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Supremes to rule on PC makers' patent spat

Down-stream royalties hit choppy water

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The US Supreme Court will review a patent dispute between LG Electronics and a group of Taiwanese computer makers over whether various degrees of separation can exhaust licensing terms.

The case has potentially far-reaching implications to determine if a patent holder can demand royalties from companies involved in different steps of a product's manufacturing process. Led by Quanta Computers, the Taiwanese firms seek to overturn a 2006 decision by the federal court for patent appeals that allowed LG to do this.

Also included in the Taiwanese group are Bizcom Electronics, Compal Electronics, Sceptre Technologies, Everex Systems, First International Computer and Q-Lity Computer.

The spat arose after LG licensed a set of patents to Intel, which in turn used the technology in chipsets it sold to PC manufactures such as Quanta. The manufacturers then used the chips to make computers for vendors such as Dell, Gateway and Hewlett-Packard.

LG sued the manufacturers in 2000 for patent infringement, claiming the agreement with Intel did not extend beyond the company. LG says Intel's licenses were determined at a lower cost, on the proviso that they did not extend to computer makers. When LG technology was combined with non-Intel components, the manufacturers infringed five of its patents, according to the company.

The Taiwanese companies claim that when Intel sold them the chips, they weren't obliged to LG's licensing under the legal rule of "patent exhaustion". This doctrine, which in the case of patents is based on case law only, allows licensing fees to be charged only one time per object.

The Bush administration had urged the Supreme court to take the case, on grounds the appellate court went too far in letting patent holders extract royalties from down-stream companies. ®

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