Distribution, Competition, and Antitrust / IP Law

Patent Law Can Stop Product Resale/Reuse

English: Sleepy Head

A different type of exhaustion. (Photo credit: Wikipedia)

Most people know that inkjet printers are pretty cheap; the real money is in the ink cartridges.  Not surprisingly, printer/cartridge manufacturers often want to stop the resale of used ink cartridges (which can be refilled by third-party ink companies).  In the past, some manufacturers have relied on patent law (many cartridges are patented) to do so.  Their position has raised two questions: can patent law support resale/reuse restrictions in the U.S., and do foreign sales allow the buyer to import the product and sell it in the United States without infringing on the patent(s)?

I previously covered this issue here.  The en banc Federal Circuit recently took up the issue in Lexmark Int’l, Inc. v. Impression Products, Inc., No. 2014-1617, ___ F.3d ____ (Fed. Cir. Feb. 12, 2016) (en banc).   The ABA’s Journal has a good summary of the case and issues (written just before the en banc decision).

In short(*), the Federal Circuit held a seller can use its patent rights to block both resale and reuse of a product.  According to the majority:

First, we adhere to the holding of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that a patentee, when selling a patented article subject to a
single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied. Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized and therefore remains infringing conduct under the terms of § 271. Under Supreme Court precedent, a patentee may preserve its § 271 rights through such restrictions when licensing others to make and sell patented articles; Mallinckrodt held that there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself. We find Mallinckrodt’s principle to remain sound after the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), in which the Court did not have before it or address a patentee sale at all, let alone one made subject to a restriction, but a sale made by a separate manufacturer under a patentee-granted license conferring unrestricted authority to sell.

While a “naked” sale means that the product is free and clear of restrictions, a patentee can restrict reuse or resale by imposing express license restrictions on the first sale.

The Court also held that authorized sales of a product abroad does not exhaust the U.S. patent rights associated with that product.

Second, we adhere to the holding of Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority. Jazz Photo’s no-exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee’s sale presumptively exhausts its rights in the article sold. A buyer may still rely on a foreign sale as a defense to infringement, but only by establishing an express or implied license—a defense separate from exhaustion, as Quanta holds—based on patentee communications or other circumstances of the sale. We conclude that Jazz Photo’s no-exhaustion principle remains sound after the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing domestic acts. Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts “without the authority” of the copyright holder. There is no counterpart to that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee’s rights in the United States.

The non-exhaustion rule effectively allows patentees to price discriminate, i.e., to charge lower prices abroad and higher prices in the U.S.  Some have argued that the position now adopted by the Federal Circuit helps consumers in low-income countries, perhaps at the expense of U.S. consumers.

Given the stakes here — as noted in the ABA Journal article — a Supreme Court petition for certiorari is almost certain, and the chances of it being granted may be reasonably high.

(*) The Federal Circuit’s decision is over 90 pages long.  So an “in short” discussion is good, but obviously omits some of the details.

 

SCOTUS Reaffirms that in Antitrust Cases, It Gives Less Deference to Precedent

Spiderman-exclusive-rooftop

(Photo credit: Wikipedia)

Yesterday, in Kimble v. Marvel Entertainment, LLC, the U.S. Supreme Court upheld the rule first announced in Brulotte v. Thys Co., 379 U.S. 29 (1964), that a patentee cannot collect royalties on sales made after expiration of the patent.

The patent law decision upholds a probably anticompetitive rule that from an economic perspective makes little sense. That said, the decision is not particularly surprising, resting as it does on stare decisis (settled law) grounds – though it is amusingly chock-full of references to Spiderman (Marvel Entertainment had licensed a Spiderman product from the plaintiff-patentee, who had a patent on a toy that lets children shoot “webs” from a device held in the palm of the hand). Somewhat disappointingly, the decision does not expressly address an important issue – whether, when a patent portfolio is licensed, license fees must decrease as patents expire.

Perhaps the most important portion of the decision is the following discussion of stare decisis and antitrust law:

If Brulotte were an antitrust rather than a patent case, we might [address the issues] as Kimble would like. This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. See, e.g., Khan, 522 U. S., at 20–21. Congress, we have explained, intended that law’s reference to “restraint of trade” to have “changing content,” and authorized courts to oversee the term’s “dynamic potential.” Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988). We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. See Leegin, 551 U. S., at 899–900. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. See Business Electronics Corp., 485 U. S., at 731. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them “on [their] own terms.” Halliburton, 573 U. S., at ___ (slip op., at 9).

This is a strong reaffirmation of the Court’s ability to reshape antitrust law according to economic principles and new economic understandings – despite the traditional rule of stare decisis. In other words, for stare decisis principles, some animals really are more equal than others.

Update (06/26/15): I was quoted in Law360 about this (may be behind a paywall).

Is Antitrust Relevant for Startups, Emerging, and Non-Dominant Firms?

The answer is (surprise!) “yes.”

There are a number of ways in which antitrust law is relevant to emerging and non-dominant companies. Those firms may:

  • Need to deal with the dominant firms in their markets, including by (i) responding to threats or actions by dominant firms to foreclose access to products, services or markets, or (ii) negotiating to acquire or maintain access to needed IP;
  • Need access to standard-essential patents (“SEPs”) and to understand their rights to and under FRAND licenses;
  • Want to exploit and license their own IP and put restrictions on its use without triggering antitrust issues;
  • Want to collaborate with other firms – including (dominant) competitors – in producing products or delivering services (i.e., entering into joint ventures);
  • Want to merge with, acquire, or be acquired by another firm, including a dominant one;
  • Want to impose vertical price or non-price restraints, or offer different customers, dealers or distributors different prices; or
  • Need to respond to a government merger or conduct investigation as a third party.

All of the above issues (and more) require the consideration of antitrust law. This is not to say that, for example, every complaint by an emerging firm against a dominant firm is the nucleus of a valid antitrust claim. There are many considerations – including whether there is harm to competition, whether a party has antitrust standing, and the like – and often there is no claim, just the rough-and-tumble of normal business competition. But it’s always helpful to understand the legal landscape, and to consider whether Congress and the courts have struck the appropriate balance between robust competition and truly exclusionary conduct. And on the defensive end, it’s always a good idea to understand how far you can push restraints.

UC Hastings — Antitrust and IP

I’m pleased to have spoken today to a group of law students at the University of California, Hastings College of the Law on the intersection of antitrust and IP law.  It was nice to see an almost-full lecture hall — lots of interest in the topic.

Hot Topics in Intellectual Property and Antitrust Law

I’ve posted my slides from my webinar presentation on hot topics in IP and antitrust law.  You can find them here.

Strategic Refusals to License IP — Slide Deck

I’ve uploaded my slide deck from the Advanced Antitrust U.S. conference (Feb. 6, 2014) on strategic refusals to license IP.  You can find a copy here.

Speaking on Antitrust Issues in Intellectual Property Licensing Transactions

FYI, I will be speaking on “Antitrust Issues in Intellectual Property Licensing Transactions” on November 6, 2013 at 1:00 P.M. Eastern Time.  Here is a link to the webinar program.  I will be covering the Nine “No-Nos” of antitrust/intellectual property licensing, which I’ve written about previously in this blog.

Why FTC v. Actavis Won’t Shift the Border Between IP and Antitrust Law

Actavis

Actavis (Photo credit: Wikipedia)

The Supreme Court’s recent decision in Federal Trade Commission v. Actavis, Inc., No. 12-416, ___ U.S. ___ (2013), has generated a lot of commentary recently. Some articles have suggested that the decision may expose certain intellectual property (IP) licensing decisions to antitrust scrutiny that prior to Actavis would have been immune from antitrust attack.  “Under Actavis, the question needs to be asked now whether a field of use restriction ‘within the scope of the patent’ raises significant antitrust concerns in particular circumstances.” See here.

But I think that it is unlikely that Actavis will be expanded beyond its peculiar confines to upset the traditional rule that patent licensing agreements that limit the field of use raise no antitrust issues.

In Actavis, the manufacturer of a brand name prescription drug brought a patent infringement suit against a generic drug manufacturer that intended to market an allegedly infringing version of the branded drug prior to the patent’s expiration. In the specific context of the Hatch-Waxman Act, the Court considered whether the Sherman Act ever could be violated by a payment by the brand name manufacturer (the patentee) to the generic manufacturer (the alleged infringer) as part of a settlement in which the generic manufacturer would agree not to market the generic versions of the drug for some period of time within the patent term.

The Court recognized that these unusual reverse payments are “quite different” from typical settlement agreements in that “a party with no claim for damages . . . walks away with money so it will stay away from the patentee’s market.” Slip Op. at 13. Accordingly, the Court concluded that such payments could, under certain limited circumstances, violate the antitrust Rule of Reason. In Actavis, the patent litigation “put the patent’s validity at issue, as well as its actual preclusive scope.” Slip. Op. at 8. Given this and other factors, “it would be incongruous to determine antitrust legality by measuring the settlement’s anticompetitive effects solely against patent law policy . . . .” Id. at 8-9.

Outside the peculiar context of the Hatch-Waxman Act, litigation over patent validity, and settlement agreements featuring reverse payments to stay away from a patentee’s market, there is simply no reason to question whether a licensing restriction within the scope of the patent grant could be an anticompetitive action under the antitrust laws.

What do you think?

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Patent Exhaustion Doctrine Does Not Protect Farmers Who Replant Patented Seeds

In a brief, unanimous opinion written by Justice Kagan, the Supreme Court yesterday agreed with Monsanto that the patent exhaustion doctrine does not enable farmers to replant and reproduce patented seeds without the patentee’s permission. The Court emphasized the well-established rule that the doctrine restricts a patentee’s rights only as to the particular articles sold, and leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.

The Court did expressly note that its holding was limited – addressing the situation before it, rather than every one involving a self-replicating product. “In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be an incidental step in using the item for another purpose . . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”

I covered the patent exhaustion doctrine previously – see, for example, here, here, and here.

The decision likely has implications in other industries. For example, BSA/The Software Alliance filed a brief arguing that a contrary decision might “facilitate software piracy on a broad scale” because software can be easily duplicated. However, it also noted that a decision that went too in favor of protecting patent rights might unduly encourage nuisance software patent infringement suits.

The opinion, styled Bowman v. Monsanto Co., No. 11-796 (May 13, 2013), is available here.

Should Antitrust Regulate Trolls?

Look at them, troll mother said. Look at my so...

(Photo credit: Wikipedia)

Professor Michael Carrier has written a recent op-ed over at arstechnica suggesting that the answer is “yes.”  Highlights:

“To start, [the antitrust agencies] can challenge concerning aggregations of patents . . . . [M]assive patent portfolios can be used offensively and can be valuable because of their size rather than the validity of each patent. These portfolios can have anticompetitive effects, including holdup, raised rivals’ costs, increased price, and reduced innovation.”

“The agencies could also promote transparency. Much troll activity today is hidden beneath a labyrinth of shell companies . . . .  Given this, how could potential targets engage in licensing negotiations or evaluate patent portfolios? The agencies must be able to shine sunlight on this subterranean network, obtaining complete information from patent acquisitions, among other conduct, to determine competitive effects.”

“It seems particularly slippery for trolls to avoid promises made by their predecessors. The agencies could prohibit transfers to trolls that refuse to adhere to promises to keep licensing costs reasonable.”

The article discusses other ideas as well, and also suggests that Section 5 of the FTC Act could be used where “certain trolls have market power in technology (licensing) markets, do not offer non-trivial efficiencies, and cause competitive harm that results in higher prices or reduced innovation for consumers.”

(Note: some people prefer the term “patent assertion entities,” or PAEs, over the term “trolls.”)

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