Patent Royalties – a royal pain?

In the Supreme Court decision in Quanta Computer, Inc. v. LG Electronics, Inc,[1] the Court unanimously agreed to uphold the doctrine of patent exhaustion. The application of this doctrine is in the public’s best interest and therefore outweighs the detrimental impact of the doctrine on patent owners’ rights to control.

LG Electronics (LG) had licensed some of its microprocessor patents to Intel, who created and sold the microprocessors. Quanta Computer (Quanta) and other companies bought the microprocessors from Intel and combined them with other parts to create computers. LG sued Quanta, claiming there was patent infringement. The doctrine of patent exhaustion provides that “the first authorized sale of a patented item exhausts the patentee’s rights to that item.”[2] Since the agreement between LG and Intel permitted Intel to sell the microprocessors, LG’s right to control the use of the microprocessors exhausted on that sale. Therefore, the effect of the doctrine was to deny patent royalties to LG for Quanta’s use of the microprocessors.

The main issue here is whether or not it is fair to put such definitive limits on the patent holder’s right to control the use of a patented item.

The rationale of patent law is to provide incentive to invent and disclose, rather than reward for ingenuity. In other words, inventors gain patent rights in exchange for disclosure of their invention. Since public benefit is the underlying goal of patent law, the answer to the question of fairness lies in public policy. Furthermore, it is in the public’s best interest to apply the doctrine of exhaustion for a number of reasons. First, if patent owners have unlimited control over their product then the public’s access to the patented item will be severely limited. For example, if LG was able to exclude Quanta from using the microprocessors in their computers, the public would also be excluded from access to those computers. Furthermore, this high level of control is not practical, especially with respect to electronics, because it may not be possible to use an item unless it is combined with other parts. For example, a microprocessor by itself may not be very useful, but when combined with other parts to create a computer it becomes extremely useful. Therefore, giving patent owners unlimited rights to control how an item is used after it is sold limits the public’s access to the inherent use but also the potential uses of that item. 

In contrast, since research and design costs can be significantly high, access to patent royalties is one of the main incentives for disclosure of inventions. By applying the doctrine of exhaustion, courts are eliminating a large source of royalties and inventors may be less inclined to seek patents. If inventors do not seek patents then there is no disclosure and the public will not gain access to the inventions.

While this argument is valid, the invention industry is very competitive and the right to 20 years of exclusivity attributed to patent owners through the Patent Act[3] is still sufficient to attract disclosure of inventions.