Qualcomm Inc. is downplaying a Supreme Court decision that restricts the ability of a patent holder to continue to collect royalties after an invention is sold or licensed, despite urging the high court not to rule as it did and making dire predictions about the ruling’s potential impact.
In Quanta Computer Inc. et al. v. LG Electronics Inc., the high court overturned a federal appeals court in holding that a patent holder essentially exhausts patent rights – and thus rights to subsequent royalties – after the initial sale of a patent.
“Unlike the license agreement at issue in the Quanta case, Qualcomm’s agreements limit the rights granted in order to prevent patent exhaustion. Therefore, we do not expect this decision to impact Qualcomm’s business,” said a Qualcomm spokesperson.
But analysts at Stifel, Nicolaus & Co. Inc. said they viewed the Supreme Court ruling as bad for Qualcomm and good for others.
“The decision affects all players in industries with downstream component sales such as semiconductors, computers and wireless handsets. Qualcomm, Yahoo Inc. and LG had lined up against eBay Inc., Cisco Systems Inc., Dell Inc., IBM Corp, Hewlett-Packard Co. and Intel Corp. The latter group won,” said Stifel.
Those high tech companies as well as Motorola Inc., Nokia Corp. and consumer advocates agreed with Taiwan computer maker Quanta, which argued the first buyer of a patent should pay the royalty in full and pass the cost onto consumers.
“The Supreme Court has made it much more difficult for a patent holder to take a second ‘bite at the apple’ after getting royalties from a component supplier for a license,” said Paul Jahn, a partner in law firm Morrison & Foerster’s San Francisco’s office. “If the supplier’s product constitutes a material part of an invention, the patent – whether apparatus or method – is exhausted. To avoid exhaustion protecting downstream vendors and customers, a license now needs to limit the component vendor’s authority to sell its own product. The court has reinforced the patent exhaustion doctrine and turned back efforts to ‘chip away’ at its edges.”
In its brief, Qualcomm warned the high court that “[n]on-trivial changes to the controlling interpretation of United States patent law have the potential to affect significantly and fundamentally the foundations of Qualcomm’s business (and those of other high technology companies).” Qualcomm added that a reversal of the federal circuit’s ruling would “expand the bounds of the exhaustion doctrine in a way that potentially would render Qualcomm and other patent owners unable to receive royalties in an amount commensurate to the significant economic value of their innovations by efficiently dividing and restricting rights granted at different stages in the chain of production.”
There could be an avenue for patent holders to mitigate the legal downside of the Supreme Court decision, however.
“We see nothing in the court’s decision today that restricts the patent holder from contracting around the patent exhaustion doctrine by expressly limiting the licensee’s ability to sell downstream so that the patent holder can collect downstream royalties,” said Stifel. “But as a practical matter, this has not been the preferred business practice because it requires collecting a greater royalty at the first point of sale.”
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Supreme Court’s decision won’t affect Nokia-Qualcomm spat
The U.S. Supreme Court’s ruling on patent exhaustion does not have relevance for the upcoming case in Delaware Chancery Court that addresses issues relating to an expired cross-licensing agreement between Nokia Corp. and Qualcomm Inc., both companies said last week.
The Nokia-Qualcomm case is set to begin July 23 and will address the nature of the two parties’ expired agreement, among other issues.
Whether the Supreme Court decision will affect either party’s patent-licensing businesses in the United States remains to be seen, but Qualcomm said that was unlikely in its case.
“We do not expect this decision to impact Qualcomm’s business,” said a Qualcomm spokeswoman. “Unlike the license agreement at issue in the Quanta case, Qualcomm’s agreements (with its customers) limit the rights granted in order to prevent patent exhaustion.”
Nokia said that because “patent laws tend to be purely national” in scope, the recent Supreme Court decision likely would have no effect on its own patent-licensing business outside the U.S. The company declined to speculate on whether the ruling would affect its patent-licensing business within the United States.
Last year, Nokia had filed two patent exhaustion complaints against Qualcomm, one in Germany, the other in The Netherlands. Both cases were dismissed last November. Nokia had 90 days to appeal the latter case, but did not, according to the company.–Phil Carson