The Supreme Court granted certiorari* in Quanta Computer vs. LG Electronics to review a controversial patent ruling of the Federal Circuit Court of Appeals. The case, involving Taiwanese manufacturers and their South Korean rival, centers on the question of how far patent owners can go in restricting licenses.

That’s the question both sides of the case hope to find an answer to when the Supreme Court reviews this key patent ruling.

The issue: Can a patent holder seek royalties from multiple companies as a patented product works its way through the manufacturing chain?

The legal doctrine at work: The Exhaustion (or first sale) principle under which a license fee can only be charged one time per object. Thus, a rights holder controls the first sale of a protected object, but does not control subsequent sales.

The arguments: Quanta claimed that LG Electronics had licensed its technology to Intel, which then made microprocessor chips that it sold to Quanta. Quanta then used the chips to manufacture computers for Dell, Inc., Hewlett-Packard Co., and Gateway Inc.

LG Electronics contends that it structured the license so that it did not extend to any of Intel’s customers – authorizing Intel to sell microprocessors and chipsets to third parties but requiring it to notify purchasers that they could not combine the Intel products with non-Intel components because LG’s patents covered not the products directly, but the processes that resulted from their combination with other components.

LG subsequently sued Quanta, Quanta Computer USA Inc., Bizcom Electronics Inc., Compal Electronics Inc., Sceptre technologies Inc., Everex Systems Inc., First International Computer Inc., First International Computer of America Inc and Q-Lity Computer Inc. for infringement of its patent rights.

The courts’ decisions: The US District Court for Northern California ruled in favor of the purchasers, stating that the licensing agreement “exhausted” LG’s patent rights. On appeal, the Federal Circuit reversed this ruling, saying that “Exhaustion” applies only to unconditional sales – not to a conditional sale like this case wherein LG expressly required Intel to inform its customers of the licenses’ limited scope.

The Supreme Court steps in – and why. Quanta and the other petitioners asked the Supreme Court to review the Federal Circuit’s decision – one they said was contrary to a 90-year Supreme Court precedent that held that “an authorized first sale of a patented article exhaust the patent owner’s rights in that article, and nullifies any ‘conditions’ that the patent owner has tried to attach to its use or resale.”

You decide. Was the Federal Circuit’s decision “an unprecedented and dangerous expansion of the patent monopoly” as Quanta asserts. Or are the petitioners exaggerating the significance of the case, “making a broad doctrinal issue out of a narrow case-specific ruling,” as LG Electronics claims?

And what happens if the Supreme Court rejects the views of the federal appeals court – a court actually established to help bring consistency to patent law? Well, that’s a story for another day.

* Judicial review by a senior court of a ruling by a lower court