Reasonable Patent Exhaustion

Abstract

A lengthy tug of war between the Supreme Court and the Federal Circuit Court of Appeals may have ended when the Supreme Court held that the sale of a patented article exhausts the patentee seller’s rights to enforce restrictions on that article through patent infringement suits. Further, reversing the Federal Circuit, the parties cannot bargain around this rule through the seller’s specification of conditions stated at the time of sale, no matter how clear. No inquiry need be made into the patentee’s market power, anticompetitive effects, or other types of harms, whether enforcement of the condition is socially costly or valuable, or has a positive or negative impact on innovation. None of this is relevant.

Lexmark was attempting to use patent law to impose a variable proportion tie – in this case, a requirement that users of its printers also use its own original equipment toner cartridges. The general although not unanimous consensus is that such arrangements are economically beneficial, and largely everyone agrees that they are beneficial when the seller lacks market power, as Lexmark did in this case.

Impression Products reveals an economic deficiency that manifests all too frequently when patent law is brought to bear on market practices. Economic concepts such as market power or output effects which are commonly used in antitrust law are virtually unknown in patent law. This fact has inclined the courts to go to wild extremes – such as equating every patent with monopoly, or concluding that a patent is a mere property right and that anything done within the scope of the patent should therefore be permissible. The result, as in this case, can be draconian rules that are indifferent to effects on innovation, competition, economic efficiency, or any other measure seems relevant to innovation policy.

One thing the Supreme Court did not discuss is the Patent Misuse Reform Act, which provides that no patent owner shall be denied relief in an infringement action because it “conditioned…the sale of the patented product on the…purchase of a separate product…unless…the patent owner has market power…” That language clearly creates an exception to the exhaustion rule for tying arrangements where the defendant lacks market power. This paper considers whether the Supreme Court was correct to ignore that statute.

The exhaustion rule also produces odd result of giving patentees an incentive to argue that components that they sell do not embody their own patents. If the product is not covered by a patent, then it is not exhausted. At this writing the issue is being litigated in the Apple v. Qualcomm dispute over Qualcomm’s post-sale restrictions on telecommunications components.

The Supreme Court based its patent exhaustion holding on concerns about restraints on alienation, which it presented as rooted in the common law. But the common law’s rules on restraints on alienation are much more complex than the Supreme Court acknowledged. The common law typically upheld restraints that were limited in time, and restraints enforced by patent infringement actions are by definition limited by the life of the patent.

This paper concludes by arguing that the Supreme Court would have been wise to develop a more nuanced exhaustion rule that examined actual effects likely to result from a particular restraint.

Keywords: patents, exhaustion, first sale, antitrust, competition, innovation, restraints on alienation, tying arrangements