February 25, 2024

Archives for October 2008

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.