An Economic Argument Against Mandatory Patent Exhaustion

Guest Post By Prof. Jonathan Barnett, University of Southern California School of Law & Prof. Ted Sichelman, University of San Diego School of Law

As Patently-O has described in several posts (here, here, here), the Supreme Court is poised to decide the fate of the patent exhaustion doctrine in Impression Products v. Lexmark International. Specifically, the Court is likely to answer two important sets of questions: (1) To what extent does exhaustion limit the enforcement of contractual sale and use restrictions on downstream purchasers?; and (2) Does exhaustion apply to foreign sales? If so, how?

Oddly, although exhaustion has major ramifications for IP markets, there have been almost no formal models of the doctrine’s economic effects in the domestic context, and few models in the international context. A recent paper by one of us (Sichelman), together with two economists, Edwin Lai and Olena Ivus, provides a rigorous economic model to determine the effects of (1) a mandatory exhaustion regime, in which the patent owner essentially can never enforce downstream limitations, and (2) a presumptive exhaustion regime, in which the patent owner and a licensee/purchaser can opt out of exhaustion via contract.

Drawing from this paper and other economically oriented analysis, we recently co-authored an amicus brief in Impression Products, which argues in favor of a presumptive understanding of the exhaustion doctrine.  (Interestingly, although academics are usually pegged as strongly in favor of mandatory exhaustion, our brief garnered 44 signatures—significantly more than the brief filed by professors arguing in favor of mandatory exhaustion.)

The major points of the brief and paper are straightforward.

  • The “Paid Twice” Argument is Meritless: Proponents of mandatory exhaustion sometimes argue that it is improper for a patent owner to be “paid twice”—for instance, once upon the initial sale of a patented good and another time upon resale. Although this may sound plausible intuitively, it does not hold up to economic analysis. A patent owner wants to maximize profits, not prices. Multiplying royalties through a chain of purchasers will tend to increase price and therefore depress consumer demand. Thus, there are strong market constraints that restrict the royalty amount a patent owner can charge. There is no sound economic reason why in every case a patent owner should not be able to break up the profit-maximizing aggregate royalty into multiple components payable at different points on the supply chain. Indeed, economic modeling shows that these “double” payments, implemented through use-specific downstream limitations, may sometimes be essential to optimizing incentives to invent and commercialize new technologies.
  • The “Restraints on Alienation” Concern is Ambiguous: The view that is generally espoused is that restraints on personal property are generally not enforced. However, much doubt has been cast on this view. Moreover, in the real property context, reasonable restraints on sale and use have been enforced for hundreds of years. This makes economic sense, especially in the patent context, because a rigorous economic treatment shows that the “restraint on alienation” concern boils down to transaction costs, including negotiation and information costs in downstream licenses and sales. The paper’s model shows that when transaction costs are high relative to the value of the underlying good—think medical device patent owner negotiating with a patient prior to a surgery—then mandatory exhaustion may yield net static benefits by eliminating the possibility of these transaction costs. However, when transaction costs are low—think a patent owner negotiating with a large computer manufacturer—then mandatory exhaustion may prevent customized deals that are economically efficient. Given the extent to which information technology and other industries rely on complex supply chains involving market participants with different needs, mandatory exhaustion may impose significant costs not justified by the benefits.
  • Exhaustion’s Effect on Consumers is Ambiguous: Many proponents of mandatory exhaustion argue that it benefits consumers. However, mandatory exhaustion tends to preclude what economists term “price discrimination”—namely, the ability to charge different prices (and associated terms of use) that reflect consumers’ different product valuations and budget constraints. By forcing patent owners to recoup all their profits from the first purchaser, the patent owner will tend to raise the initial price for the product. This increase, in turn, forecloses consumers who cannot afford the higher price. So while mandatory exhaustion does leave more money in the pockets of the consumers who can afford the product, it often forecloses another class of consumers entirely from buying the product. While some might argue that mandatory exhaustion allows for arbitrage resulting in broader access, any such gains are likely to be short-lived since the patent owner will typically respond by adopting a uniform pricing scheme, often resulting in less access for lower-valuation and lower-income consumers plus weaker incentives for the patent owner to invent and commercialize in the future. In general, the net access and incentive effects of these various factors will differ in any particular market. However, the short story is that there is no sound basis for the popular view that mandatory exhaustion necessarily promotes the interests of consumers—in many cases, just the opposite will be true.

The brief and paper also consider other important aspects of the exhaustion doctrine, such as multi-component products, information asymmetries, switching costs, design-arounds, and the like. Even taking all of these wrinkles into account, the upshot is similar to that above—whether exhaustion is beneficial depends on the particular circumstances at-issue. The same arguments hold in the context of foreign sales.

Based on these considerations, the amicus brief argues that presumptive exhaustion is the best approach for balancing the benefits and costs of downstream limitations in technology markets.  This approach allows a patent owner to opt out of a default exhaustion rule so long as clear notice is provided and the restrictions are otherwise legal (e.g., do not violate the antitrust laws or other public policy concerns). A mandatory, “per se” rule on the other hand assumes all downstream limitations are pernicious, when the economics show otherwise. In this regard, courts are in a suitable position to sort out reasonable from unreasonable downstream limitations, something that courts have done in the past when applying the exhaustion doctrine and, in the related antitrust law of vertical restraints, have done for 40 years since the Supreme Court’s landmark Sylvania decision.

We also argue that it is essential to allow downstream limitations to be enforced via a patent infringement suit rather than a state contract claim—otherwise, it would be too costly to bind remote downstream purchasers, injunctive relief would generally not be available, and a uniform body of federal law would not develop.

In sum, when the economics of exhaustion is carefully considered, the most sensible rule that emerges is a presumptive one that allows for reasonable limitations when clear notice is provided to downstream purchasers.

About Dennis Crouch

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

102 thoughts on “An Economic Argument Against Mandatory Patent Exhaustion

  1. NW> The issue of accountability is will you be held responsible for unethical conduct. You did not address that.

    Notice this is the pattern with Mr. Sichelman and indeed all the academics that post on this blog. They feel entitled not to respond to the substance of your post, and respond in some other way. This is the core of the anti-patent judicial activist unethical movement. No accountability. Please do not call yourself an academic.

    If I read your paper, and believe that you have acted unethically, is there a possible consequence to you? We all know the answer is no. So, please do not act like you are an scholar. You are a yapping propagandist.

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  2. The trashing just given to “product sticker restrictions” by some Justices in the Lexmark oral arguments does not seem to bode well for those proposed here?

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  3. Thank you to everyone who has provided additional comments since my previous reply yesterday. Unfortunately, I’m very busy at the moment, so I cannot provide detailed or direct replies to all of the new comments. Nonetheless, in brief:

    –Response to #14: As to the value of certainty, as an initial matter, one must remember that direct patent infringement effectively sounds in strict liability. In other words, no knowledge of the patent is required to be found liable. This creates tremendous uncertainty. So Congress–rightly in my view–has already overridden “certainty” as a the driving principle behind how we structure patent law. As for our specific model, certainty can be wrapped up in the general notion of “transaction costs.” Whatever risk is born here is not much different from that born by ordinary actors with respect to any given third-party patent. Moreover, if the purchaser wants more certainty, it can pay for indemnity from the seller. These are without a doubt real costs, but not ones that should dictate the outcome here.

    –Response to #12: There are no pure “externalities” with respect to exhaustion, because the question in this case is whether purchasers of the patented product from authorized sellers can be sued once again for patent infringement. Either the potential defendant bought the product or not from the seller, who must surely know of potential patents at issue, because the seller has a license to sell the patented product. Of course, there are blanket licenses and some uncertainty regarding whether a certain downstream product may be covered, but as I stated in my response to #14, these costs are not so substantial as to dictate the outcome in this case. To the extent you believe there is residual uncertainty in terms of managing potential infringement claims, this is a problem of patent law generally (see above), not the exhaustion doctrine. As for “notice,” this is a concept regularly dealt with in contract law cases, and there is no reason it cannot be deal with similarly here. As for “fairness,” our brief does address consumers, and argues that a mandatory exhaustion rule in many situations hurts consumers. For an example, see below in my response to #9 and #8.

    –Response to #10 & #6: You claim I am not “accountable.” I’ve disclosed my identity in my replies, and in my view that makes me highly accountable for my statements. More generally, I continue to write amicus briefs and blog posts when I get paid nothing to do so. (And I can assure it does not have any beneficial effect on my salary or job prospects–if anything, it has had a negative effect.)

    –Response to #9: Some of you seem to make a huge distinction between a “sale” and a “license,” with the view that restrictions on the former are not acceptable, while restrictions on the latter are. If the Supreme Court reverses–which I believe it will after reviewing today’s transcript of oral argument–then there will be a shift towards “leases” of patented products. For instance, Intel will tend to “lease” its chips to computer manufacturers at an effectively lower price than the “outright sale” price, and computer manufacturers will charge effectively lower prices for “leasing” computers to customers. At the end of the lease, the computer will be returned to the computer manufacturer, and they will control the “re-lease” market. Such a distinction between “sales” and “leases” is not sensible from an economic perspective and, ultimately, it will hurt consumers by raising prices overall.

    –Response to #8 & #7: Why specifically will it hurt consumers? Because the “sale” prices for patented products in industries with complex supply chains will rise and “leases” will be used to price discriminate and prevent secondary markets, which is less efficient than customized sale contracts. Another example of hurting consumers is international pharmaceutical sales. Applying exhaustion to foreign sales of drugs that can be imported back into the United States will lead to increased prices overseas, harming low-income consumers in developing countries. The same principle holds under domestic exhaustion–the inability to police resales makes it more difficult for pharmaceutical companies to discount products within the United States. As for “innovators as consumers,” our model takes that into account. My point here is that innovation requires profits beyond competitive profits–this is the main reason why we have patents. There is no economic basis for the claim that the first payment is sufficient to optimally incentivize innovative activity. If one believes patents are too strong, a more efficient way of achieving that end is reducing patent scope or term, not a mandatory exhaustion doctrine.

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    1. Sorry, the first response above should be titled “Response to #13.”

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    2. You are welcome – nice to see an author even try to pick up something from the comments.

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    3. Ted, one cannot simply call a sale a lease and make it so.

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    4. Prof. Sichelman, thank you very much for taking the time to respond. I appreciate you engaging on this topic. Now I’d like to respond to your points:

      Sichelman: “As to the value of certainty, as an initial matter, one must remember that direct patent infringement effectively sounds in strict liability. In other words, no knowledge of the patent is required to be found liable. This creates tremendous uncertainty. So Congress–rightly in my view–has already overridden “certainty” as a the driving principle behind how we structure patent law.”

      You’re basically saying that Congress introduced some uncertainty, so adding a lot more uncertainty is ok. That does not logically follow.

      My argument is not that patent law should have no uncertainty. It’s that your position introduces way too much uncertainty. Congress has not weighed in on this issue. It’s a weak analogy at best.

      “As for our specific model, certainty can be wrapped up in the general notion of “transaction costs.” Whatever risk is born here is not much different from that born by ordinary actors with respect to any given third-party patent.”

      I disagree. This is qualitatively very different from uncertainty of third party patents. In the exhaustion world, you put your faith in one entity to clear title to patent issues. If I buy an iPhone, I trust that Apple has obtained the necessary licenses. If Apple shows that it violated that trust, I can switch to a competitor like Samsung who I believe is more diligent. That’s not foolproof, but it’s a workable system.

      In your world, I don’t know how many hands the iPhone passed through before I got it. I’m not only trusting Apple to pay royalties, but every intermediary along the line. I’m trusting that the component makers, the device assemblers, the importers, the distributors, the retailers, and who knows how many others all paid royalties to patent owners demanding them along the chain. It’s a hopelessly complex system. I have no chance of ascertaining the legitimacy of my brand new iPhone purchased from a major retail outlet. It hangs a grey cloud of suspicion over all commerce in patented products.

      In either world, third parties with unlicensed patents are a potential threat. That’s unavoidable. But your world introduces a LOT more uncertainty.

      This is not something that transaction costs adequately capture. Does your model account for the costs of assiduously researching every step in the product chain before the item reaches your door, evaluating whether each actor (many of which are opaque foreign B2B entities with no consumer-facing division) pays their royalties to relevant patent owners? The number of patents (and patent owners) in complex technological products like mobile phones is immense. Likewise, the product manufacturing and distribution chains are immense. When every party has to potentially pay every patent owner at each step along the way, the problem grows in complexity exponentially. It’s simply unmanageable. Exhaustion forces linear complexity: pay royalties once upfront, the rest of the chain has clear title. The two approaches are just not comparable. Simply calling these differences “transaction costs” unduly dismisses an enormous amount of complexity.

      Sichelman: “Moreover, if the purchaser wants more certainty, it can pay for indemnity from the seller. These are without a doubt real costs, but not ones that should dictate the outcome here.”

      And how many businesses would provide such indemnity when there are steps in the distribution and retail chain they can’t control? How many consumers think forward enough to even consider indemnity when making a purchase – especially an impulse purchase at electronics retailers like Best Buy?

      Your solution works fine between sophisticated parties with comparable bargaining positions. However it completely fails at the consumer level. It’s not worth the vast amount of headaches it creates, just to permit a few corner cases where it may be more efficient.

      Thanks again for your time.

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    5. The issue of accountability is will you be held responsible for unethical conduct. You did not address that.

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    6. Prof. Sichelman, thank you very much for taking the time to respond. I appreciate you engaging on this topic. Now I’d like to respond to your points: (breaking this into 2 parts for length reasons)

      Sichelman: “As to the value of certainty, as an initial matter, one must remember that direct patent infringement effectively sounds in strict liability. In other words, no knowledge of the patent is required to be found liable. This creates tremendous uncertainty. So Congress–rightly in my view–has already overridden “certainty” as a the driving principle behind how we structure patent law.”

      You’re basically saying that Congress introduced some uncertainty, so adding a lot more uncertainty is ok. That does not logically follow.

      My argument is not that patent law should have no uncertainty. It’s that your position introduces way too much uncertainty. Congress has not weighed in on this issue. It’s a weak analogy at best.

      “As for our specific model, certainty can be wrapped up in the general notion of “transaction costs.” Whatever risk is born here is not much different from that born by ordinary actors with respect to any given third-party patent.”

      I disagree. This is qualitatively very different from uncertainty of third party patents. In the exhaustion world, you put your faith in one entity to clear title to patent issues. If I buy an iPhone, I trust that Apple has obtained the necessary licenses. If Apple shows that it violated that trust, I can switch to a competitor like Samsung who I believe is more diligent. That’s not foolproof, but it’s a workable system.

      In your world, I don’t know how many hands the iPhone passed through before I got it. I’m not only trusting Apple to pay royalties, but every intermediary along the line. I’m trusting that the component makers, the device assemblers, the importers, the distributors, the retailers, and who knows how many others all paid royalties to patent owners demanding them along the chain. It’s a hopelessly complex system. I have no chance of ascertaining the legitimacy of my brand new iPhone purchased from a major retail outlet. It hangs a grey cloud of suspicion over all commerce in patented products.

      In either world, third parties with unlicensed patents are a potential threat. That’s unavoidable. But your world introduces a LOT more uncertainty.

      This is not something that transaction costs adequately capture. Does your model account for the costs of assiduously researching every step in the product chain before the item reaches your door, evaluating whether each actor (many of which are opaque foreign B2B entities with no consumer-facing division) pays their royalties to relevant patent owners? The number of patents (and patent owners) in complex technological products like mobile phones is immense. Likewise, the product manufacturing and distribution chains are immense. When every party has to potentially pay every patent owner at each step along the way, the problem grows in complexity exponentially. It’s simply unmanageable. Exhaustion forces linear complexity: pay royalties once upfront, the rest of the chain has clear title. The two approaches are just not comparable. Simply calling these differences “transaction costs” unduly dismisses an enormous amount of complexity.

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  4. The paper’s biggest flaw, beyond the ones already raised here, is that it completely discounts the value of certainty. You can model all the economic efficiency equations you want, you will never capture the value of certainty in the market.

    In the presumptive exhaustion world, every patent owner is incentivized to contract out of exhaustion to preserve the possibility of future income from resales. They lose nothing by doing so. They don’t have the resources to police every resale, so many will occur anyway – including in the chain of commerce. This creates a cloud of suspicion over every purchase. You can never know if the goods you bought are free of patent right claims. Even when you purchase brand new products, you rarely buy directly from the manufacturer / patent holder. With goods involving multiple patent holders, you have even less certainty that each one was paid at every step along the chain. Did the retailer you bought from purchase the goods second hand? Who knows?

    There is great value in the certainty of a bright line rule on exhaustion. Yes, in some situations parties may reach more efficient deals if they could contract out of it. However, this is more than outweighed by the uncertainty it creates in the marketplace. Sometimes clear simple rules are preferable to the uncertainty and high transaction costs of having to litigate the reasonableness of every contractual scenario. Asking courts to judge the reasonableness of every license is far too demanding on the judiciary and ripe for abuse (as many won’t have the resources to challenge licenses even when they are clearly unreasonable).

    Economic efficiency is not the end-all be-all. We do plenty of things that are economically inefficient in favor of broader policy goals. Minimum wage, maximum working hours, paid sick leave, etc. Don’t get me wrong, efficiency is a good data point to consider. But to say patent exhaustion is not “economically efficient”, well so what? That’s the beginning of the discussion, not the end of it.

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    1. That sounds a lot like…

      …quiet title to property

      😉

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      1. I think you’re confusing title to products with title to patents. Nothing in my comments address whether patents themselves should be private or public rights. I’m only talking about the goods produced under patents.

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        1. The two are bound (think sticks in a bundle) – that’s going to be part of the unraveling.

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  5. Patent exhaustion clearly makes no sense for initial foreign sales of a product, since a different [foreign] patent, or no patent at all, is exhausted. I.e., Jazz Photo was correct and should not be confused with U.S. product sales under a U.S. patent.

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    1. Sale of an item is tied to ALL patents of that item, Paul.

      Anything else (unless CLEARLY stipulated in the sales agreement) is pure chicanery.

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      1. If that were the case, how can it be based on the “patent exhaustion” theory, with no patent applicable to that sale in that country to justify any price difference? Would it not have to be based instead on some kind of universal extended prohibition of restraints on alienation of chattels?

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        1. You assume “price difference” from country to country controls (directly) patent status.

          Your cart is before your horse.

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      2. So anon, if you have a Chinese licensee, you have no problem with that licensee selling the product to another Chinese company in China for them to royalty-free import that product into the U.S. in spite of your U.S. patent on it that you did not license to your Chinese licensee?

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        1. I would have a better agreement than the rather silly straw man you present, Paul.

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    2. Agreed, Paul, that it makes no sense to find exhaustion of US patent rights for a foreign-to-foreign transaction.

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      1. Quite depends on what is “sold” and what is not sold, but “licensed.”

        Any argument that you have made here Malcolm applies fully to all sales, even the foreign-to-foreign type.

        It’s rather odd that you would want to do a 180 based merely on location of the sale.

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  6. (Trying again with a shorter post)

    This is not at all convincing.

    First, your approach ignores the transaction costs that opt-out exhaustion imposes on people not directly involved in patent-covered transactions. As soon as there is a mere possibility that any products in a particular market may be covered by post-sale patent restrictions, *all* participants in that market incur the cost of managing that possibility in every transaction, whether or not the transaction involves the patented product at all.

    I suspect that in many markets the aggregate of these costs, which are pure externalities, would be substantial. But your model disregards them entirely. Unfortunately, you explicitly claim to address “social welfare”, which you cannot do with a model that ignores social externalities.

    This is not “philosophical”; one of the obvious policy drivers behind mandatory exhaustion is the undesirability of the search costs imposed by optional exhaustion, and a model that simply assumes these costs away is no reply, much less a refutation.

    Second, you hang a great deal on notice of non-exhaustion. To deal with complex multi-stage transactions (e.g. customer lock-in scenarios similar to the present case) the notice rule would need to be complex and discretionary enough to ensure that the customer received the notice at a time when it is useful to them – when they buy the printer, not just the cartridges (anti-trust law is unlikely to assist here, as the patentee is not misusing the patent to impose rents on non-patented items). Of course, the more complex the rule, the greater the transaction costs.

    Then there’s this:

    > A mandatory, “per se” rule on the other hand assumes all downstream limitations are pernicious

    Of course it doesn’t. What it does assume is that, all things considered, it is better to have mandatory exhaustion than to have some other less certain or predictable rule. A purely theoretical example of how opt-out exhaustion could conceivably produce a better result, but only if you assume away all fairness-affecting externalities, is not an effective attack on this assumption.

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    1. There is more than a seed of goodness there in the drift of the winds of porpoise.

      😉

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  7. My question Mr. Sichelman goes to accountability. You didn’t answer the question of whether you would be accountable. I am sure you would not. So, I waste my time reading your paper and find lots of bad cites, omissions, and misrepresentations, and there is no consequence to you.

    That is why you are not a scholar, but a propagandist.

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  8. Quick comment, but on the point of leaving, and will not be back for a few hours.

    Just started looking at the paper. Section 1.1 (page 1):

    “The facts of the case were that Impression Products had purchased printer cartridges from Lexmark both inside and outside the U.S., but was subject to contractual restrictions on Impression’s reuse or resale of the
    cartridges in the U.S. In violation of those restrictions,
    Impression altered and resold the products in the U.S., undercutting Lexmark and its domestic wholesalers in the process. At issue was whether Impression’s actions constituted infringement of Lexmark’s patents or whether the doctrine of patent exhaustion applied to end Lexmark’s patent rights upon its authorized sale of the cartridges to Impression.”

    This seems to be an incorrect statement of the facts of the case, unless my memory is particularly at fault. Impression purchased nothing from Lexmark, as I understand the case. Impression purchased spent cartridges from Lexmark’s customers.

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    1. Yes, from Lexmark’s customers. Thanks for this nit. To be certain, the economic model in the paper assumes the licensee is not in privity–i.e., a direct contractual relationship–with the patent holder, just like the facts of the case.

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            1. Now, only downstream manufacturers, wholesalers, resellers, purchasers, and the like would be potential licensees. And it this class of entities that we model in the paper. Of course, in some philosophical sense, anyone could potentially purchase the product, but as in all economic models, only those consumers with a specific demand for the product–as modeled by a relevant demand curve–are pertinent to the analysis.

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                1. Not entirely…

                  According to some schools of thought valid rights in an invention do not simply disappear, they are transferred.

                  Exhaustion in a case of unconditional sale is in effect a license .. and all further consumers downstream become automatic licensees when they take possession and ownership of the *thing* to which the IP rights of the *invention* are attached. Due to the presumptions of buyer and seller an imputed license is perfectly valid for certain contexts but imputed actual disappearance of rights seem smacks more of a historical oddity which is at odds with individual property rights.

                  So “potential licensees” under contract in certain contexts is not such an unrealistic concept.

                  Of course it all goes back to what you take “rights” in an invention under the constitution to be, and whether the State can properly (through statute or jurisprudence) mandate their “disappearance” by virtue of a particular (unconditional sale) kind of transaction.

                2. …and of course, your last paragraph does start to edge into the (necessary fallout) ideas I indicated at post 1.

                  Patents as “not Property” is a string that, once pulled, will unravel quite a bit more than most people have contemplated.

                3. I think it is laudable that you always seem to aim to bring clarity to what the law is.

                  Insofar as the Constitution is a statement of the ultimate law of the land, and insofar as various acts of men in administrations, the judiciary, and congress has, from time to time, over history, sometimes upheld and conversely sometimes violated the constitution with its invalid orders or laws or cases… it sometimes becomes difficult discerning whether your identification of “law as it is” is an identification of invalid laws as they exist as part of the “flawed system” or an identification of what you believe the ultimate valid law is as determined under the constitution irrespective of the invalid laws or precedent of the system due to errors made by men.

                  Can you clarify your position in this context?

                4. I think it is laudable that you always seem to aim to bring clarity to what the law is.

                  This is sarcasm, presumably.

                5. Law “as is” is – in my posts – taken as law properly made.

                  Flaws in a system of law are in truth unavoidable.

                  But being unavoidable is by no means ANY reason to simply accept laws and [shrug] or “just get used to it.”

                  Any attorney worth their salt (and who take their various State oath(s) seriously) would cringe at the thought of so meekly and blindly accepting such.

              1. I can also easily see a cross-wise and even an upstream licensing scenario (depending on the innovation and market integration aspects).

                Which returns to the “everyone” potential – and shows that the “relevant” demand curve makes the modeling (at best) suspect.

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    2. Distant, this is consistent with the initial briefing from Lexmark on its “program” where the whole tenor of the brief was that Lexmark owned the cartridges even after sale.

      Again, can one sell one cake an have it too?

      Recall my discussions of the Indians sales of land to settler who the next day would find Indians still hunting on the land they just sold the settlers, but this time, hunting livestock? The Indians thought they could sell the land and keep it too.

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      1. where the whole tenor of the brief was that Lexmark owned the cartridges even after sale.

        As I said before, I would rather see a focus on cleaning up the Faux License rackets that are really nothing more than sales.

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      2. Ned, I just read through Justice Thomas’s Opinion of the (unanimous) Court in Quanta Computer v. LG Electronics. I noted how strongly the opinion affirmed Univis and earlier SCOTUS cases concerning the doctrine of patent exhaustion, and based its holding on those cases.

        The oral argument in Impression Products v. Lexmark should be interesting, not to mention the opinion! I am wondering whether Chief Justice Roberts would take on the task of writing the opinion himself. Will the opinion even mention Mallinckrodt by name?

        I really don’t think that SCOTUS will see their task as choosing between competing economic policies. Once they have stated what the current law actually is with respect to domestic exhaustion, those seeking changes to the law should approach Congress with their policy arguments.

        One wonders where SCOTUS will go on international exhaustion.

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        1. The following seems on first reading to be Judge Newman’s style when analysing precedent:

          Old SCOTUS case presented features A and B. They appeared to base their holding H on B. But clearly that is not the case because Old SCOTUS case also presented feature C and this case presented not-C. Therefore SCOTUS must have based their holding on B and C being simultaneously present, so therefore we can conclude that what SCOTUS really said back then was what they should have said, namely that B and C together compel H. SCOTUS did not have before it a case exhibiting B and not-C. Since the case under consideration exhibits B and not-C, the holding of that old SCOTUS case does not control this case. And if I can repeat this exercise for maybe 10 or 20 old SCOTUS cases, I can conclude that holding H in this case would be clear error.

          “Inventing around” indeed!

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          1. so therefore we can conclude that what SCOTUS really said back then was what they should have said,

            What they said was what they really said and NOT what you think that should have said.

            Stay away from revisionist history.

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          2. What SCOTUS actually, genuinely, said in Univis:

            “The first vending of any article manufactured under a patent puts the article beyond the reach of the monopoly which that patent confers.”

            The price-fixing features of appellees’ licensing system, which are not within the protection of the patent law…

            It seems to me, based on my non-lawyer’s understanding of “holding”, that these fall within the holding of Univis, and are not dicta.

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          3. Trust me Distant, such was not only Newman style, it was Judge Rich’s style as well. I can hardly count the number of well established precedents that he went out of his way to overrule based upon almost comical arguments.

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            1. Translation:

              “Wah, I don’t like what Congress did in 1952, so I will attack the person of Judge Rich.”

              Extremely p00r taste, Ned.

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        2. One wonders where SCOTUS will go on international exhaustion.

          That’s why Kirtsaeng is being referenced.

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  9. By forcing patent owners to recoup all their profits from the first purchaser, the patent owner will tend to raise the initial price for the product.

    The patentee is free to charge whatever it wants. Allowing patent owners control over second-hand sales of an item will also “tend to raise the price” because the patentee doesn’t have to worry about competition from second-hand sales.

    This increase, in turn, forecloses consumers who cannot afford the higher price.

    A high price for the “new” item may “foreclose” the purchase of the new item. Consumers who really want the item can purchase the item on the secondary market.

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    1. The authors: the post, paper, and brief attempts to describe and advocate for an approach that balances the interests of innovators and consumers in a sensible manner.

      The last time I checked, “innovators” consume as much as anybody else or more.

      The patent system is one of the ways that we reward “innovators”. If “innovators” want to play the patent game and reap the rewards of exclusivity, they should do so. But part of the deal is that patentees don’t get to sue their customers — or their customers’ customers — for infringement after item has been purchased.

      When transaction costs are relatively low and sufficient notice is provided, the end-result of the exhaustion doctrine in many situations would be to harm consumers.

      First of all, even if we assume the “situations” are real, these alleged “situations” are, at best, a tiny, tiny, tiny, tiny fraction of all purchases of patented items. In nearly every real-world transaction involving patents, the exhaustion doctrine protects the consumer.

      Secondly, it’s not the doctrine that “harms consumers”. It’s the behavior of the company. Companies have choices. We’ve heard a lot of empty threats from various opponents of the exhaustion doctrine but that’s all they are: empty threats. Companies aren’t going to stop selling things because “the exhaustion doctrine.” Prices of goods aren’t going to skyrocket because of “the exhaustion doctrine.” Smartphone and TV components aren’t going to cease being manufactured because of “the exhaustion doctrine.”

      Reply
      1. Innovators and consumers are quite different from an economic standpoint. The key distinction here is dynamic vs. static tradeoffs. Consumers confront finished products and choose whether to purchase or not. Innovations do not grow on trees. Rather, appropriate dynamic incentives must exist for innovation–that is, new products and services–to arise. Patent law is focused on generating these dynamic incentives in a manner that does not unduly burden consumers. So to say that innovators “consume as much as anybody else or more” is not a helpful response in determining optimal tradeoffs.

        Similarly, your statement that “part of the deal is that patentees don’t get to sue their customers — or their customers’ customers — for infringement after item has been purchased” assumes your conclusion without any economic analysis. Whether this is “part of the deal” or not, the question we are attempting to answer in modeling exhaustion is whether this “deal” makes any sense given the larger aims of patent law. We conclude that–as a categorical assertion–it does not.

        As to the economic effects of the exhaustion, you argue against a straw man. Even if “prices of goods aren’t going to skyrocket” or smartphones will still be manufactured, the question remains whether prices will rise substantially and whether the quality of new phones will substantially diminish. Our economic models show that mandatory exhaustion–to the extent contractual actions are ineffective–could in certain industries substantially raise prices and diminish quality. How much is an empirical question that is difficult to answer. But given that exhaustion may hurt consumers in many situations–there is no sound evidence to support your assertion otherwise–we believe an approach premised on reasonableness is more sensible than one that entirely precludes enforcement of downstream limitations via patent infringement actions.

        Reply
        1. Our economic models show that mandatory exhaustion–to the extent contractual actions are ineffective–could in certain industries substantially raise prices and diminish quality.

          Give three specific examples and show everyone the numbers.

          How much is an empirical question that is difficult to answer.

          It’s a mathematical problem. You have made assumptions and, allegedly, they lead you to the conclusion that patent exhaustion “is bad” in “many” (how many is “many”? three? five thousand?) circumstances. If you can’t quantify the “badness” in any specific example, it seems that you are simply waving your hands around.

          given that exhaustion may hurt consumers in many situations

          There you go again. Where is this “consumer hurt”? Who is going to “hurt consumers”?

          Yes, companies try to make profits. We get that. But here’s a bit of a news flash for you: companies that try to “maximize profits” by any means necessary regularly end up shooting themselves in the face because “consumers” can smell the greed and it stinks. Do your “theoretical models” take that fact into account?

          an approach premised on reasonableness is more sensible than one that entirely precludes enforcement of downstream limitations via patent infringement actions

          There’s nothing unreasonable about a blanket proscription against double-dipping. If you sell a patented item, you can longer sue the customer or downstream purchasers of the same item for infringement. There’s plenty of sense in that, particularly if you’re a consumer which (surprise!) pretty much everybody is.

          to say that innovators “consume as much as anybody else or more” is not a helpful response in determining optimal tradeoffs.

          It’s an incredibly helpful reminder to you and everyone else that so-called “innovators” are also consumers, and vice versa. Are you trying to tell us that your theory doesn’t take this fact into account? Does your theory take into account the costs to consumers (and so-called “innovators”) of evaluating the scope of rights conferred and withheld when a patented item is purchased in this wonderful shiny future where exhaustion isn’t presumed? Will my church need to call a patent attorney before it holds its white elephant sale?

          Reply
      2. But part of the deal is that patentees don’t get to sue their customers — or their customers’ customers — for infringement after item has been purchased.

        Ask Bowman.

        Reply
    2. In a philosophical sense, the patentee “is free to charge whatever it wants.” But we are not counting angels on the head of a pin–rather, we want to know if the patentee is a profit-maximizing entity, which most are, what it will charge. Erecting roadblocks to enforcing downstream limitations will generally cause the patentee to charge a higher initial price than under a presumptive exhaustion scheme so it can recoup profits that it is foreclosed from recouping downstream. As for second-hand sales, many patented products are never used “twice” (e.g., pharmaceuticals) and many others have no robust resale market (e.g., digital software). As we note in the post, whether the net access and incentive effects of these various factors will differ in any particular market. There is no empirical evidence to support the claim that resale markets justify a mandatory exhaustion doctrine across all industries and technologies. Thus, we are left with theory to guide us, and theory counsels in favor of a context-specific standard.

      Reply
      1. In a philosophical sense, the patentee “is free to charge whatever it wants.” But we are not counting angels on the head of a pin

        It is hardly a counting of angels on the head of a pin to let the market decide whether or not it wants whatever price that a patentee may decide to charge.

        In fact, it is a rather important foundational aspect of economics.

        Reply
  10. False dichotomy from the word go. Nobody anywhere is arguing for a “a mandatory exhaustion regime”, in which the patent owner can never enforce downstream limitations. Nobody (that I am aware of) has proposed that a patent owner and a licensee may not enter into a contract that constructively limits exhaustion.

    The authors show their hand with the formulation licensee/purchaser, but of course there is a universe of difference between the two words. This case will not be close; there is no push from the USSC (or anyone else outside the CAFC) to muddy the essential, timeless difference between a buy and a lease because: patents.

    Reply
    1. Martin, I agree with you that by creating a new type of contract labeled “licensee/purchaser” the authors are essentially arguing that a sale is not necessarily a sale, but a license. And if it is a license, everyone agrees that the parties can negotiate terms that survive the transfer of possession.

      Reply
    2. Martin:

      The gizmo or physical thing, is a separate entity from the rights in an invention which manifests in the thing.

      When the patentee “conveys” an article to a recipient, can we not keep track of these two separate things? Why does keeping in mind the separateness of these necessitate a “false” dichotomy?

      In a similar way, possession of a thing, is not ownership, until the rights are transferred, likewise, ownership in the THING is a separate matter from transfer of all rights to the invention in that particular thing.

      I agree that it is implied that both are transferred when there is an unconditional outright sale, but I see no reason why a contract cannot differentiate between the two.

      For example, is it possible to buy the rights to the thing (rights in possession and rights to destroy or give away?) but only lease the rights to the invention in it or enjoy them under certain conditions?

      Reply
      1. anon2,

        Take the automobile. Would it be acceptable for car dealers sell you a car that is yours, that allows you to destroy the car or sell the car to others at your pleasure, but this still require you to get service at their dealership regardless of what the dealership charges, and justify this restriction on the basis of patents?

        Reply
          1. Sometimes Ned can be a deere tractor… but only if he disagrees with the ideas submitted.

            Reply
        1. If I sign on the dotted line, it better be acceptable to me, unless I am a neurotic case.

          If I do not sign on the dotted line, then apparently it is not acceptable to me.

          If NO one signs, I guess the dealers will go out of business, unless and until they change the contract enough for people to agree.

          If dealers and consumers cannot … literally cannot find common ground, then the sale of automobiles will not happen, and it should not happen…. notwithstanding that the Moon, or the mice, or the air should wish us to voluntarily choose otherwise.

          So what justifies any agreement between me and my car dealer? The fact that we agree. And the justification for us to simply walk away from each other … is the fact that voluntarily we choose not to deal with one another. Moons and mice be damned.

          Reply
      2. The false dichotomy is the supposed choice of a mandatory exhaustion regime or not: that choice is not on offer because nobody anywhere is proposing that patentees may not impose contractual restrictions on lessees.

        Ownership in the THING is precisely not a separate matter from transfer of all rights to the invention in that particular thing. That’s the point of this case, and the point will made with crystal clarity 8-0.

        Reply
    3. I generally agree with Anon2’s excellent response on the licensee/purchaser issue. In fact, the Supreme Court has distinguished between unconditional and conditional sales. In other words, not all sales are unconditional, thereby allowing the purchaser to do whatever he or she wants the patented good. In this sense, all purchasers are in effect licensees. See also my response below at 3.2.

      On the claim that “Nobody anywhere is arguing for a ‘a mandatory exhaustion regime,’ in which the patent owner can never enforce downstream limitations,” neither the paper nor the brief makes the claim that anyone is arguing for as much. Rather, as I stated in 3.2, the economic model makes this assumption simply to understand the full effects of absolute preclusion of downstream limitations. The qualitative results from effective preclusion–namely, by forcing parties to litigate via contract–will be similar to absolute exclusion.

      In the brief, we present a more nuanced argument, focusing on the costs and benefits of enforcement via patent versus contractual actions. As we state in the blog post, “it is essential to allow downstream limitations to be enforced via a patent infringement suit rather than a state contract claim—otherwise, it would be too costly to bind remote downstream purchasers, injunctive relief would generally not be available, and a uniform body of federal law would not develop.”

      Reply
      1. Ted, In fact, the Supreme Court has distinguished between unconditional and conditional sales. In other words, not all sales are unconditional, thereby allowing the purchaser to do whatever he or she wants the patented good. In this sense, all purchasers are in effect licensees.

        A conditional sale is a sale where the title does not pass until full payment is made at later date.

        When one title passes immediately, such as to allow the purchaser to sell the chattel, there is no conditional sale within the meaning of the Supreme Court.

        Reply
  11. I think these “professors” need to give us more. They are not publishing a paper in the sense of peer review and consequences for unethical conduct. What they have done is published in a vanity press where at best someone checked if some words in a cite match the paper.

    If I read through your amicus brief and find unethical conduct will your universities care? No.

    So, if I read your paper and find unethical conduct will you be disciplined? Removed from your professorship? The answer is no.

    So, please, stop pretending you are scholars. You are not.

    So, please accord this “paper” and “brief” as no more reliable than randomly generated characters. Let’s fact it you professors no longer have any credibility.

    Did you include with all papers statements of your financial interest? Did you include in all your papers statements of those that have helped you get your job? (e.g., Mark Lemley in one of your cases.)

    Reply
    1. So, it is a simple question: if I read your junk and find unethical conduct, can I file a complaint with your university that will be acted on?

      And we all know the answer is no. So, your “papers” and analysis is trash and you are not scholars.

      Reply
      1. Night, you do not have to read any further than “licensee/purchaser.”

        Reply
        1. (1) Financial Interest: None of the authors was paid by anyone to write the briefs or paper. Such a statement has been made in the brief. I do some consulting, but I mostly represent companies who have taken a contrary position in this case. To the extent you think Prof. Mark Lemley helped me secure my job, he has taken a position directly opposite the one I’ve taken in this brief. In fact, Prof. Lemley and I differ on many, if not most, patent law issues.

          (2) Peer Review: The economic paper has not been published in a “vanity journal” or otherwise. Rather, it’s a working paper on SSRN. However, we certainly will publish this paper in a peer-reviewed journal. The authors of this paper–including myself–have collectively published in numerous peer-reviewed journals, including the American Economic Review (one of the top economics journals), Journal of Empirical Legal Studies (one of the top journals in its field), RAND Journal of Economics (another highly regarded economics journal), Economic Theory, Journal of International Economics, Review of International Economics, and other peer-reviewed journals.

          (3) “Licensee/Purchaser”: A purchaser is also a licensee. Mere purchase does not necessarily eliminate background patent restrictions. Rather, a license is typically necessary to do so.

          Ultimately, I’m happy to discuss the merits of the paper.

          Reply
          1. Fyi, Ted, Night Writer is a blogtr0 ll who reflexively accuses pretty much every commenter here of being paid by some moneyed interest to comment.

            Yes, it is quite bizarre. I’ll give you one guess as to why he does that.

            Reply
            1. Not at all that “pretty much every commenter here

              Pretending otherwise does not make it so.

              Reply
            2. Goodness MM you have spent 8 hours a day 50 weeks a year on this blog and other blogs for the last 12 years. Either you are retired, independently wealthy, or you are a paid blogger.

              Reply
          2. Ted, an owner of a chattel purchased from the patentee or his licensee takes without any further obligation to the patentee regarding the use or sale of the chattel.

            Your statement not only implies the contrary, but assumes it for the sake of your argument.

            Reply
          3. Ted,

            WRT “Licensee/Purchaser”: A purchaser is also a licensee.

            Does the authorized sale of any patented item create a licensor/licensee relationship in privity?

            Can you cite some authority for this? If so, is a second, third, or fourth purchaser a licensee? How can the common law of privity being required to create a contract be nullified in this context?

            Reply
            1. I think ( but I am not certain), that what he is trying to say is that a purchaser may be a purchaser of less than all the sticks in the bundle of property rights.

              In that case, a purchaser may also become a licensee of those sticks not outright purchased.

              There is a spectrum of “purchase” and of “license” and in reality, the two are not either directly mutually exclusive, nor are they totally overlapping.

              Of course, my post at 1. still has its (necessary) ramifications….

              Reply
            2. Martin, you and I both know that Ted wants to sell a chattel and not sell it at the same time. He wants to blur what is going on legally.

              Reply
          4. My question Mr. Sichelman goes to accountability. You didn’t answer the question of whether you would be accountable. I am sure you would not. So, I waste my time reading your paper and find lots of bad cites, omissions, and misrepresentations, and there is no consequence to you.

            That is why you are not a scholar, but a propagandist.

            Reply
  12. Interesting idea but it neglects to discuss an important factor (not sure if the analysis itself included it) – what happens when large corporations start inserting mandatory limitations in consumer contracts or terms of services in the same manner as they do now attempting to limit class action suits and force arbitration? How will this affect a consumer grievance if there is a defective product or other issue? In general consumers of most goods have no ability to negotiate the terms of service or other contractual issues. They have to either take it or leave it, so consumers may be stuck in the same position with a car purchase, a cell phone purchase or other significant purchase of which is required for daily living (I’m sure someone else can think of better examples that I have listed here).

    Reply
    1. David I think that attempt (on a simple money purchase of goods) would run afoul of the UCC, which has a broad reasonableness standard for effective notice. See

      § 1-202 (Notice; Knowledge)

      (d) “as may be reasonably required to inform the other person in ordinary course”

      or (e)(2) “is duly delivered in a form reasonable under the circumstances”

      Reply
    2. The post does not address this issue directly, but it does so indirectly. The question here is whether form contracts supply “clear notice.” As an initial matter, almost no patent owners sue individual, end-consumers for patent infringement. So I don’t believe this is an “important” concern in the overall analysis. In any event, to the extent one believe it is important, then courts can determine whether in the patent law context, form contracts can constitute clear notice. Courts have considered the issue in detail in the contracts context–note Martin’s response–and there is no reason why judges deciding infringement actions cannot do the same.

      Reply
      1. Re: “As an initial matter, almost no patent owners sue individual, end-consumers for patent infringement.”
        That ignoring the fact that a number of major product manufacturers in recent years have had large numbers of their small business customers threatened with suits by NPEs if those customers did not pay for licenses.

        Reply
        1. Small business are not end-user consumers. Small businesses enter into and negotiate license all of the time. If an NPE holds a valid patent, the small business should pay for a downstream license for which it has actual notice and that doesn’t otherwise violate public policy. To the extent that NPEs are asserting invalid patents–and there is no reliable, systematic evidence that they are doing so at substantially greater rates than operating companies–there are more effective and efficient solutions than mandatory exhaustion. These solutions include fee-shifting, heightened pleading standards, uniform procedural rules, and so forth.

          Reply
          1. Many small businesses are end users of many different office machines, manufacturing machines, and softwares, and many engage in resales. Inspecting “notices” for various different special restrictions on all such products would make their sales and purchases extremely time consuming and complex. Have you ever even looked for patent notices on the back or bottom of your own purchased commercial products, like your kitchen appliances?
            None of those proposed fixes for patent litigation costs, even if they were implementable, will ever make attorney costs for even minimal defending against patent infringement threats cheaper than the typical licenses offered en mass to small businesses. See the FTC and state AG actions on this subject.

            Reply
            1. Our proposal requires “clear notice.” If your assertion that the transaction costs on actually inspecting such notice are so high as not to make it worth the candle–which I doubt is the case for the vast majority of businesses actually sued for patent infringement (and the evidence for mass NPE collections via demand letters is dubious)–then there is a decent argument they shouldn’t be enforceable via a patent action.

              As to your argument regarding costs of defending, a similar argument can be made in many areas of the law. And the answer is always the same–if you throw out the bad, you throw out the good (e.g., assertions by individuals of valid patents against large companies), and there is no simple line one can draw that is equitable to plaintiffs and defendants alike. Ultimately, the question is whether there is any evidence that the amounts paid in patent nuisance actions (whether from actual suits or demand letters) is large enough to cause major concern so as to justify the substantial reshaping of patent law that has occurred and that many would like to occur to an even greater extent. I have not seen any reliable evidence to make me think it is. All of the academic studies indicating otherwise are seriously flawed (or misinterpreted), and I’m happy to explain why if you’d like to point to any of them.

              Reply
              1. Ted, Your clear notice does not seem to include any notice that the buyer does not own the chattel he is buying. Now that kind of honest notice would tend to dampen sales.

                Reply
                1. Ned,

                  In the present case (the toner case), the immediate customers DID have notice.

                  That is not at issue or under any doubt.

                  What happened though (and Prof. Sichelman’s characterization of “nit” is rather unfortunate – and wrong), is that the second buyer bought without regard to what the first buyer could sell.

                  Of course, the real problem here is that the first buyer (understandably) treats that first sale as a first sale, since the “control” of the remains was not enforced (perhaps not even enforceable – such goes to whether or not that component is truly an integral part, or is merely a consumable).

                  This – as I have mentioned – has more to do with Faux Licenses that merely seek to avoid the implications of a sale.

                  Patent exhaustion is NOT the problem here. The problem is the “less than honest” attempts to avoid patent exhaustion in what by any “normal” view is the sale of a consumable.

  13. Sounds just like a self-serving study on behalf of a predatory expert class that doesn’t mind making money out of complexity. Reminds me of the various studies, before the housing bubble went bust, that assumed that housing prices always went up. In real life, we have such things as transaction costs, the Coase theorem, unscrupulous actors, people who don’t read the EULA, and markets that don’t work perfectly. An unsophisticated buyer will not be aware of the IP risk of a product he’s buying, while a sophisticated seller will be. The professional class needs to stop advocating for complexity as a way of fleecing the ignorant masses.

    Reply
    1. AP, The professional class needs to stop advocating for complexity as a way of fleecing the ignorant masses.

      Hah! Fat chance that will ever occur so long as the Federal Circuit does the bidding of the patent lobbying organizations who are enthralled by big corporate America.

      In other words, thank God for the Supreme Court.

      Reply
    2. Actually, the whole point of the economic paper is to model exhaustion in the presence of transaction costs. As the post states:

      “The paper’s model shows that when transaction costs are high relative to the value of the underlying good—think medical device patent owner negotiating with a patient prior to a surgery—then mandatory exhaustion may yield net static benefits by eliminating the possibility of these transaction costs. However, when transaction costs are low—think a patent owner negotiating with a large computer manufacturer—then mandatory exhaustion may prevent customized deals that are economically efficient.”

      Moreover, as the post states, in the brief, we advocate that notice is essential to allowing enforcement of downstream limitations. As the post states:

      “This approach allows a patent owner to opt out of a default exhaustion rule so long as clear notice is provided and the restrictions are otherwise legal (e.g., do not violate the antitrust laws or other public policy concerns).”

      Thus, AP, your comment is not a fair characterization of the post, much less the original works.

      In sum, we are not a “professional class [that is] advocating for complexity as a way of fleecing the ignorant masses.” Rather, the post, paper, and brief attempts to describe and advocate for an approach that balances the interests of innovators and consumers in a sensible manner. Merely precluding all downstream limitations from enforcement in patent actions will–as the post notes–tend to result in more uniform prices, which in many situations, will foreclose consumers from purchasing the product at all. When transaction costs are relatively low and sufficient notice is provided, the end-result of the exhaustion doctrine in many situations would be to harm consumers. This is not a view that “fleec[es] the ignorant masses.”

      Reply
  14. Nice work, Jonathan. The dichotomy between mandatory and presumptive is a bit too strong. From economic and legal perspectives, the issue is one of remedies. If patent rights are exhausted, then the patent owner has to rely on contract remedies, which in turn are subject to antitrust scrutiny. Your argument seemingly wants it both ways: recognize the contractual bargain but permit patent remedies. That does not square for several reasons: the contractual bargain may be unrelated to patent rights (an imperfect analogue to ancillary restraints), and the contract rights might be enforceable even if the patent is found invalid. More to be said but these comments might spark a discussion…or not.

    Reply
    1. Shubha, Question: can one sell his cake and eat it too?

      Reply
    2. Thanks, Shubha. In my paper with the two economists, we adopt a “per se” mandatory exhaustion regime to model what would happen if the downstream limitations could not be enforced at all, whether via a patent or contract action.

      This is important to understand the potential positive and negative effects of a mandatory exhaustion regime that precludes enforcement via patent actions but allows it via state contract law actions, because contract enforcement will never be as effective as patent enforcement for the reasons we mention in the post–difficulty in reaching purchasers not in privity, lack of injunctions, higher enforcement costs, and so forth. Thus, measuring the net benefits and costs in a per se mandatory regime will yield similar qualitative results, even if contractual enforcement is possible.

      In the brief, we take a more nuanced approach, canvassing the relevant case law and policy to argue that reasonable downstream limitations should be effectively enforceable in patent actions. Contrary to your assertion, this is not having it “both ways.” Specifically, the patent functions as a negative property right–even if it is based on utilitarian aims–to preclude certain behaviors (making, using, selling, etc., the patented invention). A sale of a patented product is coupled with a license that exempts the purchaser from either all of these patent-based restrictions or merely some of them. If the exemption is limited, as a analytical matter, this allows the patent owner to sue for infringement (effectively as a property right, not as a contractual right) beyond the scope of the exemption. There is no inconsistency, or “sell[ing] his cake and eating it, too.”

      Now, the question remains whether such suits will be tolerated by the courts. This is separate from the analytical question. We argue that as long as the limited set of exemptions are not illegal (e.g., violate antitrust laws, void as a matter of public policy, etc.) and provide sufficient notice, then the patent action should be allowed to go forward.

      This does not answer the question about what is enforceable in contract, which is a separate question from exhaustion. For instance, if the patent is invalid, can downstream restrictions still be enforced via contract? The brief has nothing to say on this issue and rightfully so, as it is entirely separate from the patent issue.

      In sum, there is no inconsistency.

      Reply
      1. Thanks, Ted. I think the key issue is identifying reasonable downstream restraints. I see this as related to the ancillary restraint doctrine under antitrust (which seems to be the roots of the exhaustion doctrine in patent law, at least common law restraint of trade doctrine prior to the enactment of the Sherman Act). If the restriction has some justification such as safety considerations as arguably present in Mallinckrodt, then the restriction can be enforced. But I still would question the value of patent remedies in enforcing these restrictions, particularly treble damages. I would also suggest that specific performance of the restriction might be as strong a remedy as a patent injunction under these circumstances. I would like to see the details of the model, but your description seems to realign the benefits and costs in the distribution of certain patented technologies that have external effects (beyond the transfer of the knowledge). The analysis in Lexmark should focus on the benefits of the patent owner’s price discrimination strategy and that analysis may parallel antitrust tying analysis.

        Reply
    3. From economic and legal perspectives, the issue is one of remedies

      Any time one speaks of remedies, one must take the proper (and complete) view of remedies, and not fall victim to looking at remedies in a vacuum of what remedies are for: to make the transgressed as whole as possible.

      With patent transgressions, there is one single remedy that while in other cases of non-patent transgressions is typically considered “severe,” THAT in patent transgressions is the single most complete (and therefore) best manner of making the transgressed whole.

      Any discussion of “transaction costs” or other costs that forgets this foundational aspect of remedies is necessarily less than perfect.

      Reply
  15. Caveat: have not read the papers.

    I wonder though if the papers even attempted to fold into their models the fallout from a view that “patents are not property”….

    Reply

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