Supreme Court issued three decisions, described below, of interest to the
Quanta Computer, Inc. v. LG Electronics, Inc., No.
06-937 (previously discussed in the
September 25, 2007 Docket Report).
longstanding doctrine of patent exhaustion, the first authorized sale of an
article that practices a patent exhausts all patent rights in that article. The
Supreme Court today reaffirmed that doctrine and held that the authorized sale
of an article that substantially embodies a patent exhausts the patent holder’s
rights and prevents the patent holder from invoking patent law to control
post-sale use of the article. The Court specifically rejected the argument that
method claims—those that describe a process rather than a physical apparatus—are
immune from patent exhaustion. It also held that patent exhaustion applies to
the authorized sale of a component, not just a completed device, if that
component contains the inventive elements of the patent and has no reasonable
non-infringing use. Finally, although the Court recognized that a patent owner
can place restrictions on the sale of patented articles when it has granted a
license to manufacture and sell articles practicing the patent, all patent
rights in the article are exhausted once it has been sold regardless of alleged
limitations on the rights granted to the purchaser.
This is a
significant victory for manufacturers and retailers who deal with intellectual
property rights, particularly those in the high technology field. It means that
once there has been an authorized sale of a product or component that embodies a
patent, all downstream purchasers will take that article free from the patent
in Quanta purchased a book of computer-technology patents, some of
which covered aspects of the way in which computer processors access external
memory and manage the “bus” that connects the processor to other components. The
patents included both “method claims” that describe the process of accomplishing
these tasks and “apparatus claims” that describe the physical components used to
accomplish these tasks. The plaintiff entered into a licensing agreement with
Intel Corporation that allowed Intel to manufacture and sell processors and
chipsets that, when combined with memory or a bus, practice the patents. The
licensing agreement (i) purported not to extend to a third party who purchased
an Intel processor or chipset and combined it with non-Intel components such as
memory or a bus and (ii) required Intel to provide third parties with a notice
to that effect. When Quanta Computer and several other firms that assemble
processors and other components for resale to laptop manufacturers purchased
Intel processors and combined them with non-Intel components, the plaintiff sued
for patent infringement.
decision below, the Federal Circuit held that the doctrine of patent exhaustion
does not apply to method patents at all and that a patent holder could avoid
exhaustion by placing restrictions on the scope of the license that it granted
to downstream purchasers as long as it required notice to those purchasers.
In a unanimous
opinion by Justice Thomas, the Supreme Court overturned both of those holdings.
The Court concluded that patent exhaustion applies to method claims, just as it
does to apparatus claims, if there is an authorized sale of an article that
practices the method. The Court reasoned that there is no justification for
exempting method claims from the exhaustion doctrine and that doing so would
provide patent owners with an easy way to avoid exhaustion because most
apparatus claims can be readily recharacterized as method claims. The Court also
reaffirmed its holding in United States v. Univis Lens Co., 316, U.S.
241 (1942), that patent exhaustion applies to the authorized sale of a
component, not just a completed device, if that component contains the inventive
elements of the patent and has no reasonable non-infringing use. Finally, the
Court concluded that patent holders cannot use the patent laws to enforce
restrictions on downstream owners of an article following an authorized sale of
that article. The Court recognized that patent holders can place restrictions on
the right to sell an article practicing its patent when it grants a license to
manufacture and sell the article, but concluded that “exhaustion turns only on
[the] license to sell products practicing the [patent]” even when the license to
manufacture and sell “specifically disclaim[s] any license to third parties.”
Slip op. at 18.
filed an amicus brief supporting petitioners on behalf of Dell Inc.,
Hewlett-Packard, Co., Cisco Systems, Inc., and eBay Inc.
Allison Engine Co., Inc. v. United States ex rel. Sanders,
No. 07-214 (previously discussed in the
October 29, 2007 Docket Report).
Claims Act (Act) imposes liability on anyone who knowingly employs a “false
record or statement to get a false or fraudulent claim paid or approved by the
Government,” and on anyone who “conspires to defraud the Government by getting a
false or fraudulent claim allowed or paid.”
31 U.S.C. §§ 3729(a)(2), (a)(3). In an opinion issued today, the Supreme Court
limited the reach of the Act.
brought a qui tam suit under the Act alleging that invoices submitted by
subcontractors to a government contractor “fraudulently sought payment for work
that had not been done in accordance with contract specifications.” Slip op. at
3. Respondents offered evidence that the subcontractors had submitted the
fraudulent invoices to the contractor for payment by the contractor to the
subcontractors, but no evidence that the invoices were ever submitted by the
contractor to the government for payment by the government to the contractor.
Despite respondents’ failure to prove that the fraudulent invoices had been
presented to the government, the Sixth Circuit found that the subcontractors
could be held liable under the Act, holding that Sections 3729(a)(2) and (3) do
not require proof of an intent to cause a false claim to be paid by the
government. According to the Sixth Circuit, proof of an intent to cause a false
claim to be paid by a private entity using government funds was sufficient.
In a unanimous
decision by Justice Alito, the Supreme Court reversed. Although the Court agreed
that Sections 3729(a)(2) and (3) do not require proof of presentment to the
government, the Court rejected the proposition that the mere intent to be paid
by a private entity from government funds is sufficient to sustain liability
under the Act. Rather, the Court held, liability requires proof that the party
submitting the fraudulent invoice intended for the invoice to be “material to
the Government’s decision to pay or approve the false claim.” Slip op. at 2.
opinion in Allison Engine is important in two respects. First, it makes
clear that the False Claims Act does not cover situations in which a private
recipient of government funds pays those funds to a third party based on a
fraudulent statement, unless the third party intends that the government itself
rely on that false statement when approving the payment. Second, by requiring
proof of an actual intent to defraud the government itself, today’s decision
raises the evidentiary threshold that the government or a qui tam relator must
satisfy to establish liability
Bridge v. Phoenix Bond & Indemnity Co., No. 07-210
(previously discussed in the
January 8, 2008 Docket Report).
Court today held that, to prevail on a claim predicated on mail fraud under
RICO, the Racketeer Influenced and Corrupt Organizations Act, a plaintiff need
not show that it relied on the defendant’s alleged misrepresentations. The Court
found that its interpretation is compelled by the plain language of the statute;
as in prior cases, the Court refused to adopt a limiting construction to make
the statute “conform to a preconceived notion of what Congress intended to
proscribe.” Slip op. at 20. The Court thus passed up another opportunity to
narrow the scope of potential liability under RICO’s civil provisions, which are
frequently invoked by plaintiffs because of the availability of treble damages.
a private right of action to “any person injured in his business or property by
reason of” an act that violates the statute’s criminal provisions. 18 U.S.C. §
1964(c). It is a crime under RICO for “any person employed by or associated with
any enterprise engaged in * * * interstate or foreign commerce to conduct or
participate * * * in the conduct of such enterprise’s affairs through a pattern
of racketeering activity.”
18 U.S.C. § 1962(c). “Racketeering activity,” in turn, is defined in RICO to
include any act that would constitute federal mail fraud, 18 U.S.C. §
1961(1)(B), a crime that is committed when a person uses the mail “for the
purpose of executing a [scheme to defraud] or attempting to do so,” 18 U.S.C. §
1341. The issue in Bridge v. Phoenix Bond & Indemnity Co., No. 07-210,
was the range of plaintiffs that may pursue a civil RICO claim predicated on
mail fraud. Is it all plaintiffs who suffer an alleged injury from the operation
of the scheme, or only those who can plead and prove that they relied on the
contents of the unlawful mailing?
in the case, petitioners in the Supreme Court, were successful bidders on
property tax liens put up for auction by an Illinois municipality. The
plaintiffs, respondents in the Supreme Court, alleged that the defendants
engaged in an unlawful scheme that “allow[ed] them collectively to acquire a
greater number of liens than would have been granted to a single bidder acting
alone” (slip op. at 4) and that this scheme injured the plaintiffs—who were also
bidders—by depriving them of the opportunity to acquire the same liens. The
plaintiffs further alleged that the defendants committed mail fraud, and
violated RICO, by sending hundreds of mailings as part of the alleged scheme.
What the complaint did not allege was that the plaintiffs themselves had relied
upon (or even received) the statements made in any of the mailings. The district
court ruled that that omission required the dismissal of the suit. The Seventh
Circuit reversed, holding that “first-party reliance”—a recognized element of
common-law fraud—is not an essential element of a civil RICO suit premised on
allegations of mail fraud.
In a unanimous
decision by Justice Thomas, the Supreme Court affirmed. The Court first found
that RICO’s criminal provisions do not impose a “first-party reliance”
limitation: “Using the mail to execute or attempt to execute a scheme to defraud
is indictable as mail fraud,” the Court said, and thus it is “a predicate act of
racketeering activity under RICO even if no one relied on any
misrepresentation.” Slip op. at 8. The Court was also unable to locate a
“first-party reliance” limitation in RICO’s civil provisions, reasoning that the
grant of a right of action to “any person” injured by a criminal violation is
“not easily reconciled with an implicit requirement that the plaintiff show
reliance in addition to injury in his business or property.”
Id. at 9.
The Court went
on to reject each of the petitioners’ arguments for the imposition of a
“first-party reliance” requirement. Noting that Congress had made “mail fraud,”
and not common-law civil fraud, the relevant predicate act under RICO, the Court
squarely rejected the view that RICO should be construed to incorporate the
“first-party reliance” requirement imposed by the common law. The Court next
declined to adopt a rule that the necessary link between causation and loss
cannot be shown in the absence of “first-party reliance,” pointing out that,
under the allegations in this very case, respondents’ “alleged injury—the loss
of valuable liens—is the direct result of petitioners’ fraud.” Slip op. at 18.
Finally, the Court refused to impose a reliance requirement to avoid the
“over-federalization” of traditional state-law claims (slip op. at 19),
suggesting that that was a policy argument more appropriately addressed to