Of Printer Cartridges and Patent Exhaustion: The En Banc Federal Circuit is Poised to Clarify Quanta

Guest post by Samuel F. Ernst, Assistant Professor of Law at the Chapman University Dale E. Fowler School of Law.

Lexmark International, Inc. sells its patented printer cartridges directly to customers and indirectly through authorized resellers.  Ordinarily these authorized “first sales” would exhaust Lexmark’s patent rights in the cartridges, such that Lexmark could not sue third parties, such as Impression Products, Inc., for patent infringement when they refill and resell the spent cartridges at a reduced price.  However, after Lexmark’s authorized and indiscriminate first sale occurs, the end user finds that Lexmark has printed a proposed license agreement on the outside packaging providing that by opening his or her printer cartridge, the customer “agree[s] to return the empty cartridge only to Lexmark for recycling.  If you don’t accept these terms, return the unopened package to your point of purchase.  A regular price cartridge without these terms is available.”  In patent parlance, this provision is known as a “post-sale restriction” – an attempt to restrict the use of a patented item for its intended purpose after the patent holder has authorized a first sale.  The Federal Circuit has granted en banc review in the case of Lexmark v. Impression Products to settle once and for all whether such post-sale restrictions are effective to prevent patent exhaustion, allowing the patent holder to pursue the patented item down the stream of commerce to prevent resale price competition or collect infringement damages above and beyond the monopoly price it earned at the first sale.[1]

One would have thought the question settled by the Supreme Court long ago.  In 1917 the Court decided in Motion Picture Patents Co. v. Universal Film Manufacturing Co. that such post-sale restrictions are ineffective to prevent patent exhaustion.[2]  In that case Motion Picture Patents held a patent on film projectors and granted a license to a third party authorizing the manufacture and sale of the projectors.  The licensee was required to affix a plate to the projectors it sold purporting to impose a post-sale restriction very similar to the restriction Lexmark affixes to its printer cartridge packaging: “The sale and purchase of this machine gives only the right to use it solely with moving pictures containing the invention of reissued patent No. 12,192, leased by a licensee of the Motion Picture Patents Company…. The removal or defacement of this plate terminates the right to use this machine.”[3]  Despite authorizing the sale of its patented projectors and collecting a full monopoly price for its invention, Motion Pictures Patent Company sought to restrict end users from using the projectors with film reels other than those licensed under its separate patent on film reels, just as Lexmark seeks to use the patent law to prevent the reuse and resale of its spent cartridges with unauthorized ink.  When Universal Film supplied end users of the projectors with film reels that were not authorized for use with the machines, Motion Pictures Patent Company sued for infringement.[4]  The Court held that the post-sale restriction was invalid and did not prevent the exhaustion of Motion Picture Patent Company’s rights in the machine.  The Court held that “the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it.”[5]

The Supreme Court grounded its holding in two policies that are central to the exhaustion doctrine.  First, because the patent law attempts a delicate balance between encouraging innovation and allowing free market competition, the patent holder should not be overcompensated for a license to its intellectual property beyond the free market value of the invention as determined by the free market at the first sale.  “[T]he primary purpose of our patent laws is not the creation of private fortunes for the owners of patents, but is ‘to promote the progress of science and the useful arts.’”[6]  Accordingly, a right to exclude, exercised and exhausted with a single sale or license of a patented product on the open market is the appropriate compensation to reward the value of the invention; nothing more should be given:

This construction gives to the inventor the exclusive use of just what his inventive genius has discovered.  It is all that the statute provides shall be given to him and it is all that he should receive, for it is the fair as well as the statutory measure of his reward for his contribution to the public stock of knowledge.  If his discovery is an important one, his reward under such a construction of the law will be large, as experience has abundantly proved; and if it be unimportant, he should not be permitted by legal devices to impose an unjust charge upon the public in return for the use of it.  For more than a century this plain meaning of the statute was accepted as its technical meaning, and that it afforded ample incentive to exertion by inventive genius is proved by the fact that, under it, the greatest inventions of our time, teeming with inventions, were made.[7]

Hence, the exhaustion doctrine and the invalidity of post-sale restrictions prevent overcompensation, or “double recovery,” for patent holders.

Second, the Motion Picture Patents Court reasoned that the exhaustion doctrine is grounded in the policy against restraints on the alienation of chattels – i.e., servitudes that run with personal property.  Once a patent holder has authorized the sale of its product, downstream purchasers of the item, including competitors in the used resale market, have a reasonable expectation that the product they buy can be used for its intended purpose.  The Supreme Court explained that a ban on post-sale restrictions avoids a situation where a patent holder can:

send its machines forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of such patent owner.  The patent law furnishes no warrant for such a practice, and the cost, inconvenience, and annoyance to the public which the opposite conclusion would occasion forbid it.[8]

The Supreme Court relied on this same policy against restraints on alienation in the recent Kirtsaeng decision, where it decided that the authorized first sale of a copyrighted article overseas exhausts the copyright owner’s right to prevent the used resale of that item.[9]  The Court stated that the exhaustion doctrine is grounded in “the common law’s refusal to permit restraints on the alienation of chattels.”[10]  And the Federal Circuit has recently relied on this policy in support of its decision that giving away a patented product in exchange for no consideration (rather than selling it) can trigger patent exhaustion.  The Circuit reasoned that if patent exhaustion were easily evaded, “consumers’ reasonable expectations regarding their private property would be significantly eroded” and it would “offend against the ordinary and usual freedom of traffic in chattels.”[11]  Nor is the policy against restraints on alienation an outmoded relic of the common law having no justification in the modern economy.  As Professor Molly Shaffer Van Houweling argues in her compelling article, The New Servitudes, personal property servitudes result in notice and information costs for consumers, result in the underuse or inefficient use of resources subject to the restriction (such as the spent printer cartridges at issue here), and waive the limitations built into intellectual property law that are intended to strike the delicate balance between encouraging innovation and allowing for the dissemination of new technology.[12]

In its opening Federal Circuit brief, Lexmark relies heavily on a different Supreme Court case to argue for the validity of its post-sale restriction, the 1938 case General Talking Pictures Corp. v. Western Electronic Co.[13]  But General Talking Pictures does not deal with a post-sale restriction imposed after an authorized first-sale releases a product into the stream of commerce.  Rather, General Talking Pictures recognizes the validity of a pre-sale restriction, whereby a patent holder expressly limits the parties to whom its reseller may sell the patented product in the first place.  In General Talking Pictures, the plaintiff licensed the American Transformer Company to make and sell its patented vacuum tube amplifiers, but stated in the license that American Transformer was only authorized to sell the amplifiers to private consumers “for radio amateur reception, radio experimental reception, and home broadcast.  [American Transformer] had no right to sell the amplifiers for use in theaters as a part of talking picture equipment.”[14]  American Transformer then made an unauthorized sale to the defendant for use in movie houses, even though the defendant “had actual knowledge that [American Transformer] had no license to make such a sale.”[15]  The Court held that the plaintiff could sue for patent infringement because it did not authorize American Transformer to make the sale, and the first requirement of patent exhaustion was therefore not satisfied – there was no authorized first sale: “[t]he Transformer Company could not convey to petitioner what both knew it was not authorized to sell.”[16]  Hence, the Supreme Court drew a distinction between (1) a post-sale restriction, which attempts to impose restrictions on the patented item after an authorized sale; and (2) a pre-sale restriction, which limits the scope of the authority to sell, authorizing sale for only particular uses or to particular customers.  Post-sale restrictions are clearly ineffective to prevent patent exhaustion because the patented item has already passed out of the patent monopoly at the time of sale.  The effectiveness of pre-sale restrictions, and the wisdom of enforcing them, is an interesting and novel question, which I explore in the context of licenses to settle patent litigation in Patent Exhaustion for the Exhausted Defendant: Should Parties be able to Contract Around Exhaustion in Settling Patent Litigation?.[17]  But the adhesion contract Lexmark prints on its cartridge packaging is plainly a post-sale restriction, rendering the General Talking Pictures case inapposite to the Lexmark case.  After Lexmark indiscriminately sells or authorizes the sale of its printer cartridges to all comers, it tries to prevent their resale through the use of a post-sale restriction, but it cannot do so under the patent law because the authorized sale means that the cartridges have already passed out of the patent monopoly.

If the Supreme Court decided this question in the 1917 Motion Picture Patents case, then why is this even an issue for en banc review?  It is because a panel of the Federal Circuit, in Mallinckrodt v. Medipart, held that post-sale restrictions similar to Lexmark’s adhesion contracts can, in fact, prevent patent exhaustion.[18]  In that case Mallinckrodt sold its patented aerosol mist delivery devices to hospitals, stamped with the legend, “Single Use Only,” and a package insert “instruct[ing] that the entire contaminated apparatus be disposed of in accordance with procedures for the disposal of biohazardous waste.”[19]  Many hospitals did not heed the restriction, however.  Instead, they sold the spent devices to the defendant Medipart, who refurbished them and returned them to the hospitals for additional use.[20]  Mallinckrodt sued Medipart for patent infringement and indirect patent infringement, and the Federal Circuit held that the “single use” restriction prevented patent exhaustion.  The court achieved this by cabining the holding of Motion Pictures Patents to circumstances where patent holders attempt to enlarge the scope of their monopoly by tying the use of their patent to the use of unpatented or separately patented items, in violation of antitrust laws or constituting patent misuse.  Hence, the court distinguished Motion Picture Patents and other Supreme Court exhaustion precedent on the basis that “[t]hese cases established that price-fixing and tying restrictions accompanying the sale of patented goods were per se illegal.  These cases did not hold, and it did not follow, that all restrictions accompanying the sale of patented goods were deemed illegal.”[21]  The Federal Circuit then limited the ineffectiveness of post-sale restrictions to circumstances where the patent holder causes anticompetitive effects under the antitrust laws:

Unless the [post-sale restriction] violates some other law or policy (in the patent field, notably the misuse or antitrust law) private parties retain the freedom to contract concerning conditions of sale.  The appropriate criterion is whether Mallinckrodt’s restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.[22]

But why should the patent laws be relegated to the shadows of antitrust policy? Intellectual property law is not solely concerned with preventing supra competitive prices or keeping licensing practices within the “rule of reason,” like some shambling poor relation to antitrust law.  Rather, intellectual property laws promote wholly different policies in wholly different ways, such as by balancing the incentive to innovate against the harm of a limited monopoly.  That is why the policies supporting patent exhaustion enunciated by the Supreme Court in Motion Pictures Patent Company were not limited to preventing illegal patent tying (although the Court did mention as one of the supports for its decision a concern with patent holders enlarging the effective scope of their patent claims beyond the claimed invention).  As discussed above, the Court also invoked the policy against servitudes running with personal property and the need to ensure that the exclusionary right is narrowly tailored to achieve the incentive to innovate.  And these policies in support of patent exhaustion have been repeated by the Court in Kirtsaeng and by the Federal Circuit in cases such as LifeScan.  Hence, under Supreme Court precedent, a post-sale restriction is ineffective to prevent patent exhaustion whether or not it has “anti-competitive effects” or the patent holder has “market power.”

If there were any doubt as to this proposition, it should have been settled by the Supreme Court’s 2008 decision in Quanta Computer Inc. v. LG Electronics, Inc.  In Quanta, LG granted Intel the unconditional right to manufacture and sell its patented microprocessors.[23]  But the license also had a provision in which LG “disclaimed” that it granted a license to downstream purchasers of the microprocessors allowing them to combine the devices with non-Intel parts and resell them.[24]  And by separate agreement, Intel was required to notify purchasers of the microprocessors that they were not authorized to combine the microprocessors with non-Intel parts for resale,[25] similar to the notice Lexmark gives its customers that they are not authorized to return the spent printer cartridges to anyone other than Lexmark.  Intel made the patented processors and sold them to Quanta, which then practiced LG’s patent claims by inserting them into computers and reselling them to customers.[26]  And so LG sued Quanta for patent infringement.  The Federal Circuit held that LG had not exhausted its patent rights, because “[a]lthough Intel was free to sell its microprocessors and chipsets, those sales were conditional, and Intel’s customers were expressly prohibited from infringing LG’s combination patents.”[27]

The Supreme Court reversed the Federal Circuit, holding that LG unconditionally authorized the sale of the chips, despite the contract’s language disclaiming a license to third parties and the notice Intel gave purchasers that they could not combine the chips with non-Intel parts.[28]  Although the contract purported to put restrictions on what Intel’s customers could do with the chips once they bought them, these restrictions came only after an authorized sale, and “[n]othing in the License Agreement restricts Intel’s right to sell its microprocessors and chip sets to purchasers who intend to combine them with non-Intel parts.  It broadly permits Intel to ‘make, use, [or] sell’ products free of LGE’s patent claims.”[29]  The Court dispensed with LG’s language disclaiming an implied license by holding that “the question whether third parties received implied licenses is irrelevant because Quanta asserts its right to practice the patents based not on implied license but on exhaustion.  And exhaustion turns only on Intel’s own license to sell products practicing the LGE patents.”[30]  In other words, once LG authorized Intel to sell the chips to third parties, the patent rights were exhausted, and LG had no more patent rights to license or refrain from licensing.  Quanta could use the microprocessors without a license.  Similarly, once Lexmark sold directly or authorized the sale of its cartridges to customers, its patent rights in the cartridges were exhausted, and Lexmark retained no patent rights in the cartridges to license or refrain from licensing beyond the single use.  Significantly, the Supreme Court makes no mention of market power, the “rule of reason,” or any other antitrust policy as the basis for its decision in Quanta.  Patent exhaustion is not merely a reiteration of antitrust law.

Some commentators have noted that the Quanta decision is arguably ambiguous with respect to whether it did away with post-sale restrictions altogether or whether it was simply the particular way in which the LG-Intel license was drafted that failed to overcome patent exhaustion.  Perhaps the post-sale restriction was ineffective simply because it was drafted in the language of a disclaimer of implied license, separate from the unconditional grant to Intel of the right to sell the microprocessors.  The lower courts, including the Federal Circuit, have rejected this unlikely reading of the Quanta case.

In TransCore, LP v. Electronic Transaction Consultants Corp., the Federal Circuit addressed the issue indirectly.  In that case, the patent holder had entered into a settlement agreement with a third party, Mark IV, in which it covenanted not to sue Mark IV for infringement when it sold the licensed products.[31]  Subsequent to the settlement, TransCore sued Mark IV’s downstream customers for infringement after they purchased the licensed products.  The holding of the case is that a covenant not to sue for patent infringement is no different from an affirmative license to practice patents; both trigger patent exhaustion.[32]  There was no express provision in the settlement license purporting to contract around patent exhaustion.  However, TransCore sought to rely on extrinsic evidence to the contract showing “the parties’ intent not to provide downstream rights to Mark IV’s customers….”[33]  The Federal Circuit held that the district court’s exclusion of the extrinsic evidence did not affect a substantial right of TransCore because “[t]he only issue relevant to patent exhaustion is whether Mark IV’s sales were authorized, not whether TransCore and Mark IV intended, expressly or impliedly, for the covenant to extend to Mark IV’s customers.”[34]  In other words, once the sales are authorized, an express or implied provision purporting to limit the effect of patent exhaustion (such as the product label at issue in Lexmark) has no effect.

In Tessera, Inc. v. International Trade Commission, the Federal Circuit held that a licensee’s authorized sale of an item resulted in patent exhaustion, shielding purchasers of the patented product from an ITC exclusion order.[35]  Moreover, the authorized sales did not retroactively lose their authorization due to the licensee’s failure to pay the patentee its royalties.[36]  The Federal Circuit rejected this argument because “[t]hat absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion – to prohibit post sale restrictions on the use of a patented article.[37]

Finally, the Eastern District of Kentucky explicitly rejected Lexmark’s post-sale restriction as effective to prevent patent exhaustion in Static Control Components, Inc. v. Lexmark International, Inc.[38]  The court noted that there was a debate among academics as to whether the Supreme Court had broadly rejected post-sale restrictions as sufficient to defeat patent exhaustion, or if “the Quanta holding is limited to the very specific facts, and the very specific license agreement, that confronted the Court.”[39]  The court concluded “that Quanta overruled Mallinckrodt sub silentio.  The Supreme Court’s broad statement of the law of patent exhaustion simply cannot be squared with the position that the Quanta holding is limited to its specific facts.”[40]  One might add that even if one did suppose that the Supreme Court granted certiorari in Quanta to opine on the details of the language of a particular license agreement, it had already ruled that post-sale restrictions are ineffective altogether to avoid patent exhaustion in the 1917 Motion Pictures Patent Co. case.

And so Lexmark’s post-sale notices to customers that they must return their spent printer cartridges to Lexmark are ineffective to prevent patent exhaustion.  This does not mean that Lexmark is without a remedy to quell competition from the used resale market – only a remedy under the Patent Act.  For example, Lexmark spills much ink in its opening Federal Circuit brief arguing that the single-use restriction printed on its product packaging is “an enforceable contract” in the Ninth Circuit.  Accordingly, Lexmark could attempt to sue its customers for their alleged breaches of the adhesion contract (despite the customer relations difficulties this might cause).  As a further example, Lexmark complains in its brief that the used cartridges refilled by third parties are susceptible to malfunctions and poor performance, and that customers often blame Lexmark rather than the supplier of the used cartridge.  If customers are indeed susceptible to such source confusion, then the remedy would appear to sound in trademark law, not patent law.  Finally, Lexmark could pursue non-legal strategies, such as making its prices more competitive with the used resale market, or competing based on quality, which it apparently already does, given the supposed malfunctions of the used cartridges.  It would be a fine world if refilling the ink in one’s printer did not cost nearly so much as the printer itself.

Hence, Lexmark has other avenues to pursue to prevent the resale of its used cartridges.  But patent law has its own requirements and its own remedies, separate from the rules and remedies of contract law and trademark law.  This is appropriate, because patent law promotes different policies than those other branches of law.  These include the rules and policies of patent exhaustion, which prohibit a patent holder from pursuing an item down the stream of commerce once the patent rights in that item have been exhausted.

=====

[1] The Federal Circuit’s en banc order, available here, also asks the parties to brief the separate question of whether the authorized first sale of a patented item overseas gives rise to patent exhaustion, a topic not treated in this post.

[2] 243 U.S. 502 (1917).

[3] Id. at 506-07.

[4] Id. at 508.

[5] Id. at 452.

[6] Id. at 511 (quoting U.S. Const. art. I, § 8).

[7] Id. at 513.

[8] Id. at 518.

[9] Kirtsaeng v. John Wiley Sons, Inc., 133 S. Ct. 1351, 1363 (2013).

[10] Id.

[11] LifeScan Scotland, LTD v. Shasta Techs., 734 F.3d 1361, 1363, 1376 (Fed. Cir. 2013) (internal quotation marks and citation omitted).

[12] Molly Shaffer Van Houweling, The New Servitudes, 96 Geo. L. J. 885, 932-46 (2008).

[13] 304 U.S. 175 (1938).

[14] Id. at 180.

[15] Id.

[16] Id.

[17] 2014 U. Ill. J.L. Tech. & Pol’y 445 (2014).

[18] 976 F.2d 700, 709 (Fed. Cir. 1992).

[19] Id. at 702.

[20] Id.

[21] 976 F.2d 700, 704 (Fed. Cir. 1992).

[22] Id. at 708.

[23] 553 U.S. 617, 636 (2008).

[24] LG Elecs., Inc. v. Bizcom Elecs., Inc., 453 F.3d 1364, 1370 (Fed. Cir. 2006), rev’d sub nom., Quanta, 553 U.S. at 638.

[25] Id.

[26] Quanta, 553 U.S. at 624.

[27] LG Elecs., 453 F.3d at 1370.

[28] Quanta, 553 U.S. at 635-37.

[29] Id. at 636.

[30] Id. at 637.

[31] 563 F.3d 1271, 1276 (Fed. Cir. 2009).

[32] Id. at 1276-77.

[33] Id. at 1277.

[34] Id. (emphasis added).

[35] 646 F.3d 1357, 1370 (Fed. Cir. 2011).

[36] Id.

[37] Id. (emphasis added).

[38] 615 F. Supp. 2d 575, 585 (E.D. Ky. 2009).

[39] Id.

[40] Id. at 585-86.

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

74 thoughts on “Of Printer Cartridges and Patent Exhaustion: The En Banc Federal Circuit is Poised to Clarify Quanta

  1. The emphasis on pre-sale vs. post-sale restrictions is very possibly irrelevant. My reading of the cases is that the major innovation injected by the Supreme Court was “authorized sale” vs. “unconditional sale.” On a casual reading, one might be confused for the other, but in the real world these are as different as night and day. By adopting an “authorized sale” as the event that triggers exhaustion, the Supreme Court was saying, in effect, that conditions on the sales of goods are, in effect, scrubbed off when the goods are resold. In earlier days, the court might have talked about privity, but the holding appears even broader in effect.

    I suspect that the Court’s paramount policy concern is that consumers need not worry that they need to educate themselves about the legal rights they acquire to use a product that they purchase. This would reveal itself in a hypothetical, subsequent Quanta case, in which LGE now (hypothetically) grants a license to Intel to sell chipsets only to 3d parties who agree to assemble computers using only licensed chipsets. Under this agreement, the same sales from Intel to Quanta (and Bizcom) would no longer be authorized, and so, if you believe the Supreme Court, the result should change. Personally I do not believe the Court, and I expect the result would not change.

  2. This is an excellent article, with probably the best summation of the issues and related cases I’ve seen thus far. Thank you!

    Re this:

    It would be a fine world if refilling the ink in one’s printer did not cost nearly so much as the printer itself.

    Indeed. It’s 2015. Time to promote some progress.

    1. Would progress be promoted by the free market without patent exhaustion? For instance, I bought some refilled cartridges for my Dell printer. The printer refused to work with the refilled cartridges. My solution? I no longer buy Dell products. They could’ve had the last three computers and the last printer I bought, but because they charge a horrid fee for printer cartridges, they don’t get my business at all.

      Any printer manufacturer who bucks this trend is therefore set to reap benefits from consumers like me, who do not agree with the policy of charging exorbitant fees for printer cartridges.

      Let the free market decide.

      1. I daresay that if you have no intention of buying the ink cartridges from them, then Dell would rather you not buy printers from them (but they’d still gladly sell you a computer, I’m sure).

        Addressing the elephant in the room: It’s a subsidy model. Consumer-grade printer manufacturers and retailers commonly sell their printers around (or even below) their costs, with the expectation of reaping the revenue stream arising from selling the inks at extremely high margins . . . provided they can lock the purchasers into buying their inks, by any means available (patents, DRM, tech, DMCA, etc.).

        1. The next time I buy an Audi RS 5, I’m going to ask for the “subsidy model.” Just tell me where to go to get that Audi gas.

          1. You already have that subsidy model, but it’s not the gas. We grilled an experienced dealer bookkeeper on this over drinks recently. Since dealer cost is publicly available, the dealer’s negotiating room is limited and the margin on cars is low. Dealer profit is effectively subsidized by service contracts, financing/lease arrangements and some up-sale options. Manufacturer rebates are minor.

            As for special fluids, do Audi’s still require pink coolant? Historically BMWs required using BMW blue coolant because of the aluminum block alloy, and a finicky cooling system (it does matter IRL). Though by no means a subsidy, as it is possible to find compatible alternatives and it has negligible profit impact, it costs a little more. Supposed to use their oil too. Don’t know about warranty impact though.

            We will bet on more required special (patented) tools/parts that feed into the dealer service model. Interlock keys or keyless systems have long been tied through coding machines to the dealer. Of course “safety and reliability” can always argued. Consider the “replacement body parts” debate.

            1. No doubt.

              But what if cars were provided by gasoline companies like phones. If you sign up for a multi-year contract to buy gas, you get your base car almost free.

              Now, if the phone companies can do this, why not gasoline/car companies?

              1. Out here in dry California, Tesla is setting up free charging stations all over the place. Free, that is, to Tesla customers.

                What if a Chevy Volt owner wanted to use the Tesla charging station?

                We have tie-in’s all over the place.

                1. the People,

                  Consider your view in light of two additional items:
                  1) critical mass
                  2) the distinction between patent and actual monopoly.

                  Tesla released their patents as a publicity stunt because they lacked critical mass and needed others to join the game and build infrastructure that they were failing to establish.

                  An actual monopoly pertains to established markets while a patent is a negative right that does not require an actual market to exist.

                  This second point is bit nuanced, so be aware of (and beware of) those who would rather obfuscate the nuance rather than appreciate it.

                2. anon check your inference-o-meter, it may be askew.

                  1) Yes indeed, but we wouldn’t downplay this business strategy as a”publicity stunt”. It’s no guarantee, but it is intelligent choice to build and broaden an emerging market base that has more than technological impediments. The fuel of patents was used to aid in first developing a strong viable technology and “released” to encourage others to add when needed to develop unified critical mass, before it was required to do so. The right to exclude-time to include.

                  2) Yes, but we’re missing how that was germane to the topic. Maybe we can add tangential relevance and awareness to the nuance that non-defensive patent assertion is also subsidized by “actual markets,” competitive/defensive assertions are “actual market” driven, and that the market for patents as assets/instruments exists only because there may be an “actual market.” So while a patent requires no market, the system certainly does.

    2. MM, this probably will be filed as an amicus brief.

      Still looking for that subsidized Audi RS 5 with exclusive Audi gas. It would be an interesting world if we could sell things like cars and require buyers to by supplies only from one source.

      1. If Audi applied this model, the car would be equipped with a fuel receptacle lock-out that only functions with Audi fuel dispensing stations, and would come with the usual restrictions to thwart work-arounds that would allow use of non-Audi fuel.

        I would be astounded if a patent for such a lock-out device doesn’t already exist.

  3. For example, Lexmark spills much ink in its opening Federal Circuit brief

    Or toner, as the case may be.

  4. I think the article places too much reliance on the characterization of post-sale restriction. Since Lexmark offers cartridges at one price with no restrictions, while offering cartridges at a discount with the restriction, their scheme could reasonably be called a pre-sale restriction, which is why Lexmark relies on General Talking Pictures.

    1. I agree that the factual assumptions here are critical to this article’s power. I do not believe that Lexmark has admitted to its restrictions being “post-sale.”

      1. The “Motion Picture Patents Co. v. Universal Film Manufacturing Co. that Motion Picture Patents Co. v. Universal Film Manufacturing Co. that such… very similar

        This is clear manipulation, as the actual case is NOT in fact “that such” and “very similar,” but instead is very distinguishable and related to tying to another patented item (thus without alternatives).

        This is clearly an attempt at a “power move” to reach a desired end – and by an academic that – in my personal belief – should be held to a higher standard than a lawyer before a tribunal, since academics not only try to influence the law (advocate), they also hold sway over those learning the law – a position of authority and trust over those susceptible to dogma.

        An even more critical eye is needed for such screed.

  5. But the SC recently found that the farmer that bought commodity seed (e.g. last year’s harvest from mixed sources) from an elevator, planted, and sprayed with glyphosate DID infringe the patent rights even though the attempted defense was patent exhaustion.
    How does this fit into the analysis?

    1. anon, Bowman concerned the right to make second generation seed. The buyer had the right to plant the seed he bought.

      The buyer of software has a right to use the software he buys, to sell it, and to make backup copies.

      Where does the right to make come in?

      1. Ned’s distinction here seems the right one to me. The person who buys the patented transgenic seed may do with it whatever he wants, free from fear of patent suit (although he may have to worry about suit regarding contractual obligations). But if he grows a new generation of seed, that is a different story. Now he is not merely repairing the bought product, but manufacturing a new product, and everyone knows that this is a patent violation. Aro Mfg. v. Convertible Top Replacement Co., 365 US 336, 342 (1961).

      2. The “right” comes in when you realize that the purpose of the sale is tied to the invention itself.

        Bowman was badly decided for that very reason. The purpose of the invention was ONLY to put the seed into the ground. There was NO nexus with ANY other use – not as pig feed, not as ground meal, not even glued to a colored piece of paper as a child’s art project.

        Think about that for just a little while.

        1. Boy oh boy, I want to see where in Blackstone you are finding that idea. Is this from the Restatement 1st of newly-made-up-law?

          1. Not making it up at all – it is tied to the very notion of exhaustion.

            You deserve a premium or a specific reason. If the sale is unrelated, how then do justify exhaustion at all?

            Further, why would anyone pay a premium for the purpose of the invention, and NOT be able to USE for that purpose?

            That Bowman did not pay Monsanto directly does not change the fact that Monsanto LET those that did pay them directly to sell – with no strings attached – into the stream of commerce. How is this purposeful “letting go wild” after receiving its contracted price NOT be considered exhaustion? How is then once in the stream of commerce, that very action with the nexus of exact use not be a permissible use by anyone in the stream of commerce?

            You have to purposefully trying to NOT understand exhaustion theory to miss this.

            1. Two points in reply:

              (1) Exhaustion is grounded in the common law doctrine that one who owns something may “free[ly] use, enjoy[], and dispos[e] of all his acquisitions.” 1 Blackstone’s Commentaries 138. There is nothing in there about “you have paid extra so you should get extra.” You can use, enjoy, and dispose of the stuff you own. That is all. If you pay a premium to acquire a good, that does not mean that you have extra rights in that good. It could mean that you value the good more than most do, or it could just mean that you are not very sharp and you got taken for a dupe. In any event, I do not have to “justify” exhaustion. The right freely to dispose of one’s property is the default, and it is a departure from the default that must be justified, not the other way around.

              (2) In any event, the special aspect of Monsanto’s invention was not that the seed would grow and reproduce. Any seed does that. The invention was a seed from which a plant would grow that is resistant to glyphosate. A farmer who bought the seed from Monsanto acquired exactly that, and has no ground to complain that they have been deprived of the value for which they paid. Monsanto’s rights in that seed was exhausted. This is not nearly the same thing, however, as to say that their rights were exhausted in future seed that did not even exist at the time of the sale.

              Bowman was not buying seed in which the rights were exhausted. Bowman was buying seed that was newly made in the time since the first sale, and therefore no rights were exhausted in the seed that Bowman bought.

              This is not a hard distinction to understand. Exhaustion means that you get to enjoy the goods that you buy—not that you get to manufacture new versions of the good.

              1. The ONLY nexus of the invention REQUIRES you to put the seed into the ground for its natural use of growing – you plainly miss that critical point.

                That is not hard to understand, yet you don’t seem to be able to get there.

                1. I guess if Monsanto were suing people for putting the seed that they bought into the ground, I would see your point. Those are not the facts of Bowman, however.

                2. It seems to me that the right way to look at Bowman is that once Monsanto sells a bag of seeds, the purchaser may do anything s/he likes with them: plant them; re-sell them; boil them and serve them with butter; etc.

                  If the buyer plants them, they will grow into glyphosate resistant plants. The buyer is now getting exactly the benefit that s/he was promised.

                  At some point, if everything is allowed to proceed without interference, those plants will produce new seed. This is an act of infringement. The new seed is a new product, and the first-sale entitles you to enjoy the use of the patented article that you bought—not to manufacture new embodiments of the claimed invention.

                  However, as the patent owner, Monsanto has granted a limited license to its purchasers to engage in this single act of what would otherwise be infringement, and if the patent owner consents then the otherwise infringing activity is not tortious.

                  Monsanto’s generosity is not boundless, however. If you choose to impose upon this act of grace and manufacture a second infringing crop, you have no one to blame but yourself when you are held liable as a low-down tortfeasor.

                3. You appear unwilling (or unable) to realize that for seeds, use included make, includes putting the purchased item into the ground and then letting nature replicate, and that the ONLY nexus of the patented item required that use.

                  No one would buy the invention for any other use, because all other uses have no nexus with the invention.

                  This is NOT a matter for “Monsanto’s generosity” – the use here necessarily includes the aspect – the natural aspect – of the act of replication. One buys the seed in the very first instance to alone plant it. If you remove that use through the “scrivining” magic of calling it “make” tell me another use that intersects with the purpose of the invention…

                  I’ve already told you that animal feed, that grounding it up, that children’s art projects have no nexus with the invention, no purpose for the sale in the first instance. There is only one purpose, one use, and THAT exhausts the rights. To turn around then and artificially constrain that very same use on the product is rather inconsistent, eh? Where is the logic?

                4. Do you care to cite a case that applies this “nexus” approach that you regard as so critical to the exhaustion analysis? As I had indicated above, I do not think that you are talking about actual U.S. law at this point, but rather about your own preferred version of what the law should be.

                5. All of the patent cases apply it.

                  You might have to connect the dots (not too difficult) in that cases deal with patents…

  6. EULA?

    Form over substance?

    If it looks like as sale, acts like a sale, it is a sale.

    Where has the Supreme Court agreed that EULA’s are enforceable without ongoing royalties?

    The day of the enforceable adhesion contract is about to end.

    1. For those who insist that software is not a manufacture and machine component, does it follow that a machine can be sold, but the software only leased?

      Why or why not?

      If – as some would desire – software is not the subject of patents at all, then can exhaustion reach? Would not then we be faced with a more insidious situation?

      I am reminded of this news blurb: link to wired.com

      I am also reminded of a certain adage: be careful what you wish for.

      1. I am not sure the vendors of software have fully grasped the danger they are in, anon.

        Regardless, in the future, I think the only way software vendors can contract with downstream buyers of their software is for support and updates.

        Resale? It is the right of the owner.

        1. Much of the software industry has turned toward a lease model anyway: Software as a Service.

          When selling software, does not the right of first sale apply, per copyright law?

          1. “Leasing” is the wet dream of never having to say “exhausted.”

            Instant remote off-switch and a perfect “hostage” situation.

            Did I mention the criminal aspects yet?

        2. I don’t think the danger is to the vendors of software Ned.

          The more insidious result is IF software is not patent eligible and is not considered a manufacture or machine component and becomes an un-exhaustible separate thing “under lease.”

          Have fun with all those paper weights – oops, “old boxes,” that you do buy, but cannot use with the always revocable “keys” of NOT owned software.

          You wanted Audi-gas…? You haven’t even begun to see the ramifications.

  7. If his discovery is an important one, his reward under such a construction of the law will be large, as experience has abundantly proved; and if it be unimportant, he should not be permitted by legal devices to impose an unjust charge upon the public in return for the use of it.

    Words most of the “we need functional claiming to create valuable software scopes” people need to learn. The reason “non-$tupid” isn’t a requirement the way non-obvious is is because it ought to be a self-policing situation.

    For example, Lexmark spills much ink in its opening Federal Circuit brief arguing that the single-use restriction printed on its product packaging is “an enforceable contract” in the Ninth Circuit. Accordingly, Lexmark could attempt to sue its customers for their alleged breaches of the adhesion contract (despite the customer relations difficulties this might cause).

    Or they could, you know, just stop being d!cks. Either build a machine that doesn’t have interchangable cartridges (good luck selling that) or actually compete over the refilling of cartridges.

    Lexmark could pursue non-legal strategies, such as making its prices more competitive with the used resale market, or competing based on quality, which it apparently already does, given the supposed malfunctions of the used cartridges.

    What a novel capitalistic idea!

    1. Why no comment on the Federal Circuit — a circuit that goes out of its way to ignore and overrule Supreme Court cases until called to carpet.

      1. The rule is simple

        NO post sale restrictions on use or resale.

        However, one can condition a license to make and sell on a field of use.

        And, this applies to copyright just as much as it does to patents.

        1. I think it would be an easier case if the defendant was just reselling non-used cartridges, or empty cartridges. But here, the defendant refills them and changes an electronic chip. That can be seen as “making” infringing cartridges.
          The court will have to put a limit somewhere. The danger could come from letting a manufacturer incorporate a small portion of a patented article in its otherwise new product, and claim that the patent rights are exhausted.

          1. Well, they certainly make to the extent they replace unspent parts. This is called reconstruction.

            I am not so sure that hacking a chip is in the same category as reconstruction.

            Regardless, the people liable for such are the re-constructors. They infringe not because they violate a license agreement. They infringe because they are reconstructing.

            1. The making, selling, …. without authorization of the patent owner (or in violation of a license agreement) is an infringing act. Why is it different here?
              The cartridges to be returned were obviously rented. Do you think that someone stealing patented goods that were rented should be allowed to put these goods on the market and not be liable for infringement?

              1. Where are you finding this “obviously rented” aspect? People buy these cartridges, not rent them. One goes to Office Max (Best Buy, etc), picks the cartridge off the shelf, takes it to the counter, pays for it, and takes it home. No rental agreement is signed or suchlike. One owns it.

                Lexmark’s hook here is that the package contains a printed adhesion contract, which says that opening the package constitutes a binding agreement to send the empty package back to Lexmark, and that if you do not agree to these terms, you must take the unopened package back to the store and exchange it for the package that does not have this contract printed on it (and which costs correspondingly more).

                No one pretends that this is a “rental” agreement. It is a sale.

                1. When I “agree to return” something to be able to use it, I do not own it, I borrowed it, even if I paid. The cartridges are rented.
                  But maybe you are right, and Lexmark was selling (tranfering ownership). I just hope that the court opinion will not be read as applying the doctrine of exhaustion to the resale of patented articles that were rented and improperly acquired by the reseller.

              1. anon, I hardly think that congress would legalize tying by allowing manufacturers to include chips that restrict the free use of chattels and then permit the manufacturers to sue those who hack to enable their free use?

                Can you explain this DRM gambit just a bit more?

                1. Ned – you need to understand the criminal aspects of being allowed to prevent others from even having the opportunity of applying Fair Use to copyrighted material that is put under lock and key.

          2. Just wait until that chip is just like a self-replicating seed, with a “rebirth” every time it is used – then you can have the “making” aspect from Bowman cited…. (I am sure that there is an analogue to a destitute 80 year old farmer out there just waiting to be made an example of)

            And Random thinks those people are d!cks now – he hasn’t seen anything yet.

            1. anon, you think this is a game, with every gambit by one met with a riposte by the other.

              This is not a game. The fundamentals are that downstream restraints on use and resale are and must remain illegal.

              DRM can only be accepted to protect against unlawful copying, not free use and resale.

        2. The difference between post sale restrictions and pre sale restrictions is ephemeral at best.

          And nothing that a good scriviner couldn’t handle.

            1. Not at all – I am merely pointing out what should be obvious to any attorney worth their salt and whom understands the law and its limitations.

  8. Interesting and informative article.

    I would seem (to this layperson) that Lexmark could have presented enforceable post-sale restrictions in the EULA (end-user license agreement) that is presented to the user installing the driver/monitoring/diagnostics software that comes with virtually every printer. I would think they could even try purporting that the ink cartridges are merely being “leased” to the end user.

    Shady, but would contract law allow such, and would it be enforceable?

    Perhaps a better question for a “Contractly-O” blog?

    1. Exactly. The organizations that employ these “shrink-wrap” license agreements probably have some rights against the user who does not abide by the license agreement terms. But that is not the relevant point. The relevant question is whether they have the right to sue for patent infringement. I agree with Prof. Ernst that the answer to this question is fairly clearly “no.”

      They probably can recover for breach of contract. Admittedly, the breach of contract remedy is a rather poor one, because (a) most businesses would rather not sue their customers and (b) one has to hunt down the defendants one-by-one. The suit for patent infringement against a competitor instead of a customer is altogether more congenial to the patent owner here. Be that as it may, however, there are no patent rights left to enforce in this instance, because they have been exhausted.

      1. Greg, just to be sure, the law of exhaustion included copyright.

        I am also not so sure that state contract law can trump federal patent or copyright law by imposing restraints on others that are not privies.

        1. Agreed. Exhaustion is also a relevant doctrine to copyright and trademark. I did not mean to imply that it is unique to patents, but it did not seem worth bringing it up, given that the suit in question is mostly concerned with patents.

          Meanwhile, I also agree that the contract cannot impose obligation on people downstream of the original purchaser. I thought that I had made as much clear. Lexmark may (this would involve UCC issues about which I do not pretend to know much) be able to sue its customers for breach of contract, but that is it. Lexmark cannot go after the buyers/collectors to which Lexmark’s customers sold/gave the spent cartridges.

            1. If a mark-owner sells a good bearing a mark, the mark-owner’s interest in the mark (on that good) is exhausted. If I want to sell my Ford Focus, I can take an ad out in the paper saying “Ford Focus for sale” and Ford Motor Co. cannot say a thing about it, because their interest in the mark was exhausted when they sold me the car. See, Brilliance Audio v. Haights Cross Comm., 474 F.3d 365 (6th Cir. 2007).

              1. Absolutely not Greg.

                If that mark were exhausted, I could then resell the item and use the mark to signify a different source of the original product – attempt to advertise that the mark signifies MY making of the product.

                In your example, the fact that you can sell the Ford (made) Focus on the secondary market speak the opposite – that the trademark is not exhausted, as the trademark still serves its purpose of designating the original manufacturer.

                A better fit with what you are trying to say is that you could buy Ford Focus and then attempt to sell them rebranded as your own make of car, while leaving all the trademarks in place, because “you own the car.”

                You seem confused on the property aspect differences between the patent (copyright) clause and the commerce clause.

                1. If I buy a patented good, I can sell that exact same patented good, despite the fact that the patentee has the exclusive right to make, use, and sell goods covered by the patent. I cannot, however, make new versions of that good. We call this phenomenon “patent exhaustion.”

                  If I buy a trademarked good, I can use the trademark in question to advertise my subsequent sale of that exact same trademarked good, despite the fact that the mark-holder has the exclusive right to use the mark in commerce. I cannot, however, make new versions of that good (even exact copies) and mark them with the trademark.

                  These are exactly analogous phenomena, and that is why smarter minds that you or me have chosen to use the same term to describe them.

                2. Academics are NOT smarter minds than you or I….

                  Well, at least me 😉

                  The analogy you want to use stops short because of Constitutional differences.

                3. Do you care to explain why the difference between commerce clause basis and patent/copyright clause basis makes a difference to the exhaustion doctrine? I have never seen anyone ground the exhaustion doctrine in Art. I, sec. 8, cl. 8. The Supreme Court is rather explicit that exhaustion is grounded in the common law. Kirtsaeng v. John Wiley & Sons, 133 S. Ct. 1351, 1363 (2013)

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