This post is the eighth in a series concerning potential patent licensing “no-nos.” The previous post can be found here.
Here, we’re concerned with what are vertical restraints: for example, requirements that a licensee sell only to certain customers, or in certain territories. Such restraints are often pro-competitive. See DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property § 2.3 and Example 1.
See also In re Yarn Processing Patent Validity Litig., 541 F.2d 1127, 1135 (5th Cir. 1976) (“But in this case, if the patents are assumed to be valid, then the restrictions on sale were within the scope of the patent grant because they were applied to a manufacturing licensee . . . and because they did no more than to prevent contributory infringement by resale to unlicensed users.”).
However, because of the first sale doctrine (which I’ve covered in prior posts in this series – see here), patent rights are exhausted after the first true sale (not license) of a product. Thus, a territorial restriction on a customer of a licensed manufacturer would not be enforceable under the Patent Act. Nevertheless, it might be enforceable as an ordinary vertical restraint under traditional antitrust law. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977).
We’re down to one more post in this series: minimum resale price provisions for licensed products. I’ll publish that post by next week.