Exhaustion is a typical figure of IP and competition law (and, in the EU, of free movement law as well). The principle is relatively straightforward: after a certain point, restrictions on use or sale of a product cannot be enforced by someone who would otherwise have the right to enforce such restrictions. Exhaustion is often also called the first sale doctrine, as the right to object to the use or sale of a product usually ends after the product is sold for the first time. For example, when someone grants a patent license to another person, the exhaustion rule says that the patentee may not by impose conditions on the patented product’s subsequent use or sale, nor enforce these conditions through a patent infringement suit.

This paper – which can be found here –  provides an analysis of a recent US Supreme Court’s decision: Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. 1523 (2017). 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 Supreme Court held that once a patented product is sold, conditions imposed on that particular product cannot be enforced via patent infringement suits – although Lexmark could enforce restrictions on use or resale of its contracts with direct purchasers under regular contract law. In applying the patent exhaustion doctrine, no inquiry needs to be made into the patentee’s market power, anticompetitive effects, or other types of harms; into whether the enforcement of the licensing condition is socially costly or valuable; or about whether the licensing condition has a positive or negative impact on innovation. In short, this ruling sets out a per se rule regarding the exhaustion of patent rights.

The paper reviews the patent exhaustion doctrine in the US. It also maps the impact of this decision for antitrust, and particularly for Standard Essential Patents and patent misuse (which is historically the basis of US antitrust enforcement in IP-related matters). Hovenkamp’s goal is to criticise the Impression Products decision on the grounds that it  is not economically sensible. Instead, IP should learn from antitrust: the per se exhaustion rule is a poor fit for an economy in which restricted distribution has become the norm, at least for branded, manufactured goods. In his own words: ‘The Impression Products patent exhaustion rule is a blunt instrument in relation to the justifications offered for it. In its favor, a rule of per-se-exhaustion-upon-sale is simply stated and perhaps easily understood. Because it is so categorical, however, it fails to distinguish harmful from beneficial uses of post-sale restraints. The antitrust law of restricted distribution began in a similar place, adopting categorical per se rules that eventually gave way to more nuanced treatment under the rule of reason as our understanding of the economics of restricted distribution changed. Even a quick examination of the types of restraints imposed in exhaustion cases indicates that they are used for many different purposes and with different effects. Current exhaustion doctrine is wrong to make these differences irrelevant’. However, ‘The best way to address these problems is not through antitrust law but rather by development of a federal common law of post-sale patent restraints that is more nuanced than is reflected in existing Supreme Court doctrine, but that reaches further than antitrust.

Comment:

This is a very legal, American-centred piece. Other than US lawyers, it could of interest to those with an interest in the interaction between antitrust and IP, and in particular on the relevance of the first sale doctrine and sale restrictions for competition law.

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