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October Term, 2007

June 9, 2008

Today the Supreme Court issued three decisions, described below, of interest to the business community.

Quanta Computer, Inc. v. LG Electronics, Inc., No. 06-937 (previously discussed in the September 25, 2007 Docket Report).

Under the 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 laws.

The plaintiff 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.

In the 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.

Mayer Brown 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).

The False 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.

Respondents 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.

The Court’s 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).

The Supreme 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.

RICO provides 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?

The defendants 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.”
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 Congress.




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