The first sale doctrine provides that when a patent holder unconditionally authorizes another party to sell a patented item, the patent holder's right to exclude with respect to the patented item is "exhausted. " The licensee can then sell the patented item to a third party - a downstream purchaser - and the patent holder will not be able to sue the third party for patent infringement based on the resale or other use of that item. A principal animating policy behind the exhaustion doctrine is to prevent patent holders from receiving overcompensation for their patented inventions by, for example, aggregating royalties along multiple points in the production and distribution chain.
This article counters the law and economics literature to argue that such provisions should not be enforced if they are brokered as part of a litigation settlement. The litigation settlement context distorts the economic efficiencies allegedly created by contracting around exhaustion and can prevent free market checks on double-recovery. The expense and risk of litigation, the threat of injunctions, and the pressure to settle can weigh heavily on the patent infringement defendant. The license fee that is negotiated may not be sufficiently discounted to account for the reservation of downstream rights preserved by the patent holder. This is particularly true in light of research in cognitive psychology indicating that litigants do not engage in economically rational behavior in making settlement decisions. Defendants will likely favor a lower settlement price in exchange for a provision contracting around exhaustion, and take the risk that litigation against downstream customers will be defeated or that indemnification can be avoided
2014 U. Ill.J.L.Tech. & Pol'y 445 (2014)