A post-sale restraint, also termed a post-sale restriction, as those terms are used in United States patent law and antitrust law, is a limitation that operates after a sale of goods to a purchaser has occurred and purports to restrain, restrict, or limit the scope of the buyer's freedom to utilize, resell, or otherwise dispose of or take action regarding the sold goods. [1] Such restraints have also been termed "equitable servitudes on chattels". [2]
Support for the rule against enforcement of post-sale restraints has at times been rested on the common law's hostility to restraints on the alienation of chattels. "The right of alienation is one of the essential incidents of a right of general property in movables, and restraints upon alienation have been generally regarded as obnoxious to public policy, which is best subserved by great freedom of traffic in such things as pass from hand to hand. General restraint in the alienation of articles, things, chattels, except when a very special kind of property is involved, ... have been generally held void." [3]
Perhaps the earliest US discussion of post-sales restraints occurs in Adams v. Burke , [4] in which the US Supreme Court refused to find patent infringement when an undertaker — who purchased a patented coffin lid, and transported it outside the territory in which the manufacturer was licensed (the ten-mile radius surrounding Boston) — used the product to bury a client. The Court stated:
But in the essential nature of things, when the patentee, or the person having his rights, sells a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use. The article, in the language of the Court, passes without the limit of the monopoly. That is to say the patentee or his assignee having in the act of sale received all the royalty or consideration which he claims for the use of his invention in that particular machine or instrument, it is open to the use of the purchaser without further restriction on account of the monopoly of the patentees. [5]
On the basis of this doctrine, in Motion Picture Patents Co. v. Universal Film Mfg. Co. , [6] the Supreme Court refused to enforce by way of a patent infringement suit against a downstream purchaser an agreement requiring that a patented film projector be used only with films licensed by the Motion Picture Patents Co., that the same agreement be imposed on downstream purchasers, and that the machine be sold with a plate affixed to it stating the same requirement.
Contemporaneously, in Straus v. Victor Talking Machine Co., [7] the Court refused to enforce a post-sale price-fixing restraint imposed on phonograph machines by means of an affixed "License Notice". The defendants, the proprietors of Macy's department store in New York, disregarded the notice and proceeded to cut prices. The patentee sought an injunction under the patent laws to compel obedience to the notice and, also, damages. The Court held that the case fell within the principle of Adams v. Burke and denied any relief. In so holding, the Court explained:
Courts would be perversely blind if they failed to look through such an attempt as this "License Notice" thus plainly is to sell property for a full price, and yet to place restraints upon its further alienation, such as have been hateful to the law from Lord Coke's day to ours, because obnoxious to the public interest. [8]
In 1926, in United States v. General Electric Co. , [9] the Supreme Court tried to make a bright-line distinction between post-sale restraints on patented goods, which the exhaustion doctrine did not allow, and limitations that a patentee imposed on the freedom of a manufacturing-licensee to sell goods manufactured under a limited license of a patent, which were permissible if "normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly". It was well settled that, under the exhaustion doctrine, "where a patentee makes the patented article and sells it, he can exercise no future control over what the purchaser may wish to do with the article after his purchase. It has passed beyond the scope of the patentee's rights." [10] But when a licensee is licensed only to make and sell goods in a particular field or through a particular channel of distribution, the patented goods so made are ordinarily subject to the limitations of the license, even when in the hands of a downstream purchaser. Accordingly, the Court upheld the legitimacy of price-fixing restrictions that GE imposed in its license to Westinghouse to manufacture light bulbs under GE's patents.
In General Talking Pictures Corp. v. Western Electric Co., [11] the Supreme Court reaffirmed and expanded on the distinction made in the 1926 GE case between post-sale restraints and licenses containing a limitation on what the licensee was permitted to do. The Court upheld as legitimate so-called field-of-use limitations on the scope of patent licenses to make and sell amplifiers only in the "non-commercial" field against a licensee and its customer that made amplifiers and sold them into the commercial field.
The bright-line distinction made in the 1926 GE case and in the General Talking Pictures case was blurred to some extent in the Supreme Court's 1940 decision in Ethyl Gasoline Corp. v. United States . [12] In that case, Ethyl Gasoline Corporation had established an elaborate licensing program under its several patents on the fuel additive tetra-ethyl lead, a motor fuel containing tetra-ethyl lead, and a method of operating an automobile engine with fuel containing tetra-ethyl lead. Ethyl sold the fuel additive, and licensed purchasers to use it to practice the other patents. The licensing program fixed prices for the motor fuel and strictly limited the types of customer to which given licensees could sell the motor fuel. Ethyl emphasized to the Supreme Court the fact that while it sold the fuel subject to a post-sale restraint it licensed the other patents, which covered the manufacture of the fuel (by adding tetra-ethyl lead to ordinary gasoline) and the use of the fuel in automobile engines. The Supreme Court refused to make any distinctions among the different patents and struck the whole program down for improperly "regimenting" the industry.
In United States v. Univis Lens Co. , [13] the patentee Univis sold unpatented lens blanks (partly finished blocks of glass comprising fused pieces of glass "of different refractive power") to "finishers", who further ground and polished them to manufacture patented lenses from them. The Supreme Court assumed that the patent was not "fully practiced"—i.e., infringed—"until the finishing licensee has ground and polished the blank". The finishing license was therefore a manufacturing license, and according to Univis, was within the protected dispensation of the General Talking Pictures case. [14] But the Supreme Court held that even though the lens blanks were unpatented their sale by the patentee triggered exhaustion of the patent. The Court considered that the blanks "embodie[d] essential features of the patented device", they were not used for anything else, and that was sufficient to trigger the exhaustion doctrine. [15] Since Univis's patent rights were exhausted by the sale of the lens blanks, the post-sale price and other restrictions that Univis imposed on the finishers were held illegal and in violation of the antitrust laws.
In 1967, in United States v. Arnold, Schwinn & Co. , [17]
In 1977, in Continental T.V., Inc. v. GTE Sylvania Inc. , [18] the Supreme Court overruled the Schwinn case's rule that post-sale restraints on mass-marketed goods were illegal per se under the antitrust laws. "Prompted by a decline in its market share to a relatively insignificant 1% to 2% of national television sales", Sylvania adopted a franchise distribution system. "Sylvania limited the number of franchises granted for any given area and required each franchisee to sell his Sylvania products only from the location or locations at which he was franchised." [19] The Court found the case not distinguishable from Schwinn on any "principled basis". [20] Nonetheless, it found overruling Schwinn preferable to following stare decisis . Pointing to the use of a "rule of reason" antitrust analysis for restrictive non-sale transactions, the Court explained, "We conclude that the distinction drawn in Schwinn between sale and nonsale transactions is not sufficient to justify the application of a per se rule in one situation and a rule of reason in the other." [21] Seeing no demonstrable economic harm from Sylvania's conduct, the Court said that no antitrust violation should be found. [22] In a footnote, the Court rejected the reliance in Schwinn on "the ancient rule against restraints on alienation". [23] The opinion did not address post-sale restraints in patent cases.
In 1992, in Mallinckrodt, Inc. v. Medipart, Inc. , [24] the Federal Circuit held that post-sale restrictions (such as those in notices affixed to the patented product), other than ones fixing prices or imposing tie-ins, were to be governed by the rule stated in the 1926 GE case for manufacturing licenses, which is the same as the rule in the General Talking Pictures case. "The appropriate criterion" for determining the limits of a seller's freedom to impose restrictions, according to the Federal Circuit, "is whether [the patentee's or licensor's] restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason". In so ruling, the Federal Circuit said that any sweeping statements by the Supreme Court about property rights, and about post-sale restrictions on customers' use of patented products not being patent infringement, are mere obiter dicta that may properly be disregarded in cases not involving price-fixes or tie-ins.
In 2008, in Quanta Computer, Inc. v. LG Electronics, Inc. , [25] the Supreme Court held that the sale of patented microprocessors exhausted the patent monopoly on the microprocessors and also as to patents covering the combination of the patented microprocessors with other electronic components, where (as in Univis) the essential features of the invention were all contained in the microprocessors, i.e., the sold article embodies the essential features of the patented invention. In this case, Quanta's primary patents were on microprocessors, but it also had patents on products combining the patented microprocessors and other apparently conventional devices, such as PCs.) In so ruling, the Court reversed the judgment of the Federal Circuit holding that the licenses were effective under the Mallinckrodt doctrine.
In 2013, in Kirtsaeng v. John Wiley & Sons, Inc. , [26] the Supreme Court held that post-sale restraints imposed abroad by a company related to the US publisher could not be enforced by a US copyright infringement action that the publisher brought. In so ruling, the Court relied in substantial part on the "impeccable historic pedigree" of "the common law's refusal to permit restraints on the alienation of chattels". It also said that the "doctrine also frees courts from the administrative burden of trying to enforce restrictions upon difficult-to-trace, readily movable goods."
Bauer & Cie. v. O'Donnell, 229 U.S. 1 (1913), was a 1913 United States Supreme Court decision involving whether a purchaser of a patented product bearing a price-fixing notice incurs guilt of patent infringement by reselling the product at a price lower than that which the notice commands. A divided Court (5–4) held that it was not.
In United States patent law, patent misuse is a patent holder's use of a patent to restrain trade beyond enforcing the exclusive rights that a lawfully obtained patent provides. If a court finds that a patent holder committed patent misuse, the court may rule that the patent holder has lost the right to enforce the patent. Patent misuse that restrains economic competition substantially can also violate United States antitrust law.
The exhaustion doctrine, also referred to as the first sale doctrine, is a U.S. common law patent doctrine that limits the extent to which patent holders can control an individual article of a patented product after a so-called authorized sale. Under the doctrine, once an authorized sale of a patented article occurs, the patent holder's exclusive rights to control the use and sale of that article are said to be "exhausted," and the purchaser is free to use or resell that article without further restraint from patent law. However, under the repair and reconstruction doctrine, the patent owner retains the right to exclude purchasers of the articles from making the patented invention anew, unless it is specifically authorized by the patentee to do so.
General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175 (1938), was a case that the Supreme Court of the United States decided in 1938. The decision upheld so-called field-of-use limitations in patent licenses: it held that the limitations were enforceable in a patent infringement suit in federal court against the licensee and those acting in concert with it—for example, a customer that knowingly buys a patented product from the licensee that is outside the scope of the license.
Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, is a decision of the United States Court of Appeals for the Federal Circuit, in which the court appeared to overrule or drastically limit many years of U.S. Supreme Court precedent affirming the patent exhaustion doctrine, for example in Bauer & Cie. v. O'Donnell.
Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), is a case decided by the United States Supreme Court in which the Court reaffirmed the validity of the patent exhaustion doctrine. The decision made uncertain the continuing precedential value of a line of decisions in the Federal Circuit that had sought to limit Supreme Court exhaustion doctrine decisions to their facts and to require a so-called "rule of reason" analysis of all post-sale restrictions other than tie-ins and price fixes. In the course of restating the patent exhaustion doctrine, the Court held that it is triggered by, among other things, an authorized sale of a component when the only reasonable and intended use of the component is to engage the patent and the component substantially embodies the patented invention by embodying its essential features. The Court also overturned, in passing, that the exhaustion doctrine was limited to product claims and did not apply to method claims.
United States v. Univis Lens Co., 316 U.S. 241 (1942), is a decision of the United States Supreme Court explaining the exhaustion doctrine and applying it to find an antitrust violation because Univis's ownership of patents did not exclude its restrictive practices from the antitrust laws. The Univis case stands for the proposition that when an article sold by a patent holder or one whom it has authorized to sell it embodies the essential features of a patented invention, the effect of the sale is to terminate any right of the patent holder under patent law to control the purchaser's further disposition or use of the article itself and of articles into which it is incorporated as a component or precursor.
United States v. General Electric Co., 272 U.S. 476 (1926), is a decision of the United States Supreme Court holding that a patentee who has granted a single license to a competitor to manufacture the patented product may lawfully fix the price at which the licensee may sell the product.
Adams v. Burke, 84 U.S. 453 (1873), was a United States Supreme Court case in which the Court first elaborated on the exhaustion doctrine. According to that doctrine, a so-called authorized sale of a patented product liberates the product from the patent monopoly. The product becomes the complete property of the purchaser and "passes without the monopoly." The property owner is then free to use or dispose of it as it may choose, free of any control by the patentee. Adams is a widely cited, leading case. A substantially identical doctrine applies in copyright law and is known as the "first sale doctrine".
Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917), is United States Supreme Court decision that is notable as an early example of the patent misuse doctrine. It held that, because a patent grant is limited to the invention described in the claims of the patent, the patent law does not empower the patent owner, by notices attached to the patented article, to extend the scope of the patent monopoly by restricting the use of the patented article to materials necessary for their operation but forming no part of the patented invention, or to place downstream restrictions on the articles making them subject to conditions as to use. The decision overruled The Button-Fastener Case, and Henry v. A.B. Dick Co., which had held such restrictive notices effective and enforceable.
Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940), was a decision of the United States Supreme Court that limited the doctrine of the Court's 1938 decision in General Talking Pictures Corp. v. Western Electric Co. Beginning with the 1926 decision in United States v. General Electric Co., the Supreme Court made a sharp distinction between (i) post-sale restraints that a patentee imposed on purchasers of a patented product and (ii) restrictions (limitations) that a patentee imposed on a licensee to manufacture a patented product: the former being illegal and unenforceable under the exhaustion doctrine while the latter were generally permissible under a lenient "rule of reason." Thus, under the General Talking Pictures doctrine, a patent holder may permissibly license others to manufacture and then sell patented products in only a specified field (market), such as only a particular type of product made under the patent or only a particular category of customer for the patented product. The Ethyl decision held, however, that a patent licensing and distribution program based on both the sale of a patented product and licenses to manufacture a related product was subject to ordinary testing under the antitrust laws, and accordingly was illegal when its effect was to "regiment" an entire industry.
Princo Corp. v. ITC, 616 F.3d 1318 was a 2010 decision of the United States Court of Appeals for the Federal Circuit, that sought to narrow the defense of patent misuse to claims for patent infringement. Princo held that a party asserting the defense of patent misuse, absent a case of so-called per se misuse, must prove both "leveraging" of the patent being enforced against it and a substantial anticompetitive effect outside the legitimate scope of that patent right. In so ruling, the court emphasized that the misuse alleged must involve the patent in suit, not another patent.
Henry v. A.B. Dick Co., 224 U.S. 1 (1912), was a 1912 decision of the United States Supreme Court that upheld patent licensing restrictions such as tie-ins on the basis of the so-called inherency doctrine—the theory that it was the inherent right of a patent owner, because he could lawfully refuse to license his patent at all, to exercise the "lesser" right to license it on any terms and conditions he chose. In 1917, the Supreme Court overruled the A.B. Dick case in Motion Picture Patents Co. v. Universal Film Mfg. Co.,
The Button-Fastener Case, Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., also known as the Peninsular Button-Fastener Case, was for a time a highly influential decision of the United States Court of Appeals for the Sixth Circuit. Many courts of appeals, and the United States Supreme Court in the A.B. Dick case adopted its "inherency doctrine"—"the argument that, since the patentee may withhold his patent altogether from public use, he must logically and necessarily be permitted to impose any conditions which he chooses upon any use which he may allow of it." In 1917, however, the Supreme Court expressly overruled the Button-Fastener Case and the A.B. Dick case, in the Motion Picture Patents case.
Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ___ (2017), is a decision of the Supreme Court of the United States on the exhaustion doctrine in patent law in which the Court held that after the sale of a patented item, the patent holder cannot sue for patent infringement relating to further use of that item, even when in violation of a contract with a customer or imported from outside the United States. The case concerned a patent infringement lawsuit brought by Lexmark against Impression Products, Inc., which bought used ink cartridges, refilled them, replaced a microchip on the cartridge to circumvent a digital rights management scheme, and then resold them. Lexmark argued that as they own several patents related to the ink cartridges, Impression Products was violating their patent rights. The U.S. Supreme Court, reversing a 2016 decision of the Federal Circuit, held that the exhaustion doctrine prevented Lexmark's patent infringement lawsuit, although Lexmark could enforce restrictions on use or resale of its contracts with direct purchasers under regular contract law. Besides printer and ink manufacturers, the decision of the case could affect the markets of high tech consumer goods and prescription drugs.
The Mercoid cases—Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661 (1944), and Mercoid Corp. v. Minneapolis-Honeywell Regulator Co., 320 U.S. 680 (1944)—are 1944 patent tie-in misuse and antitrust decisions of the United States Supreme Court. These companion cases are said to have reached the "high-water mark of the patent misuse doctrine." The Court substantially limited the contributory infringement doctrine by holding unlawful tie-ins of "non-staple" unpatented articles that were specially adapted only for use in practicing a patent, and the Court observed: "The result of this decision, together with those which have preceded it, is to limit substantially the doctrine of contributory infringement. What residuum may be left we need not stop to consider." The Court also suggested that an attempt to extend the reach of a patent beyond its claims could or would violate the antitrust laws: "The legality of any attempt to bring unpatented goods within the protection of the patent is measured by the antitrust laws, not by the patent law."
National Lockwasher Co. v. George K. Garrett Co., 137 F.2d 255, is one of the earliest or the earliest federal court decision to hold that it is patent misuse for a patentee to require licensees not to use a competitive technology. Such provisions are known as "tie-outs."
United States v. United States Gypsum Co. was a patent–antitrust case in which the United States Supreme Court decided, first, in 1948, that a patent licensing program that fixed prices of many licensees and regimented an entire industry violated the antitrust laws, and then, decided in 1950, after a remand, that appropriate relief in such cases did not extend so far as to permit licensees enjoying a compulsory, reasonable–royalty license to challenge the validity of the licensed patents. The Court also ruled, in obiter dicta, that the United States had standing to challenge the validity of patents when a patentee relied on the patents to justify its fixing prices. It held in this case, however, that the defendants violated the antitrust laws irrespective of whether the patents were valid, which made the validity issue irrelevant.
United States v. Line Material Co., 333 U.S. 287 (1948), is a decision of the United States Supreme Court limiting the doctrine of the 1926 General Electric decision, excusing price fixing in patent license agreements. The Line Material Court held that cross-licenses between two manufacturer competitors, providing for fixing the prices of the licensed products and providing that one of the manufacturers would license other manufacturers under the patents of each manufacturer, subject to similar price fixing, violated Sherman Act § 1. The Court further held that the licensees who, with knowledge of such arrangements, entered into the price-fixing licenses thereby became party to a hub-and-spoke conspiracy in violation of Sherman Act § 1.
Bulk-sale restrictions — also known as bulk-sale restraints, finished-form limitations and dosage-form limitations — are, as the term is used in United States antitrust case law, clauses in patent licenses that provide that the licensee shall make and sell the licensed product only in "finished pharmaceutical form" or "dosage form", not in bulk. Bulk form is the form in which drug chemicals are manufactured by chemical or other processes. These clauses are found primarily in pharmaceutical product licenses and are used to keep active drug ingredients out of the hands of generic manufacturers and price-cutters.
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