Background
LG Electronics (LGE) held patents covering computer systems and methods for memory management and bus operations — technology embedded in the microprocessors and chipsets that power personal computers. LGE licensed its patents to Intel Corporation, authorizing Intel to make and sell microprocessors and chipsets incorporating the patented technology. However, the Intel-LGE license agreement expressly stated that LGE’s patents were not licensed for use by Intel’s customers when they combined Intel products with non-Intel components in ways not authorized by LGE.
Bizcom Electronics, Compal Electronics, and other computer manufacturers purchased Intel chips and incorporated them into laptop and desktop computers that also used non-Intel memory and other components. LGE sued these downstream manufacturers for patent infringement, arguing that while Intel’s sale to them was authorized, the patent rights were not exhausted for downstream uses not covered by the Intel license. The trial court held that system claims were exhausted by Intel’s authorized sales, but that method claims were not.
The Court’s Holding
The Federal Circuit reversed the district court’s exhaustion ruling as to system claims and affirmed as to method claims. On the method claim issue — the more significant and consequential holding — the court stated clearly that “the sale of a device does not exhaust a patentee’s rights in its method claims.” The exhaustion doctrine, the court reasoned, applies to patented articles sold with authorization; method claims cover ways of doing things, not physical items, and a sale of a device that can be used in an infringing method does not automatically exhaust the right to enforce the method patent against later uses.
The court also addressed the system claims, finding that LGE’s express notice to Intel’s customers that the license did not cover their combinations effectively conditioned the authorization — such that the sale was not truly unconditional and exhaustion did not apply to system claims either. Collectively, the court found the downstream computer manufacturers liable for infringement despite having purchased chips from an authorized Intel sale.
Key Takeaways
- Under the Federal Circuit’s 2006 ruling, an authorized sale of a product embodying a patent does not exhaust method patent claims — downstream users remain liable for infringing uses not covered by the patentee’s license to the seller.
- An explicit notice condition in a license agreement limiting the downstream uses covered by that license can prevent exhaustion from arising from the authorized sale.
- The Supreme Court reversed this reasoning in Quanta Computer v. LG Electronics (2008), holding that the authorized sale of a device that substantially embodies a patent — including method patents — does trigger exhaustion downstream.
- The case highlights a long-running tension in patent law between the patent holder’s interest in capturing value at every level of a supply chain and the patent exhaustion doctrine’s policy of enabling free movement of purchased goods.
Why It Matters
LG Electronics v. Bizcom represents a high-water mark of patent holder power in multi-party supply chains — a moment where the Federal Circuit allowed LGE to pursue both its licensed chip manufacturer and the downstream product makers who purchased those chips. The ruling created significant uncertainty for technology companies throughout the supply chain: purchasing from a licensed supplier was not necessarily a shield against patent infringement liability.
The Supreme Court’s 2008 reversal in Quanta Computer v. LG Electronics fundamentally reset the doctrine, extending exhaustion to method claims and to downstream uses that the patented item was designed for. Together, these two decisions define one of the most consequential doctrinal shifts in the patent exhaustion area and remain essential reading for anyone advising companies operating in multi-tier technology supply chains.