An Economic Defense of Flexibility in IPR Licensing: Contracting Around 'First Sale' in Multilevel Production Settings

Anne Layne-Farrar

Charles River Associates; Northwestern University

December 23, 2010

The legal doctrine of first sale (or exhaustion for patents) dictates that the first sale of any good (intermediate or final) that embodies licensed IPR exhausts the holder’s rights. Thus, a patent holder is held to licensing just one party in a good’s production chain and an original copyright holder cannot affect the resale of a copyrighted good. The Supreme Court’s decision in the Quanta case strengthened the patent exhaustion rule, but the ruling appears to leave open the possibility that the parties could contract around patent exhaustion. In this paper, I present an economic argument in support of such contractual flexibility in situations involving intermediate production goods. In particular, I argue that under several real world circumstances the ability to license more than one party in a vertical production process makes economic sense and does not result in anticompetitive harm. Concerns such as "double dipping," raised during Quanta, do not hinge on multi-level licensing. Thus, as long as the parties involved can be presumed to understand the terms and conditions, they should be free to contract around a default "first sale" rule.

Number of Pages in PDF File: 41

Keywords: Patent Exhaustion, Licensing, Royalty Base, Vertically Disaggregated Industries

JEL Classification: D45, L42, K21, L63

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Date posted: January 5, 2011  

Suggested Citation

Layne-Farrar, Anne, An Economic Defense of Flexibility in IPR Licensing: Contracting Around 'First Sale' in Multilevel Production Settings (December 23, 2010). Available at SSRN: https://ssrn.com/abstract=1734865 or http://dx.doi.org/10.2139/ssrn.1734865

Contact Information

Anne Layne-Farrar (Contact Author)
Charles River Associates ( email )
1 South Wacker Drive
Suite 3400
Chicago, IL 60606
United States
312-377-9238 (Phone)
HOME PAGE: http://www.crai.com
Northwestern University ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
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