Is Patent Exhaustion the Big New Thing?

It can be no coincidence that both in the US as well as in Europe “patent exhaustion” has been brought in the legal limelight. Last week in the US the US Supreme Court allowed certiorari in a case Quanta Computer Inc. v. LG Electronics Inc., 06-937.

At the same time in Europe Nokia alleges in German (Mannheim) and Dutch (The Hague) courts that Qualcomm’s patent(s) are “exhausted” in respect of chipsets supplied by Texas Instruments which have been sold on the European Union market with a Qualcomm license. If Nokia’s claim succeeds, Qualcomm would be prevented in Europe from enforcing its respective patents in relation to Nokia handsets. The reason why the case has been brought in The Netherlands, a relatively small market for handsets, is that TI chips used by Nokia are initially supplied to The Netherlands (Rotterdam biggest port of entry in the EU, the Netherlands being an important EU wide distribution country) and subsequently shipped to plants in Finland Germany and Hungary.

TI and Qualcomm are publicly known to have entered into a so called Patent Portfolio License (CDMA/WCDMA license) in 2000 , which expired April 2007. While Nokia is believed to have the option to extend the license under the same terms till December 2008, it is trying to renegotiate better terms with Qualcomm under a renewed license. The inability of parties to agree on new terms caused the current patent struggle in Europe.

The US Quanta-LG case in the US must have inspired Nokia that “exhaustion” is a pretty powerful tool in the negotiations so it must have chosen to use this weapon in its struggle with Qualcomm for better licensing terms. A finding by a Dutch court that patent have been “exhausted” could have a serious impact on Qualcomm’s position as the leading company holding CDMA/WCDMA intellectual property. This effect would be felt by Qualcomm EU-wide (and so not just in The Netherlands). When the goods imported from TI into Netherlands for further distribution in Europe are “patent”- free, or exhausted, this has the immediate that any goods delivered by TI to Nokia are no longer subject to infringement claims anywhere in Europe, as the goods are brought on the EU market with the “consent” of the patent holder and can therefore be “freely” traded on the whole EU market. Quite a smart way of gaining negotiating power as a “normal” infringement or invalidity case would under the current patent rules have only national ( as opposed to EU wide) effects.

One wonders why Nokia paid under this license until April 2007 if it was of the opinion that the patents were exhausted because of Qualcomm’s license to TI, the maker of the chipsets used by Nokia in its handsets. If you think of the consequences of a finding of “exhaustion” for Nokia themselves one cannot but conclude that Nokia has all the reasons in the world not to let it come to any court decision. Nokia themselves would most likely be ripped of their ability to enforce many of its own patents when confronted with infringement. Like the discussion of patent disclosure and standards, these issues work both ways. Once the finding of “exhaustion” is being supported in court is works both ways, Nokia will on the short run found a way out of paying much lower a price for any Qualcomm license, however it will seriously impound their enforcement capability of enforcing their own patents against other mighty players in this highly competitive IP market.

The judgement by the Dutch court is expected to be delivered on October 31.