Origins of Patent Exhaustion: Jacksonian Politics, ‘Patent Farming,’ and the Basis of the Bargain

Abstract

Current conventional wisdom holds that patent exhaustion and copyright first sale—which allow you to buy a patented smartphone or a copyrighted book and use or resell it for any purpose—have longstanding common law bases first referenced in U.S. courts by Chief Justice Taney in the mid-nineteenth century: “when the machine passes to the hands of the purchaser, it is no longer within the limits of the [patent]. It passes outside of it.” The doctrines are at the heart of the modern technology-based economy and have been repeatedly in front of the Supreme Court: first sale in Kirtsaeng v. John Wiley & Sons, Inc.; and exhaustion now on appeal in Lexmark International, Inc. v. Impression Products, Inc. Without them, consumers would need to ensure they have all intellectual property permissions needed to use or resell purchased goods, much like the confusion around rights to digital content obtained through the internet. This Article, however, shows the conventional account to be mistaken. Taney’s statement was likely politically driven dicta in a case involving only patent licensees holding franchises to build and operate proprietary retail businesses. There were no sales of goods. But its compelling spatial metaphor was repeated in other opinions until taking on the veneer of longstanding law. Nonetheless it took twenty years for the Court to hold an implied use-only right upon sale of patented goods, and forty years to find a resale right. This Article unpacks the context of Taney’s bootstrapped quote and traces its incremental transformation to show that even when fully formed by 1900 it was simply a default presumption for unconditional sales in which full title in the good passed to the buyer with no right of reversion. Sales subject to express, mutually assented conditions allowed the patentee to pursue patent property-type remedies in appropriate situations, and not just contract remedies. The unifying principle was to enforce the basis of the bargain, especially to protect licensees and purchasers from patentee “gotcha” tactics. Accordingly, the Article advocates a flexible approach to exhaustion rather than a mandatory rule, while giving enhanced scrutiny to consumer transactions, to allow fair, innovative transactions at different price points in the new sharing, goods-as-services, and digital economies.

[A substantially revised version of this working paper, "The Damaging Myth of Patent Exhaustion," is posted to SSRN and forthcoming in Volume 28 of the Texas IP Law Journal.]

Keywords: Patents, Patent Exhaustion, Franchising, Assignments, Licenses, Manufacturing, Basis of the Bargain, Legal History, Roger Brooke Taney, Nathan Clifford, Value Chain Licensing, Conditional Sales, Lease-Licenses, Goods-As-Services