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Under the patent exhaustion doctrine, the first authorized sale of a patented product “exhausts” the patent owner’s right to control the buyer’s subsequent use of the product. As a result, patent owners were traditionally precluded from collecting royalties on subsequent sales of their products. In this case, LG Electronics (LGE) sold Intel the unrestricted right to use its patent in making Intel computer chips, but attempted to circumvent the patent exhaustion doctrine by requiring Intel to notify its customers that they were not authorized to combine the Intel chips with any non-Intel products. After some of Intel’s customers disregarded this notice and combined Intel chips with computer memory made by other companies, LGE sued those customers for patent infringement. In ruling in favor of the defendant customers, the district court held that, under the patent exhaustion doctrine, LGE’s rights in its patent were exhausted by Intel’s authorized sale of the chips to its customers. The Federal Circuit reversed, holding that the patent exhaustion doctrine only applies to “unconditional” sales and does not preclude a patent owner from selling its patent rights in a limited manner and imposing conditions on subsequent buyers that allow the patent owner to collect a separate royalty each time that the patented item changes hands.

The Supreme Court ruled unanimously on 6/9/2008 that patent owners can not extend their patent rights beyond the first authorized sale of a patented item. This principle applies to method claims as well as other patent claims. Once a product embodying a patent is sold, its buyer may resell it without being restrained by the patent laws.