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US Supremes limit royalty double dippage

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The US Supreme court has overturned a lower court ruling that let South Korea's LG Electronics double-dip on royalty licensing.

In a unanimous decision today, the court favored Taiwan's Quanta Computers, delivering a ruling that will limit a patent holder's ability to collect royalties from companies at different stages of the production process.

The case reverses a previous Federal appeals circuit decision on patent exhaustion. The high court agreed to review the licensing dispute last September at the urging of the Bush administration.

LG had licensed a set of patents to Intel for use in its chips and chipsets, but the agreement specifically barred Intel from mixing the technology with components from other manufacturers.

Intel then sold the chipsets to PC manufacturers such as Quanta — which in turn used the chipsets to make computers for vendors such as Dell and Hewlett-Packard.

LG sued Quanta in 2000, accusing the manufacturer of infringing three patents because computers with the Intel chipsets also had kit from other companies.

A US District Court in California ruled in Quanta's favor, but an appellate court overturned the decision. The Bush administration then urged the Supremes to take the case on grounds the ruling went too far in letting patent holders extract royalties from down-stream companies.

The high court ruling today said LG couldn't extract royalties from Quanta because the initial sale to Intel had "exhausted" LG's ability to control how the technology was used.

"Nothing in the License Agreement limited Intel's ability to sell its products practicing the LGE Patents," wrote Justice Clarence Thomas for the court. "Intel's authorized sale to Quanta thus took its products outside the scope of the patent monopoly, and as a result, LGE can no longer assert its patent rights against Quanta."

However, the court did say Quanta's sale to computer vendors would not have been authorized if Intel had originally breached the contract with LG. So, although the ruling will limit downstream royalty collection, companies better hope everyone upstream read the fine print very carefully.

A copy of the ruling? That would be right over here. (PDF warning) ®

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