Wednesday, January 30, 2008

Quanta Oral Arguments

Quanta Computer v. LG Electronics, argued before the Supreme Court on January 16, 2008, addresses an issue of critical importance to the biotechnology industry, i.e., to what extent, if any, can a patent owner impose restrictions on the use or resale of a patented product subsequent to an “authorized purchase,” and enforce such restrictions by means of a patent infringement action. In 1992, the Federal Circuit held in Mallinkrodt that patent owners can impose post-sale restrictions on authorized purchasers by providing adequate notice to the purchasers, essentially granting purchasers a limited license under the patent. The Solicitor General and others argue that Mallinkrodt was wrongly decided and have asked the Supreme Court to decide Quanta in a manner that overrules it. They assert, along with the defendant Quanta, that under Supreme Court precedent an authorized sale exhausts all patent rights in the purchased item.

In a previous post, I discussed the importance of enforceable post-sale restrictions to biotechnology, and noted that BIO and organizations representing seed and agricultural biotechnology companies have filed amicus briefs in support of Mallinkrodt and the Federal Circuit’s position on post-sale restrictions. However, it seems to me that the particular facts of Quanta and the manner in which the case has been framed by the parties render it a poor vehicle for resolving this important issue. As a consequence, the oral arguments for the most part failed to adequately address the crux of the question to be decided.

The patent owner, LGE, has completely distanced itself from Mallinkrodt and the question of whether a patent owner can impose post-sale restrictions on a patented product. Instead of defending Mallinkrodt, LGE seeks to avoid patent exhaustion by arguing that the doctrine only applies in cases where the asserted patent covers the product that was the subject of the authorized sale, and that its patents do not cover the products sold by Intel (i.e., the “authorized purchases”). They point out that their patents are not infringed until LGE combines the non-infringing Intel product with other components to make an infringing computer. In effect, LGE is providing the Court with an opportunity to rule in its favor without necessarily upholding, or even addressing Mallinkrodt or post-sale restrictions on the sale of patented products. This might be good litigation strategy, particularly with the SG coming down in favor of overturning Mallinkrodt, but as a consequence during oral arguments there was no one to advocate in defense of Mallinkrodt and enforceable post-sale restrictions.

Mallinkrodt has been championed by a diverse coalition of supporters in addition to representatives of biotech and seed companies. The list includes AIPLA, IPO, Qualcomm, Yahoo!, IPO, WI-LAN, academics (including myself), and many others. I particularly liked the AIPLA and WI-LAN briefs – WI-LAN provides a good case study of the important role enforceable post-sale restrictions have played in the development of HD radio. Clearly, the importance of the case extends far beyond biotechnology. Unfortunately, the legal and policy argument in favor of Mallinkrodt received little attention during oral arguments, with one brief exception. Near the end of the Quanta attorney’s initial argument, Justice Kennedy asked the following question (the only question he asked throughout the entire oral arguments): “Are there cases where some downstream restrictions on use might be necessary to prevent the patent from becoming worthless, i.e., in the biological area for replication of seeds in agriculture and so forth?”

Quanta’s attorney started to distinguish between the patent owner’s right to use and the right to make – I assume that she was preparing to argue that patent exhaustion only bars the enforcement of post-sale restrictions on the right to use an invention, not the right to make an invention, and restrictions on the replanting of patented progeny seeds implicate the right to make rather than the right to use. However, before she could develop this argument Justice Kennedy noted that Univis, one of the principal cases cited by Quanta and the SG, involved the right to make a product. After fumbling a bit, she dropped the issue without ever really answering the question. Aside from this brief exchange, the positive aspects of the Mallinkrodt rule were never addressed during oral arguments.

I don't think that distinction between the rights to make and use is really applicable to patented crop seeds. The only use of these seeds is to plant them and grow more seeds, which can be harvested and sold as food or feed, or saved and replanted. In other words, use of the seeds necessarily involves making new copies of the patented invention, so in a sense making and using the invention are one in the same. But seed patent owners do not object to farmers to growing copies of the patented seeds, they seek to restrict the subsequent use of those copies, i.e., sale as food or feed is permitted, saving for replanting is not permitted.

Furthermore, while the downstream control of patented recombinant seeds is important, there are others contexts where post-sales restrictions play a critical role in permitting biotechnology patent owners to profit from their innovations. As noted in an earlier post, post-sale restrictions provide an important means for a patent owner to engage in differential pricing. For example, the owner of a patent claiming an invention useful as a research tool might charge a relatively low price to purchasers that use a product for basic research, and a higher price when the product is used commercially, such as in drug development or a diagnostic test. This flexibility in pricing is beneficial in making the technology accessible to basic researchers, while allowing the patent owner to share in the profits when the technology is employed in more lucrative commercial applications. Such restrictions would be difficult to enforce if Mallinkrodt were overturned, and would not be saved by the distinction between restrictions on using and making alluded to by Quanta’s attorney in her response to Justice Kennedy.

Transcript of the oral arguments can be found here.

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