The Misinterpretation of the Patent Exhaustion Doctrine and the Transgenic Seed Industry in Light of Quanta v. Lg Electronics

• Publication year: 2008
• Citation: Vol. 10 No. 2008

Tod Michael Leaven ⁰

The Supreme Court's recent interpretation of the patent exhaustion doctrine mandates that the transgenic seed industry use contract law instead of patent law to enforce post-sale restrictions. Prior to Quanta Computer, Inc. v. LG Electronics, Inc., the federal district courts and the Federal Circuit held that patent exhaustion was not triggered if a sale was restricted and that post-sale restrictions are enforceable under federal patent law. In Quanta, the Court held that all authorized sales trigger patent exhaustion regardless of restrictions and that post-sale restrictions are not enforceable under patent law. Although Quanta is a case about computer components, the Court's decision affects the transgenic seed industry. Both the computer industry and the transgenic seed industry relied heavily upon the same pre-Quanta federal case law for interpretation of the patent exhaustion doctrine. This broad holding removes uniform federal remedies under patent law for violating post-sale restrictions, and the seed industry must now rely on a patchwork of state contract law to enforce post-sale restrictions.

I. Introduction

On June 9, 2008, the Supreme Court of the United States unanimously clarified the patent exhaustion doctrine¹ in Quanta Computer, Inc. v. LG Electronics, Inc.² The patent exhaustion doctrine sets the threshold for when a patent is considered exhausted, meaning the patentee or a licensed agent can no longer exert control over the patented item and the purchaser of the item may use it in any manner without any threat of committing patent infringement.³ In Quanta, the Court held that the initial authorized⁴ sale of a patented item terminates all of the patent rights to that item.⁵ The Court claimed that its holding simply reaffirmed the interpretation it has held since the Nineteenth Century.⁶ The decision firmly disavows the federal district courts' and the Federal Circuit's misinterpretation that only an unrestricted⁷ sale could exhaust the patentee's rights over an item.⁸ Although Quanta involved computer components, the ramifications naturally extend to any industry that relies upon the lower courts' misinterpretation of patent exhaustion.⁹ The Court issued its decision despite warnings from the transgenic seed¹⁰ industry that such a broad holding could have serious adverse consequences on its industry.¹¹ The Court also noted that the patentee will have to rely upon contract law instead of patent law to enforce any post-sale restrictions.¹² The result of the Court's decision is that members of the transgenic seed industry can no longer avoid patent exhaustion by using complex licensing and sales restrictions, a practice upon which they have come to rely.¹³ Losing uniform patent law remedies¹⁴ for enforcement of post-sale restrictions will force the industry to restructure its sales model to rely on contract law.¹⁵ Contract law is controlled at the state level and is subject to state majoritarian pressure, which, in agricultural states, might favor farmers over big seed corporations.¹⁶ With the growing importance of the transgenic seed industry,¹⁷ this shift to contract law could translate into higher food and energy costs as well as delay several benefits that transgenic crops provide.¹⁸

In a world with global climate change, increased carbon emissions, drought, poverty, and malnutrition, the transgenic seed and the bioengineered crop it produces is the deus ex machina, which translates to "god from the machine."¹⁹ Crops can be engineered to resist insects, drought, diseases, herbicides, salinity, and cold temperatures, and they can be grown in ways that decrease wind erosion and water erosion.²⁰ It is also possible to increase nutrition and health benefits²¹ as well as crop production.²² Crops can also be engineered to more easily and efficiently convert into biofuels and bioenergy.²³ Engineered crops can also encompass vaccines against cholera and hepatitis B.²⁴ In the United States, farmers grow genetically modified varieties of corn, canola, cotton, papaya, squash, and soybeans.²⁵ In 2005, bioengineering had increased crop production by 8.3 billion pounds.²⁶ At the same time, bioengineering also reduced both costs by $1.4 billion and pesticide use by 69 million pounds.²⁷ In discussing the seed industry's reliance upon the lower federal courts' case law, Croplife International, "a global federation representing the plant science industry and a network of regional and national associations in 91 countries,"²⁸ explains:

[Transgenic seed patentees] commercialize such products using limited licenses that allow growers to raise and sell one generation of crops, but not to save and replant the resulting crops to make subsequent generations of the patented product. [Seed patentees] rely upon settled case law holding that the patent exhaustion doctrine does not invalidate such license limitations.²⁹

Part II of this recent development describes the transgenic seed industry and how the federal district courts and the Federal Circuit applied the patent exhaustion doctrine to the industry. Then the seed industry will be compared to a strikingly similar case involving licensing and patent exhaustion in the computer industry.³⁰ This comparison is important for two reasons. First, the computer patent exhaustion case LG Electronics, Inc. v. Bizcom Electronics, Inc.,³¹ relies upon the same district and circuit court precedent as do the transgenic seed cases. Second, Quanta reversed Bizcom due to the lower courts' misinterpretation of the patent exhaustion doctrine. Part III of this recent development analyzes the impact that the exhaustion doctrine will have upon the transgenic seed industry after Quanta overruled the lower courts' interpretation. Finally, Part IV of this recent development briefly examines how the Supreme Court's decision requires reliance upon contract law instead of patent law.³²

II. Case Law Before Quanta

A. Transgenic Seed Industry

The sales and contracting model used by the transgenic seed industry is based upon years of seemingly settled federal case law. Seed patentees own patents for numerous biotechnologies and license these biotechnologies to seed companies.³³ The seed companies are licensed to manufacture³⁴ and sell seeds incorporating the patented technologies to farmers on the condition that the seed companies "place a notice on all bags of [transgenic] seeds stating that the seeds are covered by U.S. Patents, that the purchase of the seeds conveys no license, and that a license from [the seed patentee] must be obtained before using the seeds."³⁵ The license between the seed patentee and the farmer regulates the first-generation seed³⁶ by requiring the farmer to only use the seeds for one commercial crop season.³⁷ The license further regulates the second-generation seed³⁸ by stating that the farmer must commercially sell all of the second-generation seed and cannot save any second-generation seed for either personal consumption or replanting.³⁹ Seed patentees utilize this contractual procedure for securing the continuance of their patent rights post-sale.⁴⁰

When farmers violate these restrictions by saving and planting second-generation seeds, seed patentees protect their interests by bringing patent infringement suits against the farmers.⁴¹ In defending such suits, farmers assert, applying the patent exhaustion doctrine, that the seed patentees cannot exert control over the seeds because the seeds were sold outright, moved out from under the patent monopoly, and belong entirely to the farmers.⁴² In response, seed patentees generally rely upon three major arguments under patent law to enforce the restrictions against using second-generation seeds: (1) in order for a sale to trigger patent exhaustion, it must be an unrestricted sale and the licensing requirements for purchasing seed make these sales restricted;⁴³ (2) the rights of seed patentees are severable and the seed patentees are only conveying certain rights and not others;⁴⁴ and (3) patent exhaustion only applies to first-generation seeds and not the second generation.⁴⁵ Due to the reliance on the lower courts' misinterpretation of patent exhaustion, the transgenic seed cases are analogous to Bizcom, which involves computer component patents.

B. LG Electronics, Inc. v. Bizcom Electronics, Inc.

In Bizcom, a computer industry case with sales and licensing arrangements strikingly similar to those in the transgenic seed industry, the sales and contracting model used was also based upon the same seemingly settled federal case law. LG Electronics, Inc. ("LG") owned patents for numerous technologies relating to personal computers and licensed the technologies to Intel, Inc. ("Intel"). ⁴⁶ Intel is licensed to manufacture microprocessors and chipsets incorporating the patented technologies and sell them to Quanta Computers, Inc. ("Quanta") and other companies on the condition that they give written notice that the purchase of the patented items conveys no license, that Quanta does not have a license to combine an Intel product with any non-Intel product, and that Quanta further has to obtain a license from LG. ⁴⁷ LG utilizes this contractual procedure to secure the continuance of its patent rights post-sale.⁴⁸

When Quanta violated this restriction by purchasing the patented items and combining them with non-Intel components,⁴⁹ LG sued Quanta for patent infringement.⁵⁰ The Federal Circuit relied upon three arguments to reverse the district court's order and sustain LG's restrictions under patent law: (1) only unrestricted sales trigger patent exhaustion,⁵¹ (2) LG's rights are severable and LG did not convey all of its rights,⁵² and (3) patent exhaustion only applies to the physical items and not to the method of combining those items with other components.⁵³

C. Similarities between the Seed Industry and Bizcom

The immediate similarities between the licensing and sales restrictions and how they are...