Can Your Patent Block Repair and Resale and Prevent Arbitrage?

resaleby Dennis Crouch

The first rounds of merits briefs have now been submitted to the Supreme Court in Impression Prods. v. Lexmark. The case questions the extent a patentee can control the entire resale and repair market for its products.  For products originally sold in the US, the Federal Circuit held that express use/resale limits at the point of first-sale are effective – even against subsequent bona fide purchasers. For products sold overseas, the Federal Circuit held that US Courts should presume no exhaustion of the US patent – this would automatically prohibit 3rd party importation into the US.

As a property law professor, I tend to think about about the mass confusion among the students as they try to work through the law associated with real covenants and equitable servitudes on land.  It creates substantial confusion among lawyers. But what we want is a system where property rights can be fairly and openly traded without even having lawyers extensively involved with each of our purchases.  With personal property courts long ago rejected servitudes (such as use and resale restrictions) that bind subsequent purchasers. Unlike real property, personal property moves and is often transferred without substantial paperwork or record-keeping, and allowing a set of unique restrictions has the potential of gumming up the marketplace.  The Federal Circuit in this case went all the way to the other side — holding that the presumption in foreign sales is that no US patent rights are exhausted.  I purchased my last couple of smart phones through the used market – and have also repaired them several times.  Under the law, I probably should have taken steps to ensure that all of the original equipment manufacturers affirmatively granted repair and resale rights.  Coming together, the Federal Circuit’s approach here has the potential to limit the market for the repair and reselling of goods.  I would suggest that those activities are incredibly beneficial to our society in terms of resource allocation and avoiding waste as well as empowering citizens and avoiding anticompetitive market behavior.  Although these policy goals are relevant to the Supreme Court decision-making, the Court’s primary analysis pathway should be doctrinal.

In these cases, the most important brief is often the amicus filing by the U.S. Government. Here, the brief USG brief was filed on January 24 by President Trump’s newly appointed acting solicitor general (Noel Francisco) who (like Obama’s SG) has taken the position of supporting the challenger (Impression) against the patentee (Lexmark) and the Federal Circuit.  Time will tell whether this stance is more generally predictive of the new administration’s stance on patent rights and patent enforcement. [15-1189_amicus_reversal_united_states]

The Government frames the questions presented as follows:

  1. Whether a U.S. patent owner may invoke patent law to enforce restrictions on the use or resale of a patented article after the first authorized sale of the article in the United States.
  2. Whether and under what circumstances a U.S. patent owner may authorize the sale of a patented article in a foreign country, either under a foreign patent or otherwise in accordance with foreign law, while reserving its exclusive rights under U.S. patent law.

Answering these questions, the Government argues simply that “restrictions on post-sale use or resale are not enforceable under U.S. patent law” and that the Federal Circuit’s approach is wrong.  This is the same rule that applies generally to attempts to place a restrictive covenant on personal property.  As a minor caveat, the Government takes the position that, under limited circumstances, a foreign sale might not exhaust the associated U.S. patent rights.

The basic justification for this approach is to ensure that we have a working commercial market. The brief quotes the 1895 Keeler decision: “The inconvenience and annoyance to the public” if patent rights are not exausted by the first authorized sale [is] “too obvious to require illustration.”

Since A.B. Dick was overruled in 1917, this Court has rejected every attempt to invoke patent law to control the use or resale of an article after the first authorized sale in the United States.

At the international level, the Government suggests that the court allow express reservation of rights for foreign sales – this would thus allow a German company to sell its products in Germany (with an express export restriction) and then use its U.S. to patent to prevent those products from being sent to the U.S.  This gives the manufacturer more control over the market and would allow for price discrimination (i.e., charging higher prices in the U.S.).

In its merits brief, petitioner Impression Prods. takes a harder stand on international exhaustion — arguing that the court should follow its own prior precedent in the copyright case of Kirtsaeng and hold that any authorized sale by the patentee exhausts all U.S. patent rights – even if the authorized sale is abroad.  [15-1189-merits-petitioner]   Professor Feldman agrees in her brief, naming the Federal Circuit’s actions as “reversal from below” [15-1189_amicus_pet_professor_robin_feldman] as did the Huawei brief (although in different words) [15-1189_amicus_pet_huawei_technologies].

A common argument for exhaustion is that it allows for a robust resale market that greatly benefits consumers and helps price discrimination by allowing third party arbitrage.  Although U.S. prices are low for some goods, they are very high for others (such as pharmaceuticals and printer ink).  International exhaustion would help to solve that problem (although there are many regualtory hurdles associated with importing .  In its brief, the AARP join with EFF and Public Knowledge (and others) to argue this point: “Manufacturers currently exploit weak exhaustion rules to harm consumers. . . . Limitations on resale and repair rights lead to monopolization rather than competition.” [15-1189_amicus_pet_public_knowledge]

Costco is a business that is actively engaged in the sort of price lowering arbitrage discussed by AARP and argues that the Federal Circuit’s exhaustion rules “impose enormous costs for manufacturers, retailers, and consumers.”  They effectively ask – will the american retailers need to inspect patent licenses for all of the components and sub-components found in the products they sell? [15-1189_amicus_pet_costco_wholesale_corporation]  Similarly, an interesting trade group – the Association of Service and Computer Dealers International filed its brief and explained how the no-exhaustion rules impact the market for hard drives, DVDs, Flash Memory, and other consumer product. [15-1189_amicus_pet_ascdi] The UCC (Article 2) provides some protections here, but does not, for instance, provide authority to repair.

FSU Professor Frederick Abbott has an interesting take. Abbott is an expert on international trade law.  He writes:

A fundamental flaw in the approach of the Federal Circuit involves its reasoning that a rule of territoriality of patent rights precludes U.S. courts from taking into account activities of U.S. patent owners outside of the United States. The international agreements governing the international patent system do not prescribe such a rule of territoriality. . . The rule of independence of patents prescribed by the Paris Convention[] provides that acts taken by patent authorities in one country do not affect patent rights in other Paris countries.  recognition by this Supreme Court that first sales in foreign countries exhaust U.S. patent rights would not affect patents granted outside the United States.

[15-1189_amicus_pet_abbott]

Finally, Stanford’s IP Clinic filed a law professor’s brief signed by Mark Lemley, Dan Burk, Sam Ernst, Shubha Ghosh, Orly Lobel, Pamela Samuelson, Jessica Silbey, and others that explains:

A clear exhaustion rule promotes the alienability of patented articles and reduces transaction costs. Unlike clear, reliable property rights, idiosyncratic arrangements of rights that depend on what covenants or conditions an upstream seller has attached to a chattel impose high information costs on purchasers. . . . Exhaustion doctrine also prevents patentees from extracting a patent royalty at multiple stages in a product’s distribution chain, which would compensate them in excess of the societal benefit their inventions have provided.

[15-1189-intellectualpropertyprofessors]

It will be interesting to see how the ‘other side’ responds here .

 

About Dennis Crouch

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

65 thoughts on “Can Your Patent Block Repair and Resale and Prevent Arbitrage?

  1. If Jazz Photo is going to overuled, would someone please explain their exhaustion theory when the first sale is in a country where the product was never patened?

    1. I am told (I do not read Japanese, so I am in no position to confirm this) that in Japan, an authorized sale anywhere in the world exhausts the Japanese rights. That is to say, as long as the party who holds the JP patent releases the goods into commerce, the JP patent rights are exhausted as to those released-goods. The theory is that the JP rights-holder has already received its reward (from the sale in Thailand, or wherever), so no further rewards are necessary. It is no part of the analysis to ask “was the item patented where it was sold?”. The only relevant question is “did the JP rights-holder (or its ex-JP affiliate) willingly part with the goods?”.

    2. Paul, when one sells a chattel, one invests in the buyer full legal rights — the right to possess, the right to use (profit from, destroy), the right to repair and the right to sell.

      Suing your buyer for patent infringement seems a tad inconsistent with the bill of sale.

      Now, if the seller does not sell, but bails (leases), demanding return of the chattel at some time certain, demanding in the meantime that the bailee keep the chattel in good repair, where profits from use may inure to the owner, then the patentee can impose any terms it wants.

      1. I recall, Paul, a company that integrated computer requirement, etc. as a business. They would buy subsystems and other components, and integrate them into larger systems. The problem was, it was discovered, that some of the subsystems it bought were not actually sold, but leased. The leases were fully paid up. No right of return was required. And, yet, one day, the lessee demanded an accounting for all “its” property — the equipment it “leased.”

        Now this was a real case. What say you? Was the equipment of this lessee sold or leased? Can one look to the substance of the transaction rather than to its words?

      2. Further, Ned, the “limitations” you put on the “non-sale” are indeed absent from most modern “lease situations” (at least more so in certain categories of goods).

        1. So in answer to the question at 7, all respondents seem to agree that patent exhaustion iin that case is based soley on the old doctrine against restrants on alienation of chattels, as noted earler.

  2. Exhaustion doctrine also prevents patentees from extracting a patent royalty at multiple stages in a product’s distribution chain, which would compensate them in excess of the societal benefit their inventions have provided.

    I am in emphatic agreement with Prof. Lemley & al. that contriving exhaustion law to preclude enforcement of post-sale use-restrictions via patent law, but this particular argument looks like a dodgy example of assuming the consequent to me. How do we know that charging royalties at multiple stages along the distribution chain would “compensate them in excess of the societal benefit”? I am very skeptical of our ability to know how much an invention is “worth” to society, except by waiting to see what the market is willing to pay for it. If parties up and down the distribution chain really are willing to pay royalties, I would take that as prima facie evidence that the invention provides enough societal benefit to warrant such royalty payments.

    Their transactions cost argument is fine, but the assertion that an invention might be “overcompensated” by the market strikes me as bizarre. Did the Holy Spirit descend on Mark Lemley an impart to him perfect knowledge of the true social value of all technologies?

    1. Er, “that contriving exhaustion law to preclude enforcement of post-sale use-restrictions via patent law is a good idea,…”

    2. Greg how much is a cancer drug “worth” to save your child?

      Every penny you have and can borrow. That price determination, by itself, means nothing.

      1. What do you mean it “means nothing”? From where I am standing, it means that the inventor of that drug has produced enormous social utility. It seems strange even to have to defend that premise. If my son had cancer, I would bless the inventors of the drug that cured him. There would not be enough blessings my tongue could pronounce.

        1. Greg c’mon now, don’t be obtuse. It simply means that for some patented articles, there is no working market mechanism for price discovery. The vendor can get whatever they may get, and if you allow double royalty, or triple, etc. they will get it.

          If prices bear some relationship to costs (e.g. the article is costly, uses rare materials, etc.) there are quasi-markets upstream of the invention to help find a reasonable price, but if the price is made of pure rents, and there is no rational upper limit, then it can be unreasonable.

          It’s unreasonable because nobody invents anything of major value in a vacuum. Society creates conditions for markets to exist in the first place, and if an invention has vast utility to that society, yes the inventor should be vastly rewarded, but if it has existential value, the inventor cannot then be granted ownership of society. There are rational limits.

          1. Very interesting. However, the denial of the conditional sale doctrine is rooted in the fact that all of the patentee’s exclusive rights are based on a federal statute and not in property law. Thus the Roberts Court will not establish a conditional sale doctrine which has no basis in the patent statute. The only tricky question is how the Roberts Court will distinguish Mitchell v. Hawley in which the Court established in dicta a conditional sale doctrine. Although the facts are quite different between Lexmark and Hawley.

              1. I just do not see a logical connection between the comment and the putative response.

                An interesting complaint. Let me know when you’re read to discuss subject matter eligibility again, Greg, because this was my primary objection to your “arguments.”

                I assume you’ve been sharpening them up in the meantime …

            1. This statement is just not correct: “However, the denial of the conditional sale doctrine is rooted in the fact that all of the patentee’s exclusive rights are based on a federal statute and not in property law.

              Up until recently, it was purely a given that patents were property, and that view undergirds a HUGE swath of judicial doctrines – including (especially) exhaustion.

          2. Greg c’mon now, don’t be obtuse.

            Fair enough. I confess that I am being a little obtuse. Still and all, it seems to me that there is a qualitative difference between “it means nothing” and “if the price is made of pure rents… then it can be unreasonable.” I can agree with the second assertion, but not the first.

            I think that your point gestures towards Mike Munger’s work on so-called “euvoluntary transactions.” This is a point to which I am sympathetic, so I do not wish to take up a strong contrary position to yours. Still and all, it sounds to me that even if we can agree that the inventor of this cancer drug is not entitled to every penny of wealth on Earth, that they are entitled to a truly gargantuan reward.

            I think, then, that my earlier response to Prof. Lemley’s argument still stands. The willingness of people up and down the supply chain to pay royalties is, in most instances, not especially analogous to your example of the parent of a sick child. Their willingness to pay royalties really is prima facie evidence that the asserted value is not “unreasonable.”

            1. Still and all, it sounds to me that even if we can agree that the inventor of this cancer drug is not entitled to every penny of wealth on Earth, that they are entitled to a truly gargantuan reward.

              Good grief. No, we can’t agree on that, at least not in the way that you’ve just stated it.

              Cancer drugs aren’t created by a handful of people working in a vacuum without any intellectual assistance from the rest of humanity. That’s not how science works. Take it from a scientist.

              Who decides what is “truly gargantuan”? Is it enough money to buy a house in San Francisco or Manhatten? Or does it need to be enough to buy a small country?

              On the other hand, if a cancer drug that saves millions of lives is entitled to “truly gargantuan” rewards, then presumably the “invention” of an animated virtual bolt lock on a touch screen is worth an “extraordinarily modest” pat on the head.

            2. Greg thanks for the link to Munger- very interesting stuff.

              Whenever I delve into libertarian thinking, I can’t help but think of Anatole France’s immortal ” In its majestic equality, the law forbids rich and poor alike to sleep under bridges, beg in the streets and steal loaves of bread”.

              One man’s freely negotiated arrangement is another’s contract of adhesion, but I do believe that the role of law in the economy should encourage free markets whenever there are circumstances that provide actually free markets, and to prevent excessive rent-seeking where there are asymmetries; for whatever reason they may exist. Patents by their useful function create asymmetry- a frictional price worth the benefit- but it’s entirely reasonable to attempt to attenuate that cost in various ways.

              What we find in patent controversy after patent controversy is an underlying political question. Politics are deeply ideological and philosophical beyond the plain calculus of power. I’m a liberal, you are a libertarian, and we see things in different lights. Nothing wrong with that 😉

              1. [Y]ou are a libertarian…

                Whoa there. Just because I cited a libertarian author does not mean that I am a libertarian. Much of stuff on the “Library of Economics and Liberty” makes me think of the exact same Anatole France quote you cited.

                I would call myself a ‘liberal’ just like yourself. That we occasionally see things in different lights is, as you say, fine. Liberals are allowed to disagree with each other at times, especially about patents.

                1. Sorry for mislabeling! If you say you are a liberal, you are a liberal, since that’s how a liberal thinks 😉

    3. Greg DeLassus the assertion that an invention might be “overcompensated” by the market strikes me as bizarre.

      It’s not bizarre at all unless perhaps you are envisioning some imaginary “market” that doesn’t exist. We live in the highly regulated “market” we created, which incentivizes all kinds of strange things for all kinds of reasons. That’s because some regulations exist based on reasons which were never good reasons to begin and other regulations exist for good reasons but lead to undesired consequences that weren’t foreseen.

      I presume everyone has seen this:

      http://www.philly.com/philly/health/Pharma-firm–Opioid-Overdose-Antidote-Then-Raising-The-Price.html

      Now a small Virginia company called Kaleo is joining their ranks. It makes an injector device that is suddenly in demand because of the nation’s epidemic use of opioids, a class of drugs that includes heavy painkillers and heroin….

      And as demand for Kaleo’s product has grown, the privately held firm has raised its twin-pack price to $4,500, from $690 in 2014.

      That price is absurd and the people running that business are sharks.

      1. Reversal. On both questions. They will find that an authorized sale is an authorized sale, because there is no law or doctrine mandating that for a sale to be authorized that it may not be extraterritorial. If the sale, for whatever contractual reason, it not actually authorized, than exhaustion is not implicated. There is no Monsanto twist here that will save Impression- the weight of the Amici alone should do them in.

        1. That is not an outcome that I really want, but I suppose I find reversal on both grounds plausible enough.

          Why do you predict 8-0? If Justice Ginsburg was not convinced of international exhaustion for copyright in Kirtsaeng (where there was at least some statutory warrant for that conclusion), why do you suppose she will be fine with the same for patents (where there is literally no such statutory warrant)?

          1. I think beating on the CAFC is a fun family activity, and in these fraught times, the court will be looking for cases where they can demonstrate rock-solid stability and comity. Patents are not particularly political and I see nobody of serious influence on Impression’s side here ex Pharma, who have their own worries.

  3. And yet another “theme” that will need to reconcile any “but patents are not property” view.

    (Also, dare I mention Monsanto as wrecking that “no servitude against personal property” view..?)

    Inconsistencies induced by the judicial branch abound.

    1. Patents are treated as property in many respects. But not all respects.

      Is that too complicated for you?

      Inconsistencies

      Oh, because that’s a real problem for you. Sure it is.

      1. The complication, my dear Malcolm is that this like pregnancy – you cannot be “just a little bit pregnant.”

        (Further, the actual words of Congress on the matter firmly state one of those two conditions – take a guess which one).

  4. I may be confused…

    – Let’s say I make and sell widgets in the US through my sales, marketing and service organizations;

    – I see China has a growing market for my widgets, so I supply my widgets to a distributor in China with a limited authorization to sell in China and a license to my patent portfolio only to the extent necessary to allow them to sell in China

    – Chinese distributor is a bust, and sells excess inventory of my widgets to a third-party distributor in the US because there’s a market in the US. This US Distributor really undercuts my pricing and I lose revenue on those sales, pricing power going forward, and brand recognition because of the US Distributor’s short-term interest.

    I’m limited to contract damages against the Chinese Distributor? I can’t use my US patent portfolio to pursue an injunction to stop the US Distributor? The US Distributor can pursue a damages claim against Chinese Distributor if I get my injunction. They were in position due diligence before buying the widgets from the Chinese Distributor. They also don’t have the long-term interest my business has in maintaining the market for the widgets.

    It just seems very strange to me that the law would push the damages upstream to me and my business when the harm to me will far exceed that of the US Distributor.

    1. I’m limited to contract damages against the Chinese Distributor?

      Not right now. Right now, under Jazz Photo, ex-U.S. sales do not exhaust your U.S. patent rights, and therefore you can still sue the importers for patent infringement (or, probably more importantly, seek an import ban from customs).

      If Impression Prods. wins in front of the SCotUS, then I guess you would be limited to your contract damages. As I said below, I hope that the SCotUS holds for Lexmark on this particular issue. I think that the question of whether international sales should exhaust U.S. patents is better left for Congress than the Court.

      On the other hand, while Congress has not been much exercised by the Kirtsaeng decision, I expect that PhRMA will put a bee in their bonnet about patent exhaustion if the SCotUS holds for Impression Prods. In other words, maybe Congress really will speak (and quickly) if the SCotUS holds for world-wide exhaustion.

          1. I am not sure that this is a “presumption.” More like a conclusion. The argument runs thus:

            (1) Price discrimination is economically efficient.

            (2) Everyone (well, almost everyone) benefits when markets are more efficient.

            (3) U.S. consumers and producers are part of “everyone.”

            (4) Therefore U.S. consumers and producers benefit from allowing systems in which economic price discrimination is possible.

            A lot of people imagine that ending international price discrimination means cheaper drugs and textbooks. Really, it means cheaper current drugs and current textbooks, but few new drugs or new textbooks.

            I guess if you think that the consumer goods on offer right now are as good as they are ever going to get, and no further innovation is really desirable, then ending international price discrimination would probably benefit U.S. consumers. If you think that you might like something better in future, however, then international price discrimination is probably all to the good.

            1. international price discrimination means …. few new drugs or new textbooks.

              Because why?

              (2) Everyone (well, almost everyone) benefits when markets are more efficient.

              (3) U.S. consumers and producers are part of “everyone.”

              Who is part of the “almost” group referred to in (2)?

          2. Well, look at it this way….

            In the US, my widget is sold to bankers for whom each widget generates $10,000 of profit per month.

            In China my widget was sold to factor operators for whom each widget generates $100 of profit per month.

            Is that price discrimination or is that something else? If I charged the banker and the factory operator the same price the banker would be a super super happy guy.

            1. And would then turn around and hire another bank teller.

              Businesses are not like people, they don’t save for retirement. If they make a savings of X somewhere, they will spend X somewhere else, or give X back to the shareholders (who will likely spend it as well, or buy more shares of something else).

              At some point someone is going to have to pick a price that the market will bear. That’s sort of the concept of market driven economies.

              Businesses love market driven economies… except for their product, for their own product, they prefer monopolies, legislative restrictions on resale, etc.

              If you’re making a widget and want to sell it for $10,000 to bankers in the US, and $100 to Factors in China, you do not want the company that makes the DooDad that comprises the vital part of your widget to charge you $4,000 in the US and $40 in China, you want to buy them all in China, manufacture them in China, and then import them to the US and take that windfall.

              Now if exhaustion becomes the norm for international sales, it seems that what will really happen is we’ll get a globalization of supply, and everyone will buy the components of their widgets wherever it’s cheapest, and sell them everywhere they can make a profit, and not sell them where they can’t.

              1. If the widget & the doodad are covered by the same patent, then your point might obtain. If they are covered by different patents, however, then even under international exhaustion, authorized Chinese sales of the doodad will not exhaust the widget patentee’s rights in the U.S.

  5. My inclination would be to leave the law on exhaustion alone. This is really a matter for Congress to settle, rather than the Court. I gather that the idea is to harmonize patent law with copyright after Kirtsaeng, but Congress has already spoke to the issue in copyright, and has not spoken to the issue in patents. Let Congress speak first.

    Meanwhile, I am hoping for a victory for the defendants on the question of post sale restrictions as a matter of patent law. It is fine to go after contract breakers qua contract breakers using contract remedies. It is not fine, however, to say to someone who bought with no notice of limitations “well, we wrote some words on the package (which package was already removed from the product by the time that you bought it) whose effect is that our patent rights were not exhausted. Your use of this product is an infringement. Even though you paid good money to a putative seller, you still owe us $10000 in damages for infringement.”

    Let the aggrieved patentee go after her privity in contract, and leave the distant purchase in good faith alone.

    1. Greg. I largely agree with you on this front, although it is a little bit tough to actually figure out the current state of the law.

      At least from the point of view of all of the briefs filed so far (and I tend to agree with them) the Federal Circuit ruling conflicts with prior Supreme Court precedent. Obviously, in this situation the Supreme Court precedent controls according to our abstract legal framework. However, the Federal Circuit hears the cases and thus its rulings have de facto control.

      I expect what will happen is that the Federal Circuit will be reversed with the Supreme Court stating “follow our old precedent.” At that point the law will be settled enough to Congress to easily be able to act if it so desires to reset policy as it sees fit.

      1. [I]t is a little bit tough to actually figure out the current state of the law.

        Who can argue with this?

        Federal Circuit ruling conflicts with prior Supreme Court precedent.

        Do you mean Quanta & Malinckrodt? If so, I would appreciate if you could unpack your thinking on the point.

        I really want to believe that Quanta overruled Malinckrodt, but I just cannot get there. It seems to me that it is still possible to thread the needle between those two cases, and given the presumption against sub silentio over-ruling, I just cannot agree that Malinckrodt has yet been over-ruled (although I would be delighted to be convinced otherwise).

        1. Greg, Malinckrodt was contrary to a number of old Sup. Ct. cases that were long before Quanta, it just has not gotten tested for being overuled before.
          I just hope Jazz Photo does not get overuled with it.

    2. My inclination would be to leave the law on exhaustion alone.

      Goodness. I just realized that I left a very important word out of that sentence.

      My inclination would be to leave the law on international exhaustion alone.

      1. It will not be possible to leave the international question alone (and still decide the case).

        Are you hoping for a throwing out of the case on it being improvidently granted?

    3. Greg, so I sell you my car. Under the law you can use, sell, repair. You own the car.

      I sell you my car on condition you buy gas from me. You buy gas from Y. Who owns the car? Assuming you own it, do you have a right to sell it?

      Now I sell you my car on the condition you buy your gas from me. You sell the car to a stranger. He buys gas from someone else than me. Who owns the car? What contract does the stranger have with me?

      1. I sell you my car on condition you buy gas from me. You buy gas from Y. Who owns the car? Assuming you own it, do you have a right to sell it?

        I would answer that the common law of property does not honor such defeasible conditions on chattels. When I buy gas from Y, this amounts to a breach of our contract and you can recover damages from me (assuming that none of the standard defenses to contract claims, such as fraud, duress, etc, apply), but this does not affect my ownership of the car. Because I definitely still own the car, I definitely have the right to sell it.

        Now I sell you my car on the condition you buy your gas from me. You sell the car to a stranger. He buys gas from someone else than me. Who owns the car? What contract does the stranger have with me?

        If I sell the car, I may well be under contractual obligation to you to impose my contract terms on my buyer, but if I fail to do so, you have only remedies against me, and none against the buyer. Of course, if I do impose contractual terms on my buyer (i.e., Ms. X signs the paper agreeing to buy gas only from Ned), then you have all the rights of a third-party beneficiary to a contract to hold her to the terms under contract (not property) law.

        1. In the real property context, very few defeasable estates are being used. Rather the usual approach these days is to create servitudes such as those used in homeowner associations where the penalty is a fine or perhaps injunction rather than forfeiture of title.

        2. Greg, but why would you ask the stranger to buy gas from me? That would only lower the price the stranger would be willing to pay for the car.

          Now, after you sell and the stranger buys gas from someone else than me, I sue you, Greg for breach of contract, asking as damages the profits on lost sales of gas to stranger.

          Do I win?

          1. [W]hy would you ask the stranger to buy gas from me? That would only lower the price the stranger would be willing to pay for the car.

            Er, I guess that my understanding of the hypo is that I am under contractual obligation to impose these terms on my successors & assigns. If I do not require these conditions in the contract, I will be in breach. I agree that this term decreases the sale price I can charge, but then presumably the reason why I agreed to the condition in the first place is that it reduced the price that I had to pay for the car. In other words, I buy cheap and I sell cheap.

            [A]fter you sell and the stranger buys gas from someone else than me, I sue you…

            Hm, law school is long enough ago for me that I really do not remember how this works. Can you recover from me for Ms. X’s breach, and I have a cause of action against her, or can you only recover from her? I confess that I do not know.

            1. am under contractual obligation to impose these terms on my successors & assigns

              Funny that – such was an opportunity that Monsanto had – and did NOT take advantage of (and yet they still won…

        3. I would answer that the common law of property does not honor such defeasible conditions on chattels

          Unless of course, you are Monsanto.

          😉

      2. Also recall the toilet paper case: the patentee sued when the buyers of the patented holder/role combination bought toilet paper rolls from a third party. Why even bother with patent law if the seller of the holders could simply sue for breach of contract, or inducement to breach, if they sold the holders on a condition that the buyers buy toilet paper rolls only from them?

        1. Why even bother with patent law if the seller of the holders could simply sue for breach of contract, or inducement to breach, if they sold the holders on a condition that the buyers buy toilet paper rolls only from them?

          Why indeed? I would prefer that patent law not be involved in such cases. Contracts do less mischief than patents in such a case.

          1. Greg, I think the answer is that such contracts could only be imposed under monopoly conditions, are restraints on trade, and, for these reasons, violate the antitrust laws. That is why they wanted, and still do want, to justify the trying by the use of the patent laws.

            Just because the government has stopped enforcing the antitrust laws doesn’t mean that tying has become legal. (IIRC, we seem to be in the world of reasonableness — some pro-business justification for the restraint.)

            However, I recall hearing a story the other day that Apple was sued because it required all apps for its phone, etc., to be sold through its store. I think Apple will respond that this ensures quality.

            1. O.k. That’s just one more reason why we should not want patent law to serve as a work-around for the lack of contract remedies. We should not want these post-sale restrictions floating around.

  6. With personal property courts long ago rejected servitudes (such as use and resale restrictions) that bind subsequent purchasers. Unlike real property, personal property moves and is often transferred without substantial paperwork or record-keeping, and allowing a set of unique restrictions has the potential of gumming up the marketplace.

    I take no exception to this assertion, except to note that this would have been an excellent occasion to cite Prof. John C. Gray’s excellent Future Interests in Personal Property. Anyone who has not read this, but who takes an interest in property law, really should. At least read the first three pages or so, which are enormously entertaining.

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