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Supremes Say No to Royalty Double-Dipping

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In a unanimous decision Monday the Supreme Court restricted patent holders’ from collecting multiple royalties by charging the supply chain for IP that’s already been sold upstream. 

Their Honors found for Quanta and against LG Electronics in a case in which LG licensed some chip technology rights to Intel on condition that Intel’s customers not mix the resulting Intel-made chips with anybody else’s widgetry without getting a separate license of their own from LG, basically making the Intel chips unusable. 

While some companies paid LG, Quanta, which was making boxes for Dell, HP and Gateway, said screw that and duly got sued. The district court that heard the case found in Quanta’s favor but in 2006 the Federal Circuit reversed the decision on the grounds that the patents didn’t go along with chips, especially when the sale was conditional all along, which is how the case wound up in the lap of the Supremes, who have gotten in the habit of reversing the Federal Circuit’s patent decisions lately. 

The Supreme Court decided that buying a product you couldn’t use made no sense and so ruled in favor of the so-called doctrine of patent exhaustion, the old “first sale” rule, which says that a patent holder loses his ability to control an invention’s use once it’s been sold. 

The Quanta decision, written by Clarence Thomas, is in keeping with other positions the Supreme Court has taken the last few years restricting patent holders, the most famous probably being the KSR v Teleflex case in which it expanded the definition of obviousness, making it harder to get a patent and supposedly putting a lot of patent lawyers out of business. The Supreme Court has also made it harder to get an injunction. 

The Quanta decision is expected to impact licensing terms and perhaps the language of agreements.

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