doctrine did not apply because the sale of the components was expressly conditioned on the defendants not using the LG components in an infringing combination. Such an expressly conditional sale cannot exhaust patent rights.
This case involves two sales of computer components. First, LG sold various components to Intel. Intel then resold those components to the defendants Bizcom and other computer manufacturers. LG authorized Intel to sell the components to the defendants, on the condition that the defendants would not combine the LG components with other, non-Intel components in the computers that the defendants manufacture. LG asserted that the defendants violated this restriction by combining LG components with non-Intel components, and sued the defendants alleging infringement of LG patents covering such combinations.
Five LG patents were at issue in this case. United States Patent No. 4,918,645 (“the ‘645 patent”) discloses “systems and methods that increase the bandwidth efficiency of a computer’s bus system.” Patent No. 5,077,733 (“the ‘733 patent”) relates in relevant part to “a method that controls the access of a device to a bus shared by multiple devices.” Patent No. 4,939,641 (“the ‘641 patent”) claims “a system for ensuring that outdated data is not retrieved from memory.” Patent No. 5,379,379 (“the ‘379 patent”) relates to “a system and method for ensuring that outdated data is not retrieved from memory.” Finally, U.S. Patent No. 5,892,509 (“the ‘509 patent”) describes “networked computers capable of sharing certain video images.” The patent claims asserted by LG do not cover components sold to Intel and resold to the defendants, but the claims do cover the products made by combining those components with other non-Intel components.
III. The District Court Ruling
LG Electronics brought this suit in the District Court for the Northern District of California. There Bizcom and the other defendants asserted that they had an implied license to practice the patent claims asserted by LG, and that even if no license was implied, those patent rights were exhausted upon LG’s sale of the components to Intel.
The district court found no implied license. To show that a license to practice the patent is implied by the sale of the patented product, the accused infringer must establish that the product has no noninfringing use and that the “circumstances of the sale … indicate that the grant of a license should be inferred.” The district court noted that the sales agreement between LG and Intel expressly barred combination of LG components with non-Intel components, and that Intel had sent a letter to the defendants informing them of this limitation. Because Intel informed the defendants of the restriction on combination, no license could be implied.
Conversely, the district court found that LG’s patent rights were exhausted by the sale of the components from Intel to the defendants. Generally, an unconditional sale of a patented product exhausts the patent rights related to the product. The purchaser can therefore use or resell the product without infringing on the patent holder’s rights. The district court found that the first sale of the components from LG to Intel was conditional. However, the district court found that the second sale of the components from Intel to the defendants was unconditional in spite of the letter sent by Intel informing the defendants that the components were not to be combined in a way that infringes LG patents. Although this letter was sufficient to negate the implication of a license, it was not sufficient to “transform what would otherwise be the unconditional sale … into a conditional one” because the letter did not show that the defendants expressly agreed to this condition on the sale. Therefore the system claims in the LG patents were exhausted by this second unconditional sale.
Additionally, the district court found that LG’s claims based on the ‘509 patent were barred under a license agreement between LG and Microsoft in which LG agreed not to sue Microsoft or any of its suppliers, subsidiaries or licensees. The court determined that the defendants were included within this class of parties. Given the court’s findings that the defendants did not infringe patents ‘645, ‘733, and ‘379, and that LG was contractually barred from suing based on patent ‘509, the court granted the defendants’ motion for summary judgment of noninfringement. LG appealed their case to the Federal Circuit.
IV. The Federal Circuit Ruling
A. Implied License and Exhaustion
The Federal Circuit agreed with the district court that no license could be implied in a sale that was expressly conditional. However, the Federal Circuit disagreed with the district court’s findings regarding exhaustion. Although the sale of LG components from LG to Intel was unconditional, the sale from Intel to the defendants was expressly conditioned on the defendants not combining the LG components with non-Intel components. The Federal Circuit determined that the defendants who had purchased components from Intel were “expressly prohibited” from infringing LG’s patents, and that the letter sent by Intel to the defendants informing them of this restriction should be included in the sales contract between Intel and the defendants. Therefore, the defendants actually agreed to the restriction, the sale was conditional, and this condition bars the application of the exhaustion doctrine.
After finding no implied license and no exhaustion, the Federal Circuit proceeded to analyze each patent at issue to determine whether the defendants had infringed. The court reviewed the district court’s claim construction de novo. Under their claim construction, the court determined that the defendants infringed some claims, and that there was a genuine issue of material fact whether the defendants had infringed other claims. Consequently, the court vacated the district court’s grant of summary judgment and remanded the case for further consideration. The following sections summarize the Federal Circuit’s findings regarding the alleged infringement of each of the five patents.
B. The ‘645 Patent
The ‘645 patent discloses systems and methods to increase the bandwidth of a computer’s system bus through the use of a more efficient memory access routine. The device, or “agent”, fulfilling a memory request uses strobe signals to access multiple cells instead of inefficiently accessing one cell at a time. The defendants’ devices employed a similar system of exchanged signals, but the defendants argued that their devices did not infringe because their signals did not travel over the system bus, because their signals were not strobe signals, and because their devices did not employ the same sort of “requesting agent.”
The Federal Circuit disagreed. It determined that the allegedly infringed claims in LG’s ‘645 patent did not actually contain the limitation that the strobe signals must travel over the system bus, and that the defendants were incorrect to argue that the prosecution history implied such a limitation. The court also determined that there was a genuine issue of material fact as to whether the defendants’ devices utilized strobe signals. Finally, the court accepted LG’s definition of “requesting agent.” In light of these findings, the court vacated the district court’s finding of noninfringement of the asserted claims of the ‘645 patent.
C. The ‘733 Patent
The ‘733 patent discloses a system to provide multiple devices access to a system bus, preventing any one device from monopolizing bus access. The asserted claims of this patent contain a limitation of “counting a number of accesses by the device to the bus.” The district court had found that the defendants’ devices did not practice this limitation. The Federal Circuit disagreed, finding a genuine issue of material fact as to whether this limitation was present in the accused devices.
D. The ‘641 Patent
The ‘641 patent discloses a system for ensuring that current data is retrieved from memory. The Federal Circuit disagreed with the district court’s construction of this patent’s claims, and found that the district court improperly read certain limitations into the claims. Under the Federal Circuit’s construction, the asserted claims read on the defendants’ devices and therefore the defendants had infringed this patent.
E. The ‘379 Patent
The ‘379 patent also discloses a system and method for ensuring that current data is retrieved from memory. As with the ‘641 patent claims, the Federal Circuit found that the district court had construed certain claims of the ‘379 patent too narrowly. Additionally regarding one claim, the court found that although there was no literal infringement, there was a genuine issue of material fact as to whether there was infringement under the doctrine of equivalents.
F. The ‘509 Patent
The ‘509 patent describes a system of networked computers sharing digital images. The district court found that LG’s claims based on the ‘509 patent were barred under a license agreement between LG and Microsoft in which LG agreed not to sue Microsoft or any of its suppliers, subsidiaries or licensees. Here, the Federal Circuit disagreed with the district court and found that a genuine issue of material fact exists whether the defendants could be included in the list of parties exempt from suit by LG. On remand, each defendant would be required to prove that they could be considered a Microsoft “licensee,” as that term is defined in the contract between LG and Microsoft.
This case is a straight-forward application of the exhaustion doctrine – an affirmation by the Federal Circuit of its statement in B. Braun Medical v. Abbott Laboratories that patent exhaustion does not apply to a conditional sale. As such, it leaves unanswered many questions regarding the scope of patent exhaustion. The Federal Circuit emphasized that in a conditional transaction, it is “reasonable to infer that the parties negotiated a price that reflects only the value of the ‘use’ rights conferred by the patentee.” This statement is grounded in the concept that a patent has the attributes of private property and as such can be conveyed in whole or in part as determined by the parties to the conveyance. Under this private law paradigm, what should a court decide in a case where there is a long chain of title and the final purchaser has no notice of the restrictions placed on the original transfer of the patented product from the patentee to the first purchaser? In this case, the defendants had notice of the restriction and the court had no need to address this question.
Another interesting question arises out of the notion that patent law has attributes of public law. A patent can be viewed as a contract between the inventor and the public in which the inventor discloses the invention to the public and in exchange receives exclusive rights to practice the invention for a period of time. Some commentators have suggested that, given this public law aspect of patent rights, the courts should have discretion to refuse to enforce a condition on the sale of a patented good if enforcement would be detrimental to the public good. In exercising such discretion, U.S. courts would be following the example of courts in other countries such as Japan, where a restriction on the transfer of a patented good does not prevent a court from applying the exhaustion doctrine. Here again, this case was not an opportunity for the court to stretch the exhaustion doctrine because it would be difficult to argue that the defendants were engaged in an activity that was in some way especially beneficial to the public. A case involving a conditional sale of patented pharmaceuticals may provide a better test.
Scott Tobias is a J.D. candidate at the University of Washington School of Law.
 453 F.3d 1364 (Fed. Cir. 2006).
 LG Electronics, Inc. v. Asustek Computer, Inc., 248 F. Supp. 2d. 912 (N.D. Cal. 2003); LG Electronics, Inc. v. Bizcom Electronics, Inc., 2004 U.S. Dist. LEXIS 29906 (N.D. Cal. 2004).
 Met-Coil Sys. Corp. v. Korners Unlimited, Inc., 803 F.2d 684, 686 (Fed. Cir. 1986) (quoting Bandag, Inc. v. Al Bolser’s Tire Stores, Inc., 750 F.2d 903, 925 (Fed. Cir. 1984)).
 LG Electronics, Inc., 248 F. Supp. 2d. at 918.
 See Donald Chisum, Chisum on Patents, § 16.03[a] (2005).
 LG Electronics, 248 F. Supp. 2d. at 916-17.
 LG Electronics, 453 F.3d at 1369.
 U.S. Patent No. 4,918,645.
 LG Electronics, 453 F.3d at 1373-75.
 U.S. Patent No. 5,077,733.
 LG Electronics, 453 F.3d at 1375-76.
 U.S. Patent No. 4,939,641.
 LG Electronics, 453 F.3d at 1377-78.
 U.S. Patent No. 5,379,379.
 LG Electronics, 453 F.3d at 1378-81.
 U.S. Patent No. 5,892,509.
 LG Electronics, 453 F.3d at 1370-73.
 B. Braun Medical v. Abbott Lab., 124 F.3d 1419, 1426 (Fed. Cir. 1997).
 See Arthur J. Gajarsa, Evelyn Mary Aswad, and Joseph S. Cianfrani, How Much Fuel To Add To The Fire Of Genius? Some Questions About The Repair/Reconstruction Distinction In Patent Law, 48 Am. U.L. Rev. 1205 (1999).
 See Toshiko Takenaka, Japan’s IP High Court Finds Infringement For Refilling of Ink in Recycled Ink Cartridges: Canon K.K. v. Recycle Assist K.K., CASRIP Newsletter, Vol. 13, Iss. 1 (Winter 2006).