Qualcomm is the world’s largest supplier of cellular modem chipsets. Nokia holds one of the largest portfolios of patents declared “essential” to practicing the cellular modem standards, such as 3G and 4G LTE. On July 22, 2008, to settle their respective cross-claims for patent infringement, Nokia and Qualcomm entered into a “Subscriber Equipment and Infrastructure Equipment License Agreement.” [1] In the License Agreement, Nokia agreed it would not sue Qualcomm for patent infringement based on Qualcomm’s manufacture and sale of Qualcomm products.
The following day, Qualcomm published on its website a press release titled “Nokia and Qualcomm Enter Into a New Agreement, Companies Agree to Settle All Litigation.” [2] Consistent with the License Agreement, the press release states “Nokia has agreed not to use any of its patents directly against Qualcomm, enabling Qualcomm to integrate Nokia’s technology into Qualcomm’s chipsets.” Thus, as of July 2008, Nokia authorized Qualcomm to introduce into the market modem chipsets practicing Nokia’s patents.
Under a pair of Supreme Court decisions in Quanta Computer, Inc. v. LG Electronics, Inc., 128 S.Ct. 2109 (2008) and Impression Products, Inc. v. Lexmark Int’l, Inc., 137 S. Ct. 1523 (2017), Nokia exhausted its right to sue downstream purchasers of Qualcomm modems sold or imported into the United States. Indeed, Nokia’s License Agreement includes a “Revocation Provision” which purports to void Nokia’s covenants to Qualcomm if a court later finds exhaustion arising from the Agreement. [1]
In Quanta, the Supreme Court rejected the notion that a patent owner could authorize the manufacture and sale of a product embodying (or “substantially embodying”) a patented invention, while retaining the right to sue downstream purchasers of that product for infringement. The Court cited three decisions from the 1800s to hold “the longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item.” The Court addressed two previously-disputed issues in its Quanta decision: (1) whether method claims could be exhausted under the doctrine, and (2) whether exhaustion arises where the patentee authorizes the sale of technology practicing the “essential features” of the invention but not the complete claim. The Court applied the exhaustion doctrine broadly in both cases. The Court held that method claims may be exhausted just like claims directed to an apparatus or system. The Court also held exhaustion arises from the authorized sale of less than a complete patented invention if what was sold “substantially embodies” or constitutes a material part of the patented invention.” That was true even though the patentee’s agreement authorizing the sale expressly carved-out downstream combinations with other technology necessary to complete the claimed invention.
Nearly a decade later, in Impression Products, the Supreme Court revisited the exhaustion issue to reaffirm that, while a patentee is free to negotiate contracts with a purchaser, it “may not, by virtue of his patent, control the use or distribution of the product after ownership passes to the purchaser.” Noting that “an illustration never hurts,” the Court prophetically described the necessity and applicability of patent exhaustion in both the automotive and cellular industries:
Take a shop that restores and sells used cars. The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to repair and resell those vehicles. That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale. Those companies might, for instance, restrict resale rights and sue the shop owner for patent infringement. And even if they refrained from imposing such restrictions, the very threat of patent liability would force the shop to invest in efforts to protect itself from hidden lawsuits. Either way, extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain. And advances in technology, along with increasingly complex supply chains, magnify the problem. See Brief for Costco Wholesale Corp. et al. as Amici Curiae 7-9; Brief for Intel Corp. et al. as Amici Curiae 17, n. 5 (“A generic smartphone assembled from various high-tech components could practice an estimated 250,000 patents“).
Against this backdrop, the Court held “even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product.” Applying the distinction between contract rights and patent rights, the Court held “once sold, the [Lexmark] cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.” The Court also held that exhaustion of U.S. patent rights arose from the authorized sale of patented items even when those sales took place outside of the United States.
Under Quanta and Impression Products, Nokia exhausted its U.S. patent rights as to downstream purchasers of Qualcomm modem chipsets when Nokia authorized Qualcomm to make and sell into the marketplace modem chipsets practicing, or at least “substantially embodying,” Nokia’s patent claims. Under these decisions, it is of little consequence (1) that the 2008 agreement may authorize only Qualcomm to sell patented chipsets and not downstream purchasers, (2) that the Qualcomm modem chipsets may not practice every claim limitation of Nokia’s patents, or (3) that the chipsets may be manufactured and sold abroad before being imported into the United States.
In 2013, ITC Administrative Law Judge Pender held that exhaustion did not apply to the import of Qualcomm modem chipsets under the 2008 License Agreement because the sale of those chipsets took place abroad. [1] ALJ Pender cited the Federal Circuit’s decision in Fuji Photo Film Co. v. Jazz Photo Corp., 394 F.3d 1368 (Fed. Cir. 2005), which based its authority on its earlier decision in Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094, 1110-11 (Fed. Cir.2001). But, four years later in Impression Products, the Supreme Court overturned Jazz Photo and rejected the Federal Circuit’s view that authorized foreign sales of a patented item avoid exhaustion under U.S. law.
Taken together, Quanta and Impression Products reflect the wide breadth of exhaustion under U.S. patent law. Under these decisions, Nokia lacks the patent rights necessary to enforce, or demand patent royalties for, Qualcomm-based modem products sold within, or imported into, the United States.
[1] ITC Investigation No. 337-TA-847, May 2, 2013 Initial Determination (Public Version).
[2] https://www.qualcomm.com/news/releases/2008/07/23/nokia-and-qualcomm-enter-new-agreement
