UPDATE 3-US court rules in Quanta's favor in LG patent case

Mon Jun 9, 2008 3:24pm EDT

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(Adds background in paragraph 2; legal analysts in paragraphs 8-11)

By Diane Bartz

WASHINGTON, June 9 (Reuters) - The U.S. Supreme Court on Monday ruled in favor of Taiwan's Quanta Computer Inc (2382.TW), rejecting LG Electronics Inc's (066570.KS) argument that it had placed explicit limits on how its patented technology could be passed on.

The decision could have major implications for companies which license patents, since the court unanimously overturned a federal appeals court ruling with the practical effect of voiding an agreement between two firms, patent experts said.

South Korea's LG Electronics had accused Quanta of infringing its patent for the "systems and methods" of using components to make a computer, not the components themselves.

LG Electronics, which holds the patents on the products, had an agreement with Intel Corp (INTC.O) that allowed it to make computer chips and chip sets but explicitly forbade mixing the components with parts from non-Intel manufacturers.

Quanta argued that LG Electronics had licensed its technology to Intel, which in turn made microprocessor chips that it sold to Quanta. Quanta used the chips to make computers under contract for Dell Inc DELL.O, Hewlett-Packard Co (HPQ.N) and Gateway Inc.

"LGE argues that there was no authorized sale here because the license agreement does not permit Intel to sell its products for use in combination with non-Intel products to practice the LGE patents," the high court said.

"LGE overlooks important aspects of the structure of the Intel-LGE transaction. Nothing in the license agreement restricts Intel's right to sell its microprocessors and chip-sets to purchasers who intend to combine them with non-Intel parts."

Scott Kieff, who teaches patent law at the Washington University Law School, said the court brushed aside "very express contracts among very sophisticated parties (LG and Intel) and the court doesn't seem to be respecting contract terms.

"The LG/Quanta decision may end up being very difficult for everybody -- those who own IP (intellectual property) rights and those who want access to IP," he told Reuters.

Ben Clark, a patent lawyer with Bryan Cave LLP, said the Supreme Court distinguished between the license agreement, which did not bar downstream use of LG patented technology, and a separate "master agreement," which spelled out when the patent was "exhausted."

"The lesson for licensors who really want downstream restrictions is put it in the license agreement," he said.

Ray Van Dyke, a patent lawyer with Winston and Strawn, said companies could raise royalty rates because of the new ruling. "The patentee has to get all their value on the first sale," he said.

Van Dyke also said that the ruling could be good news for farmers who want to use genetically modified seed from the plants that they grow, rather than buying seed every year from Monsanto Co (MON.N) and other seed companies. Farmers have been sued for seed-saving, a time-honored agricultural practice, and one was sentenced to eight months in prison in a dispute related to the practice.

George Best, a patent expert with the law firm Foley and Lardner, said he was not surprised by the ruling and said it was unlikely to reduce litigation over patents, which high-tech companies have long complained about.

A federal district court in California initially decided Quanta and the others did not infringe the patents. But a U.S. appeals court overturned the decision and ruled in favor of LG Electronics. (Additional reporting by James Vicini) (Reporting by Diane Bartz; Editing by Gerald E. McCormick and Lisa Von Ahn)

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