Distribution, Competition, and Antitrust / IP Law

Potential Patent Licensing “No-No” #9: Minimum Resale Price Provisions for the Licensed Products

Yes or No?

This post is the last in the series of nine posts concerning potential patent licensing “no-nos.” The previous post can be found here.

Today, generally speaking, restrictions on a licensee’s resale prices are not per se illegal as a matter of federal law.  Recent non-patent cases have breathed new life into old doctrine in this area.

In the early 20th century, the Supreme Court held that an IP owner could condition an IP license on the licensee’s agreement to sell licensed product at a specified price. See United States v. General Electric Co., 272 U.S. 476 (1926).  “We think [the patentee] may [limit the sales price], provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.”  Id. at 490.

The exclusive right of a patentee, the Court wrote, “is to acquire profit by the price at which the article is sold.” Id. The Court concluded that this right extended to ensuring that licensees do not undercut the licensor and destroy its margins.

General Electric diverged from the basic rule announced in Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and reconciling the decisions was not entirely easy.  Arguably, General Electric may have been limited to the situation where a patent owner itself manufactures and sells the patented product and also licenses licensees to sell the product.

Since General Electric, courts have further limited its application. See, e.g., United States v. Line Material Co., 333 U.S. 287, 312 (1948); (multiple patentees may not enter a cross-licensing scheme that establishes the resale price of products to be manufactured under cross-licenses); Newburgh Moire Co. v. Supreme Moire Co., 237 F.2d 283, 293-94 (3d Cir. 1956) (“[T]he patent laws were not intended to empower a patentee to grant a plurality of licenses, each containing provisions fixing the price at which the licensee might sell the product or process to the company, and that, if a plurality of licenses are granted, such provisions therein are prohibited by the antitrust laws.”).

The 1995 DOJ/FTC Antitrust Guidelines for Intellectual Property went further and suggested that the agencies will enforce the per se rule against resale price maintenance (“RPM”) in the intellectual property context.  The agencies took the position that General Electric had been effectively overruled, and that fixing a licensee’s resale price was per se illegal.  In the agencies’ view, General Electric actually concerned the first sale of a licensed product, not the resale.  Cf., e.g.United States v. Univis Lens Co., 316 U.S. 241 (1942); Ethyl Gasoline Corp. v. United States, 309 U.S. 436 (1940) (suggesting IP RPM is in fact unlawful).

However, today, after State Oil Co. v. Khan, 522 U.S. 3 (1997), and Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), vertical agreements on price are no longer per se illegal under federal law. Although Khan and Leegin did not involve patents, there is little reason to think that the federal antitrust rule would be different for patented products.

There is an important caveat: as discussed repeatedly on this blog, state law can and does differ. Some states continue to treat RPM (or at least minimum RPM) as per se illegal. Thus, some continued caution is necessary.

* * *

That’s the end of the nine no-nos series.  As we’ve seen, in very many cases, what used to be a clear “no-no” is now no longer so, and is often permissible.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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