Quanta Computing, Inc. v. LG Electronics, Inc., Allison Engine Co. v. United States ex rel. Sanders, Munaf v. Geren, Geren v. Omar, Taylor v. Sturgell and Irizarry v. United States

June 16, 2008 Supreme Court Update

Greetings, Court Fans!

We owe you quite a few summaries, as the Court has been busy (and it will only get busier as the Justices get ready for their summer vacation at the end of the month). Special thanks this time out to Wiggin and Dana associate Tahlia Townsend, who's helping us catch up with the deluge.

First up is the Court's unanimous opinion in Quanta Computing, Inc. v. LG Electronics, Inc. (06-937), where it held that the sale of components that "substantially embody" a patent "exhaust" the ability of the patentholder to extract further royalties from future downstream purchasers of the components. That's a bit of a mouthful, so some factual background may be helpful. LG purchased a slew of patents relating to computer processors, and it accused Intel of infringing on those patents. LG and Intel resolved their dispute in a license agreement that allowed Intel to sell its processors to computer manufacturers, but Intel had to include a disclaimer in its sales agreements warning that buying the processors did not entitle manufacturers to combine the processors with any other components, i.e., to actually install them in computers. In essence, LG was trying to preserve a right to demand royalties not just from Intel but from anybody who later tried to use a processor in a computer. LG then sued Quanta and other computer manufacturers who bought processors from Intel, seeking royalties on their use of the processors. Relying on the "patent exhaustion" doctrine, whereby the first sale of a patented good generally exhausts a patentholder's rights, Quanta argued that Intel's sale of its processors exhausted LG's right to royalties. The district court ruled for LG in part, holding that the patent exhaustion doctrine did not apply to certain LG patents on "methods" (as opposed to "apparatus" patents); the Federal Circuit agreed but also held that none of the patents were exhausted because the sale of the Intel processors was "conditional" – it did not allow processors to be sold and combined with other products.

The Court reversed 9-0, with Justice Thomas leading the way. This case was right up Thomas's alley; the patent exhaustion doctrine has been around for 150 years, but was last discussed by the Court in 1942, so he got to start with a history lesson. The upshot is this: when an item "substantially embodies" a patent, even if it does not completely "practice" it, the sale of that item exhausts the patentholder's rights such that it can no longer enforce restrictions on the patent. The Court then held that the doctrine applies to method patents as well as apparatus patents. The line between the two is not always clear, and while a "method" may be used every time an item is used in the stream of commerce, exempting method patents from exhaustion would allow patentholders to avoid exhaustion, and keep extracting royalties, simply by inserting method claims into every patent specification. Moreover, there was no stopping point to LG's claim, for if method patents were never exhausted LG could demand royalties from all downstream purchasers, including consumers. The Court then found that Intel's processors substantially embodied the LG patents such that LG's rights were exhausted – the processors could not "practice" the patents, or even function at all, unless they were combined with other products, so their only reasonable and intended use was in a computer. The Court also found that nothing prevented Intel from selling processors to manufacturers – while it had to give manufacturers notice of LG's attempted reservation of rights, Intel's license itself was not conditional in any way. So patent exhaustion applied, and LG had no right to further royalties.

The Court issued another unanimous opinion in Allison Engine Co. v. United States ex rel. Sanders (07-214), where it held that a plaintiff suing under the False Claims Act cannot show merely that a false claim was ultimately paid with government funds, but that the defendant intended that its false statement help induce the government itself to pay the claim. Once again, the facts are helpful: the Navy contracted with shipbuilders to build new guided-missile destroyers, and the shipbuilders in turn subcontracted part of the work to Allison Engine and others. Allison Engine billed its work to the shipbuilders, who paid for the work out of the funds they received from the Navy for the overall job. Two former employees of one of the subcontractors, suing under the federal qui tam statute, claimed that the subcontractors failed to perform their work according to specifications, and thus that their bills were false claims. The False Claims Act covers the knowing use of a false statement "to get a false claim paid or approved by the Government." The qui tam plaintiffs ("relators," as they are called) argued that it was enough that the bills ultimately were paid out of government funds, and the Sixth Circuit agreed. The Court reversed, in an opinion by Justice Alito. The Court held that the text of the Act, requiring the use of false statement "to get a false claim paid by the Government," required that the defendant intend that the government pay the claim – if Congress had meant simply "to get a claim paid with government funds," it could have said so. This does not mean, however, that the false claim has to be submitted directly to the government. It is enough, for example, that a subcontractor give a false statement to a general contractor, intending that the general contractor use it to get the government to pay. There, unlike in this case, the fraud is still directed at the government. The Court similarly held that relators alleging a conspiracy under the False Claims Act have to show that the intent of the conspirators was to induce the government to pay a false claim, and not merely to get a private contractor to pay a false claim with government funds.

Following up on yesterday's opinion in Boumediene v. Bush, the Court issued yet another unanimous opinion in the consolidated cases of Munaf v. Geren (06-1666) and Geren v. Omar (07-394). Led by the Chief, the Court held that federal courts have jurisdiction to hear petitions filed by U.S. citizens detained by U.S. troops in Iraq, even if those troops are functioning as part of a multinational force. Munaf and Omar, U.S. citizens, went to Iraq and allegedly committed crimes there on behalf of insurgent groups, and were detained by U.S. troops operating under U.S. command but as part of a multinational force (MNF-I) charged with holding individuals who threaten Iraqi security pending their prosecution in Iraqi courts. Family members in the United States. filed habeas petitions seeking their release and injunctions barring U.S. forces from transferring them to Iraqi custody. The government argued that the habeas statute did not apply because U.S. forces were agents of MNF-I and the Iraqis, not the United States. The Court, however, swiftly concluded that physical custody by U.S. troops under U.S. command is sufficient for jurisdiction, at least where the detainees are U.S. citizens and there is no indication that their captors cannot produce them. So the petitioners won that much, but their victory was short-lived. Citing military and foreign policy concerns, the Court decided to reach the merits and promptly dismissed their applications for failure to state a claim. The men had conceded that, were they not in U.S. custody, the Iraqi government would be free to arrest and prosecute them for their alleged crimes, but they nevertheless argued that transfer from U.S. to Iraqi custody would violate due process. This struck the Court as a transparent attempt to parlay the fortuity of detention by Americans into shelter from Iraq's sovereign prerogative to punish malefactors within its borders. It is well-settled that U.S. citizens who commit crimes against a foreign sovereign may be transferred to the foreign jurisdiction for trial and punishment. As to the petitioners' concerns about torture, the State Department had determined that the Iraqi Justice Department and its facilities met generally acceptable international standards, and the Court was not in a position to second-guess that assessment. The Court did note that it was not presented with an "extreme case in which the Executive has determined that a detainee is likely to be tortured but decides to transfer him anyway." Justice Souter (joined by Justices Ginsburg and Breyer) wrote a two-paragraph concurrence highlighting that reservation and signaling a willingness to consider, in the right case, "whether substantive due process bars the Government from consigning its own people to torture."

The Court managed another yet unanimous opinion in Taylor v. Sturgell (07-371), tackling the permissible scope of nonparty preclusion based on adequate representation by a previous litigant. The case arose out of successive FOIA suits against the FAA seeking specifications for a vintage F-45 airplane. A man named Herrick filed first and lost (on trade secrets grounds). Taylor, Herrick's friend and fellow antique aircraft enthusiast, then sought the same records, using the same lawyer. Applying the "adequate representation" exception to the general rule against nonparty preclusion, the lower courts held that Taylor was bound by Herrick's suit because of the men's common interest in the records, their use of the same lawyer, and their close personal relationship – facts that made Herrick Taylor's "virtual representative." The Court roundly rejected the virtual-representative approach as inconsistent with due process, Court precedent, and judicial efficiency, and not justified by any increased risk of vexatious litigation in the public law context. Emphasizing the importance of a "constrained approach to nonparty preclusion," the Court reiterated that adequate representation could only be found where, in addition to alignment of interests, "either the party understood herself to be acting in a representative capacity or the original court took care to protect the interests of the nonparty." Addressing the FAA's alternate theory that Taylor's suit was a collusive attempt to relitigate by proxy, the Court remanded for further consideration of the "ambiguous facts." It sent a firmly-worded warning, however, that "[a] mere whiff of ‘tactical maneuvering' will not suffice" and hinted that the test should be one of agency (i.e., the previously precluded party controls the new suit). It also rejected the FAA's argument for a burden-shifting framework; preclusion is an affirmative defense, so the defendant bears the burden of proving agency.

The run of unanimity ended in Irizarry v. United States (06-7517), where the Court split 5-4 in yet another federal sentencing case. Rule 32(h) of the Federal Rules of Criminal Procedure requires courts to give notice of any contemplated "departures" from the Federal Sentencing Guidelines range not foreshadowed in the presentencing report or the parties' sentencing memoranda. At the time the Rule was crafted, the term "departure" unambiguously referred to the very modest opportunities for judicial tinkering with a sentencing range authorized by the Guidelines themselves. But since United States v. Booker (2005), judges have been free to deviate from recommended ranges in ways not authorized by the Guidelines, sometimes described as "variances." The question in Irizarry was whether Rule 32 should be read to apply only to Guidelines-authorized departures, or also to "variances." A majority of the Court, led by Justice Stevens, concluded that it should not. Writing for the Chief and Justices Scalia, Thomas, and Alito (yes, you read that correctly), Stevens explained that the due process concerns which led to the Rule 32(h) notice requirement had been alleviated by the Booker transition to advisory Guidelines, and it would be impractical to require judges to give notice of all the grounds upon which they might depart. The dissent, led by Justice Breyer, retorted that the larger number of possible grounds for departure argued in favor of notice, not against it. Thomas added a short concurrence reiterating his view that the Booker remedy of advisory Guidelines is nonsense and that the Guidelines should go back to being mandatory.

That's all for now -- though the Court issued three more opinions this morning, plus a few cert grants, so we will be back shortly. Thanks for reading!
Ken & Kim
From the Appellate Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart, Ken Heath, or any other member of the Practice Group at 203-498-4400