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UPDATE: Supreme Crt Rules Against LG, Limits Patent Royalties

Jun 9, 2008 11:41:37 (ET)

(ADDS details from the opinion in second through fourth paragraphs.)

WASHINGTON (Dow Jones)--The U.S. Supreme Court on Monday ruled against LG Electronics Inc. (066570.SE) in its royalties dispute with Korean computer manufacturers, limiting the ability of companies to collect royalties after the first sale of a patented product.

The unanimous decision stops LG Electronics, which holds computer chip and system patents used in Intel Corp. (INTC) products, from demanding additional royalties from Quanta Computer Inc. (2382.TW) and several other companies. LG had already licensed its technology to Intel, which then used the technology in computer parts it sold to the other companies.

The high court said that longstanding patent law precedent extends to method patents, which cover processes rather than complete devices and are often part of high-technology components.

"This court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method," Justice Clarence Thomas wrote. "The authorized sale of an article that substantially embodies a patent exhausts the patent holder's rights and prevents the patent holding from invoking patent law to control postsale use."

Justice Thomas rejected several arguments offered by LG Electronics and said the original patent license prevents LG from asserting any additional patent claims. "Nothing in the license agreement limited Intel's ability to sell its products practicing LG patents," he said. "LG can no longer assert its patent rights against Quanta."

The high court's decision reverses an earlier ruling by the Federal U.S. Circuit Court of Appeals, a special appeals court that hears patent cases.

At issue in the case was whether LG could sue to force the computer suppliers to pay royalties on components they legally purchased from Intel, even though Intel already paid royalties to LG in a technology licensing agreement.

Quanta Computer makes laptops for major U.S. computer sellers and is the only company sued by LG that hasn't settled. It is among several large Korean companies that bought computer components from Intel.

Quanta then assembled the components with non-Intel parts, a move LG says was not covered by the patent licenses it reached with Intel. LG sued the Korean companies for alleged patent infringement and the Federal Circuit Court agreed LG had the right under federal law to additional royalties.

The dispute began in 2000 and 2001 when LG sued the Korean companies for refusing to pay royalties. A federal trial judge ruled against LG, saying it had already exhausted its patent rights in the sales agreement with Intel. But the Federal Circuit Court in July 2006 said that LG could pursue patent claims against the Korean manufacturers.

The case is Quanta Computer Inc. v. LG Electronics, 06-937.