September 18, 2020

Why Patent Exhaustion Matters

In Tuesday’s post, I explained why I thought Quanta v. LG was a good decision as a matter of law. Today I’d like to talk about why it’s an important outcome from a policy perspective.

The function of the patent exhaustion doctrine is to ensure that the lanes of commerce do not become clogged with excessive legal restrictions. It has parallels in other areas of the law. Copyright has the first sale doctrine, which says that copyright holders’ rights in a particular copy of a creative work end when the work is sold (or given away) by the copyright holder. Similarly, in property law, the law tends to look skeptically on what the lawyers call “servitudes running with chattels.” In plain English, this means that if someone sells you a car together with a contract stipulating that it never be driven on Tuesdays, and you turn around and sell that car to me without making me sign a similar contract, I’m not bound by the no-driving-on-Tuesdays rule. The original owner may be able to sue you for breach of contract, but nobody would say I’m guilty of theft for using the car in contravention of a contract I didn’t sign, even if you signed a contract saying otherwise.

To see why this is important, imagine trying to run a pawn shop or used bookstore in a world where every item comes with a license agreement limiting how the property may be used. Tracking, complying with, and enforcing such restrictions would be prohibitively expensive, both for the parties involved and for the legal system, so the courts naturally frown on efforts to encumber property with restrictive covenants.

The same considerations apply in the patent system. One of the biggest challenges facing the patent system right now—especially in the IT industry—is the fragmentation of patent rights. The combination of more patents, broader patents, and increasingly complex products has made patent clearance extremely difficult for high-tech firms. Patent exhaustion helps because it reduces the number of times a given patent needs to be licensed for any given consumer product. A firm can be reasonably certain that if an upstream supplier has already licensed a particular patent, that firm doesn’t need to negotiate a license itself. That’s a good thing because negotiating patent agreements is far from costless. Licensing a patent at one point in a supply chain is almost certainly more efficient than a system that requires a fresh patent license for every step in the supply chain.

It’s important to remember that the purpose of the patent system is to ensure inventors are adequately rewarded for their inventions, not to give patent holders the power to micro-manage the entire production process. The patent system should ensure patent holders get the royalties to which they are entitled, but it should otherwise stays out of the way so that downstream manufacturers can spend their resources on engineers rather than patent lawyers. The Supreme Court’s decision in Quanta was a step in the right direction.

Comments

  1. John Millington says:

    “imagine trying to run a pawn shop or used bookstore in a world where every item comes with a license agreement limiting how the property may be used.”

    Don’t many software publishers claim that software is sold in just such a fashion? You buy MacOS from Amazon, and somehow magically have a contract with Apple even though you never had any dealings with them.

    • John,

      It’s a slightly different situation there: Amazon is acting as a salesman for Apple (Amazon has not so much purchased the right to use MacOS, but rather has taken on MacOS as inventory). And in fact, until you use it, I’d assume you’re free to sell it again (unless a contract with Amazon stipulates that it’s for your own use). I’d assume that’s why you have to agree to a EULA when you use the software, not when you purchase it.

      But I think that hits on a key point: let’s assume I use MacOS, but then I decide to sell my computer to you. Are you then technically bound by the EULA, even though I am the one who agreed to it? Based on what Tim has written here, I’d assume not but the resale of my computer and/or OS may be prevented by the EULA, which I just clicked through.

      • Anonymous says:

        Doesn’t this presume the whole “licensed, not sold” notion is valid?

        If I purchase a copy of a copyrighted work, such as a novel or a CD, that’s a sale — not a license. The copy becomes my personal property, and I don’t require any further permission from anyone to read that book or listen to that CD. Copyright simply does not speak to the act of reading or listening: it only speaks to certain actions laid out in the statutes, such as copying and public performance. I am bound to obey the copyright law, but I am not bound by any additional restrictions invented by the copyright holder.

        Under the “licensed, not sold” notion, there never is a sale: the copy of the work never becomes the property of the person who paid for it, because the transaction was not a sale but a license contract. The terms of that contract, however, are not disclosed to the receiving party until well after he has paid for the copy of the work.

        Trouble is, that’s entirely contrary to a whole raft of principles on which contracts generally work.

  2. Another Kevin says:

    How is it that patent exhaustion did not apply in the Timeline v Microsoft case? in that case, if I recall correctly, a court held that Microsoft had failed to license retail rights to patented technology that it bought from Timeline – and that Microsoft’s customers were therefore liable for infringement of the patents. This decision appears to fly in the face of the doctrine of patent exhaustion. Is the doctrine different when the vendor manufactures the patented article? Or when the use of the patented article is practicing the art taught in the patent?

    http://www.theregister.co.uk/2003/02/20/sql_server_developers_face_huge/

    • It’s probably because Microsoft didn’t license the patent. If they license it, they are not infringing and they shield their downstream users. If they don’t, they are infringing and do not shield their downstream users.

      You might think that makes sense, or think that it’s silly. Personally, I think the whole patent system is silly.