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WASHINGTON—A
US Supreme court case pitting Quanta Computer Inc. against
LG Electronics Inc. will shape the power of patent holders
to extract royalties from companies at each stage when a
product is being made.
At issue
is whether LG can enforce its memory-technology patents
against both Intel Corp. and the computer makers that
install Intel’s chips in their machines. Quanta, the
world’s largest maker of notebook computers, says it can’t
be forced to pay royalties on three LG patents because
Intel already has paid.
The
dispute has divided businesses and generated cries of
alarm from both sides of the debate. Quanta, backed by
computer and mobile-phone manufacturers, accuses LG of
“holding the entire computer industry hostage’’ by seeking
billions of dollars in duplicate royalties.
On the
other side are companies that rely on licensing fees,
including Qualcomm Inc., the mobile-phone chipmaker that
gets three-quarters of its profit from patent licensing.
The company says a sweeping ruling might “affect
significantly and fundamentally the foundations’’ of its
business.
The
competing claims will force the court to sort out not just
the intricacies of patent law, but also how its decision
will affect relationships among technology companies.
“Everybody’s got their ax out on this one,’’ said Marvin
Gittes, a patent lawyer at Mintz Levin in
New York. “The views are all over the lot.’’
LG, South
Korea’s second-largest electronics maker, wants
Taiwan-based Quanta to pay royalties for installing
Intel’s chipsets and microprocessors. Santa Clara,
California-based Intel, the world’s largest chipmaker,
isn’t involved in the High Court case.
The US
Court of Appeals for the Federal Circuit in Washington,
which specializes in patent law, said the suit could go
forward.
Electronics manufacturers have rallied to Quanta’s side.
Hewlett-Packard Co., Dell Inc., International Business
Machines Corp., Nokia Oyj, Motorola Inc., Cisco Systems
Inc. and NCR Corp. are among those backing Quanta.
The lower
court ruling “allows each patent owner to work its way
through every manufacturing chain that in any way
implicates its patents, extracting a separate royalty for
the same invention at each stage of the process,’’ Dell,
Hewlett-Packard, Cisco and eBay Inc. said in a filing with
the court.
eBay, the
world’s largest auction house, says expanded patent rights
might affect people using the service to resell products.
The Bush administration and trade groups representing
biotechnology companies and car-parts remanufacturers also
are urging the court to restrict patent rights.
LG’s
allies at the court include Yahoo! Inc. and a trade group
that represents Monsanto Co. and other seed growers.
Yahoo, owner of the most-visited US web site, said the
laws of economics will prevent patent owners from
collecting excessive royalties by dividing them among
multiple companies responsible for a single product.
“If Intel
said, ‘I need a license that covers not only me but all of
my customers,’ LG would say, ‘It’s going to cost you 100
times more,’’’ said patent lawyer Robert Krupka of
Kirkland & Ellis in Los Angeles, who isn’t involved with
the case. “Intel doesn’t want to pay that.’’
Of LG’s
supporters, Qualcomm may be the one with the most at
stake. The San Diego-based company collects royalties from
both chipmakers and the phone-handset makers that use the
chips.
The
Supreme Court case might affect the patent-licensing
contracts being negotiated between Qualcomm and Nokia, the
world’s largest mobile-phone company. Nokia has argued in
Dutch and German courts that some of the technology was
already covered by an agreement between Qualcomm and Texas
Instruments Inc.
“It could
impact their ability to set a different rate with Nokia,’’
said Ehud Gelblum, an analyst with JP Morgan Securities
Inc. in New York. “It’ll have to be factored into how they
write contracts and could create a big mess.’’
Quanta
says the High Court can rule in its favor without calling
Qualcomm’s basic business model into question. Quanta says
patent holders can attach conditions to licenses and
enforce those restrictions through breach-of-contract
suits.
Qualcomm
requires those licensing its mobile-phone technology to
pass it on only to handset makers that have reached
agreements with Qualcomm.
By
contrast, LG didn’t place any restrictions on Intel’s
right to sell its chips, Quanta contends. “It is
undisputed that Intel had authority to sell these items to
Quanta and that Intel’s sales did not constitute
infringement,’’ Quanta argued.
LG says it
required Intel to notify its customers that the chipmaker
couldn’t license them to combine the chips with other
computer components. LG says that step triggers separate
patents it owns covering systems for increasing a
computer’s speed and efficiency.
“Intel’s
customers knew that they were not purchasing a license to
practice LGE’s patented systems with non-Intel parts and
could not practice those patents without obtaining a
separate license from LGE,’’ the Korean company argued. | 
