The exhaustion doctrine generally provides that when a patent holder sells or authorizes another party to sell a patented item, the patent rights in that item are exhausted, and the patent holder cannot pursue that product down the stream of commerce to demand royalties from each party that subsequently acquires the item. Patent holders have often sought to evade patent exhaustion by drafting licensing agreements attending or authorizing the sale of their patented products that place restrictions on the use of the patented item or otherwise provide that no patent exhaustion has occurred. In Impression Products v. Lexmark, the Supreme Court held that such post-sale restrictions are ineffective to prevent patent exhaustion. This overruled Federal Circuit precedent holding that contractual restrictions to evade exhaustion were effective so long as they did not run afoul of antitrust laws or constitute patent misuse. This author has long argued that the Federal Circuit's interpretation of Supreme Court precedent was incorrect-that post-sale restrictions could not prevent patent exhaustion, as set forth in cases dating from the 1917 case Motion Picture Patents v. Universal Film to the 2008 case Quanta Computer v. LG Electronics.
A per se prohibition on contracting around exhaustion is justified by multiple policy principles, including (1) the policy against restraints on alienation of personal property; (2) the policy against compensation for patent holders above what is necessary to promote invention (commonly known as "double-recovery"); (3) the need to protect the boundary between federal patent law and the common law of contracts and property; and (4) all of these policies in addition to judicial efficiency when parties attempt to evade exhaustion in drafting a patent license agreement to settle litigation.
Some scholars argue that contracting around exhaustion allows for welfare gains such as increased output and vertical price discrimination. These scholars contend that the policy against restraints on alienation is a misunderstood and outdated relic of the common law; and that the policy against double-recovery has no empirical justification. To the contrary, total exhaustion protects modern consumers by preserving the used resale market, reducing the cost of goods, and protecting consumers from being locked into particular brands and secondary products. Arguments against total exhaustion for consumer goods fail to account for the inefficiencies of personal property servitudes, such as the uncertainty and research costs resulting from post-sale restrictions, hidden costs of products through tied secondary products, notice costs for licensed manufacturers, and the need for costly litigation to test the validity of contractual restrictions under rule of reason economic analysis-litigation that will rarely occur because it is beyond the reach of the great majority of consumers.
In short, the Supreme Court was correct as a matter of its own precedent and of sound policy that contractual post-sale restrictions are wholly ineffective to prevent exhaustion, regardless of whether they run afoul of antitrust law or constitute patent misuse. Patent law is not the poor stepchild of antitrust law. It pursues separate policies. Moreover, to the extent contracting around exhaustion is economically desirable for high-end, non-consumer goods, the Court's opinion does not result in absolute exhaustion in all circumstances. Pre-sale restrictions and leases may remain viable options for patent holders to evade exhaustion. For high-end, non-consumer products where there are lower transaction and notice costs relative to the price of the product, these avenues are practicable, and the concerns with servitudes and double recovery adhering in the consumer goods context are ameliorated.
59 IDEA 41 (2018).