Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Potential Patent Licensing “No-No” #3: Restricting the Right of the Purchaser of the Product in the Resale of the Product

Yes or No?

This post continues a series of posts on nine potential “no-nos” of patent licensing. The last post in the series can be found here. (The nine “no-nos” were articulated some forty years ago, and as we’ve already seen, the law has changed between that time and today in certain important respects.  Some “no-nos” are no longer problematic — at least not always.)

Consider the following: you own a patent, and sell or license patented products. Can you impose restrictions on the resale of the products, and if so, are there any limitations on the types of restrictions you can impose? These are the issues addressed — primarily through the prism of patent misuse doctrine — below. This article is a bit longer than usual, so bear with me, or you can read the first few paragraphs and skip to the end for the punch line.

To preview: the treatment of a non-price, non-tying restriction probably depends upon whether it is (i) a license restriction (or a conditional sale) (and thus probably permissible) or (ii) a post-sale restriction the patentee attempts to impose in connection with an unconditional sale.  Note, though, that the law in this area can be complex, and the following is one attempt to make coherent sense of it.

Patent Exhaustion / First Sale Doctrine

Early case law focused on the distinction between restrictions on licensees of the right to make and/or sell patented articles (permissible) and restrictions on end users who use articles in the ordinary pursuits of life (not permissible).  See Adams v. Burke, 84 U.S. 453 (1873).

It is not clear that the manufactuer/end user distinction makes sense.  Under more recent case law, as a general matter, an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s use of the device thereafter. See B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1426 (Fed. Cir. 1997). The theory behind this rule is that in such a transaction, the patentee has bargained for, and received, an amount equal to the full value of the goods. See id. (citing cases). This exhaustion doctrine, however, does not apply to an expressly conditional sale or license. In such a transaction, it is more reasonable to infer that the parties negotiated a price that reflects only the value of the “use” rights conferred by the patentee. As a result, express conditions accompanying the sale or license of a patented product are generally upheld. See id. These contractual conditions are subject to antitrust, patent, and other applicable law, as well as equitable considerations such as patent misuse. See id.

In Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 704 (Fed. Cir. 1992), the Federal Circuit outlined the framework for evaluating whether an express condition on the post-sale use of a patented product constitutes patent misuse. Mallinckrodt manufactured a patented apparatus for the delivery of radioactive or therapeutic material in aerosol mist form to the lungs of a patient, for diagnosis and treatment of pulmonary disease. Mallinckrodt provided the apparatus with a package insert that stated: “For Single Patient Use Only.” Medipart received used apparatuses from hospitals, cleaned and reconditioned them, and returned them to the hospitals from whence they came. Mallinckrodt sued Medipart for patent infringement and inducement to infringe.

In reversing a grant of summary judgment to Medipart, the Federal Circuit held that, except as to per se violations such as price-fixing or tying, restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all or part of the patent grant. See id. at 706. “The appropriate criterion is whether Mallinckrodt’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.” Id. at 708. The Federal Circuit concluded that the district court erred in holding that the restriction on reuse was, as a matter of law, unenforceable under patent law. If the sale of the apparatus was validly conditioned “under the applicable law such as the law governing sales and licenses,” and if the restriction on reuse was within the scope of the patent grant “or otherwise justified,” then violation of the restriction may be remedied by action for patent infringement. See id. at 709.  Field of use restrictions are generally upheld. See B. Braun Medical, 124 F.3d at 1426.  A restriction on how and where a product can be resold can be thought of as a field of use restriction.

Impact of Quanta Computer

Some authorities believe that in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), the Supreme Court overruled Mallinckrodt sub silentio. See, e.g., Herbert Hovenkamp, Innovation and the Domain of Competition Policy, 60 ALA. L. REV. 103, 11 n.35 (2008); Static Control Components, Inc. v. Lexmark Int’l, Inc., 615 F. Supp. 2d 575, 585 (E.D. Ky. 2009).

In Quanta Computer, LG owned certain patents, and licensed the technology to Intel for use in microprocessors and chipsets, subject to a stipulation that no license was granted to any third-party chip purchasers using the Intel products in combination with non-Intel components. Quanta built computers that employed Intel chips with non-Intel components, and LG sued for patent infringement. The Supreme Court held that the first-sale doctrine barred the suit. LG argued that there was no authorized sale because the license agreement did not permit Intel to sell its products for use in combination with non-Intel products to practice the LG patents. In rejecting this argument, the Court noted that nothing in the license agreement actually restricted Intel’s rights to sell products to purchasers who intended to combine them with non-Intel parts. See id. at 636. “Because Intel was authorized to sell its products to Quanta, the doctrine of patent exhaustion prevents LGE from further asserting its patent rights with respect to the patents substantially embodied by those products.” Id. at 637.  In other words, the LG-Intel agreement did not impose conditions on the sale of patented products, but attempted to impose conditions on the use of those products after an authorized sale.

Even if Quanta Computer did effectively overrule Mallinckrodt, it did so on the basis of the first-sale doctrine. Nothing in Quanta Computer suggests that Mallinckrodt’s field-of-use analysis of license restrictions, effective prior to or at the time of sale, is no longer valid.  This interpretation is consistent with Lexmark.

In Lexmark, Lexmark produced printers and toner cartridges. It allowed consumers to buy printer cartridges free of any restrictions. It also offered “prebate” cartridges at a discount, in exchange for consumers’ agreement to use the cartridges only once and return the empty cartridges to Lexmark. Lexmark sued Static Control for patent infringement because it sold to certain re-manufacturers parts and supplies for reworking used toner cartridges. According to the Lexmark court, Quanta Computer distinguished between conditions restricting the right to sell, like the condition in the license agreement between the patent holder and the manufacturer in General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175 (1938), on reh’g, 305 U.S. 124 (1938), which prohibited the manufacturer from making its initial sales of patented amplifiers to commercial users, and post-sale conditions on use. See Lexmark, 615 F. Supp. 2d at 584-85. Sales of Lexmark prebate cartridges were unconditional. Anyone could walk into a store and purchase a prebate cartridge, or purchase one from the Lexmark website. See id. at 585. Thus, Lexmark’s sales were authorized and unconditional, just like the sales of LG’s patented products in Quanta Computer. See Lexmark, 615 F. Supp. 2d at 585. As such, the sales exhausted Lexmark’s patent rights. See id.

Compare Monsanto Co. v. Scruggs, 459 F.3d 1328 (Fed. Cir. 2006), later proceeding, 2009 WL 536833 (N.D. Miss. Mar. 3, 2009), leave to appeal denied, 345 F. App’x 552 (Fed. Cir. 2009). Monsanto developed patented herbicide-resistant soybeans and cotton. It licensed its biotechnology to seed companies, and imposed licensing restrictions. (For example, seed companies were prohibited from selling seeds to growers who had not signed a Monsanto license agreement. Additionally, seed sold to licensed growers could only be used to grow a single commercial crop. See 459 F.3d at 1333.) Scruggs purchased seeds from seed companies without signing a license agreement, planted them, retained the new generation of seeds and used them to plant subsequent generations of crops. See id. Monsanto won summary judgment for patent infringement. Monsanto’s “no replant policy simply prevents purchasers of the seeds from using the patented biotechnology when that biotechnology makes a copy of itself. This restriction is therefore a valid exercise of its rights under the patent laws.” Id. at 1340. The district court rejected a motion to reconsider predicated upon Quanta Computer. See 2009 WL 536833. Scruggs’ purchases were unauthorized. See id. at *1.

Conclusion

In short, this is one way to square the case law: pre-sale or license conditional restrictions on the use or resale of patented products are generally enforceable — at least if they are supported by contract and licensing law.  When such restrictions are within the scope of the patent grant, they do not usually pose a patent misuse or a Sherman Act concern.  [Note, though, that licensing restrictions that impose a tie requiring the purchase of non-patented products (a practice covered in an earlier post in this series) or that require or impose resale price maintenance (to be discussed in an upcoming post) may be problematic.]  However, per Quanta Computer, unconditional sales accompanied by purported post-sale restraints might constitute misuse (or at least may result in the restraints being unenforceable).

Given the complexities in this area (e.g., is there a true license involved? or is it an unconditional sale?), some forethought is required before implementing any resale restriction.

Related posts:

Trackbacks

  1. [...] This post continues the series of posts regarding patent licensing and competition issues. The post prior to this one can be found here. [...]

  2. [...] exhaustion / first sale lets him use replanted beans.  I covered the exhaustion issue recently here.  Monsanto, of course, is arguing that its patent extends to each new generation of [...]

  3. [...] I blogged about patents, the first-sale doctrine, and self-replicating technologies (genetically-modified plants) here. [...]

  4. [...] P.S. I covered an earlier, related Lexmark decision on patent exhaustion here. [...]

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