European Intellectual Property Review 1993
[1993] Eur. Intel. Prop. Rev. 460-65 (Vol. 15, No. 12)

The Unobserved Demise of the Exhaustion Doctrine in US Patent Law
Richard H. Stern


[*460] The exhaustion doctrine has been a well settled, internationally accepted rule of intellectual property law for many years. Under the exhaustion doctrine, when a patent owner sells a patented article to a customer, the patent owner has no further right under the patent laws to exercise control over the customer's use and disposition of the sold article. Property law, rather than patent law, then governs customers' use of such property. Hence, a customer's disobedience of a notice restricting a customer's use of a product that the patentee sold to the customer was not punishable as patent infringement. In the Mallinckrodt decision, the Federal Court overturned a century of US law to this effect, creating a new legal rule and a discrepancy between US and European/Japanese patent law. The author asserts that the decision is insupportable.

For over a century the exhaustion doctrine has been a fixture of US patent law. Under this doctrine a patent owner cannot use the patent laws to prevent its customers from freely using, and reusing, patented products that they purchased from the patent owner or one of its authorised licensees. While US patent law did not recognise the legitimacy or effectiveness of use restrictions that patentees sought to impose on their customers, it did recognise and enforce functionally equivalent limitations on the scope of licences to manufacture and sell patented products. Thus, a patentee could give a manufacturer a "limited licence' to exploit a patent only in a designated field of use, and exceeding the scope of the licence would be patent infringement.

These dichotomous rules of law — the “exhaustion doctrine” [FN1] (or “first sale rule”) and the doctrine permitting limited manufacturing licences — were so clear and so fixed that by 1926 the Supreme Court, in United States v General Electric Company, [FN2] could observe:

It is well settled ... that where a patentee makes the patented article and sells it, he can exercise no further control over what the purchaser may wish to do with the article after his purchase. It has passed beyond the scope of the patentee's rights. But the case is a different one ... when we consider what a patentee who grants a license to one to make and vend the patented article may do in limiting the licensee in the exercise of the right to sell. [FN3]

A patentee could rightfully limit the right of use of licensee-made articles, “provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly.” Differently stated, the patentee was entitled to “grant a licence ... upon any condition the performance of which is reasonably within the reward which the patentee [as a patentee] is entitled to secure.” [FN4]

The phrases “reasonably adapted,” “reasonably within the reward,” and “entitled to secure” are not self-defining; indeed, they are remarkably lacking in substantive content. The outer limits of how far a patentee might reasonably go in limiting licensees’ conduct have not been clear, therefore, and courts have thus far allowed virtually any limitation on the scope of a licence to manufacture a patented product unless the limitation was shown to be a device to form an industry cartel. [FN5] On the other hand, it seemed clear that a patentee could go virtually nowhere in limiting customers’ conduct, except for restrictions necessary to protect health, safety, and product reliability. [FN6]

The rationale of the exhaustion doctrine was that customers' property rights governed over rights of the patentee under the patent law, after the point of the patentee's sale of the patented goods, while in the case of a patent licence the rights of the patentee under the patent law (in respect of unlicensed subject matter) were never extinguished. The exhaustion doctrine has been adopted in Europe and Japan, where it still remains a fixture of patent law and other intellectual property law. [FN7] A short while ago, it would have been fair to state that the exhaustion doctrine was a worldwide, settled principle of intellectual property law. [FN8] [*461]

The Mallinckrodt Case

Late in 1992, this century or more of exhaustion doctrine law was suddently swept away, and the rule permitting limited-scope licences swallowed up the exhaustion doctrine. In Mallinckrodt, Inc. v Medipart, Inc., [FN9] the Federal Circuit declared that it was patent infringement for a customer to disobey a restrictive notice; such conduct would provide a basis for an injunction under the patent law compelling obedience to the restriction, as well as damages under the patent law for the infringement. The Court held prior case law to the contrary, in the main, to be mere obiter dictum. The plaintiff Mallinckrodt owned a patent on a device for dispensing a radioactive mist used in taking diagnostic lung X-rays, and for trapping the mist after use. Mallinckrodt sold the device to hospitals for about $40 or $50. Hospital personnel would load the device with a suitable radioactive fluid to perform a diagnostic procedure on a patent, use the device, and then discard it. Mallinckrodt labelled the devices with the notice “Single use only.”

Because the device itself cost approximately $10 to make, most of the purchase price that hospitals paid Mallinckrodt probably represented the value of the patent (or the patented technology). This fact inspired the defendant Medipart to go into the recycling business, in which Mallinckrodt apparently had no direct interest. For a $20 recycling fee, Medipart would clean one of the devices for a hospital, replace some parts, subject the device to gamma radiation to kill germs, and return it to the hospital for reuse. [FN10]

Since Medipart and hospitals dealing with it were defying Mallinckrodt's “Single use only” label, and were cutting into its profits, Mallinckrodt sued the recycler for patent infringement. Medipart then moved to dismiss the patent infringement claim because of the exhaustion doctrine; the district court agreed and granted summary judgment. Mallinckrodt appealed and the Federal Circuit reversed. It held that, despite what the Supreme Court had been saying, the apparently absolute rule against post-sale restrictions on patentees' customers should apply only to price-fixes and tie-ins. In cases not involving price-fixes or tie-ins, such as this one, patentees were free to limit their customer's use of products as long as the restrictions did not so greatly hinder competition as to amount to an anti-trust violation.

At this point, Medipart gave in and settled the case by agreeing to go out of the business of recycling these devices. As a practical matter, that makes the Mallinckrodt decision the governing US precedent, henceforth. [FN11] Therefore, one may expect the Federal Circuit’s remarkable (and largely unnoticed) overruling of a century of Supreme Court decisional law under the exhaustion doctrine to bind patent litigants for the foreseeable future. This will make US patent law on enforceability of use restrictions on customers quite different from European and Japanese law. [FN12]

The decision raises a number of questions: Is the Federal Circuit’s decision legally supported? Whether or not the decision is legally sound, does it make good sense from a policy standpoint? What are the implications for industry?

Prior Case Law Under Exhaustion Doctrine

The Federal Circuit's decision is not legally supported. It erroneously conflates anti-trust law and patent infringement law, although they raise distinctly different factual and policy issues, calling for different balances of interests. In the past, courts have differently analysed and treated the legal consequences of a patentee's imposition of restrictions on customers' use of patented products, depending on whether the question that the court had to answer was: whether the customers' disobedience was patent infringement, subjecting them to sanctions under patent law; or whether the patentee was guilty of an anti-trust violation for engaging in the practice, making the patentee liable to injured persons for treble damages and liable to various governmental sanctions (for example, compulsory licensing).

Patent infringement cases

Until the Federal Circuit’s Mallinckrodt decision, an unbroken line of Supreme Court and lower court precedents held that the patentee’s patent right over a product that the patentee sold (or that a licensee authorised to make a sale sold) ended at the point of sale. Accordingly, a customer did not commit patent infringement by disobeying a notice, contract, or other “remote control” limitation that the patentee sought to impose on the use of goods that it had sold to the customer. [FN13]

The earliest Supreme Court precedents involved customer use of patented products outside an approved territory. [FN14] Then the Supreme Court held that it was not copyright [FN15] or patent [FN16] infringement to sell a product at [*462] a lower price than a notice on the product commanded. In later cases, the Court held that it was not patent infringement to disobey a notice stating that the customer must use the patented product only with goods supplied or licensed by the patentee. [FN17] All of these decisions held that a patentee's right to sue for patent infringement did not extend past the point of sale of the article, on the ground that an authorised sale terminated the patent monopoly on the article sold. The Court’s rationale was based on property law, which the Court considered to supervene over patent law once the patentee sold the patented article to the customer-owner. As already indicated, the exhaustion doctrine applies only to sales from the patentee (or its authorised licensee) to customers. Limitations imposed on manufacturing licensees are subject to a far more liberal rule. The distinction between sales and manufacturing licences can be very fine, particularly when the patentee's licensee rather than the patentee has sold the goods. Nonetheless, US case law has long maintained the distinction as critical. [FN18] An example of the difficulty of the distinction is illustrated by two contrasting views (those of the Court's majority and the dissent) of the facts involved in General Talking Pictures Corp. v Western Electric Co., [FN19] a decision elaborating the doctrine of the 1926 General Electric case. The patentee AT&T gave ATC a non-exclusive licence to make and sell the patented product for the “private” field (radios and similar consumer devices). AT&T withheld any licence to make and sell for the “commercial” field (theatres). ATC then sold to a third party, GTP, who sold amplifiers to theatres. GTP knew of the AT&T-ATC licence limitation and ATC knew of GTP's intentions. Were ATC and GTP infringers?

The Court’s majority appears to have considered the patents to be on amplifiers, [FN20] and that theatre amplifiers were different from home radio amplifiers — that is, one would reasonably expect a theatre amplifier to be a large, high-power device, and a radio amplifier to be a small, low-power device. At least, the majority opinion gives the impression that the “private” and “commercial” devices were readily distinguishable and were not fungible with one another. It would thus seem clear that all concerned knew that the use of the invention was worth one price in the high-power theatre-amplifier field and worth something less in the low-power radio-amplifier field, so that ATC simply was not authorised, under its arrangement with AT&T, to get the benefit of exploiting the more elaborate and valuable theatre-amplifier use of the invention for the price of its radio-amplifier licence. By the same token, ATC and GTP had no business making an arrangement to build big amplifiers after ATC had bought only a small-amplifier licence from AT&T.

According to the dissent, however, the patents were not on amplifiers but were on vacuum tubes, which are fungible, mass-produced, staple articles of commerce used as components of amplifiers and other electronic products. [FN21] If one accepted the dissent’s view of the facts, the General Talking Pictures case would appear indistinguishable from the exhaustion doctrine line of cases. The majority and dissenting opinions do not appear to challenge one another”s view of the law, as such. Each appears to consider that the other”s legal conclusions as to infringement would be correct, if the other had the facts right.

Small changes in a case”s fact pattern can thus convert the case from one of post-sale customer restriction to one of manufacturing licence limitation. Nevertheless, until Mallinckrodt that is where US patent law has drawn the line of demarcation. The exhaustion doctrine applies to use restrictions in sales by a patentee or an authorised licensee, while it does not apply to use limitations in manufacturing licences. These difficulties in making distinctions — which may make for hard cases — did not occur in the Mallinckrodt case, however, and do not explain the Federal Circuit’s ruling. Mallinckrodt was not a hard case, for the patentee Mallinckrodt, itself, rather than a licensee, made the sales in question.

Anti-trust cases

The anti-trust case law concerning exhaustion has been subject to considerable ebb and flow, but that has occurred almost entirely in cases not related to patents. The Supreme Court first expressly addressed an anti-trust challenge to a patentee’s alleged post-sale restrictions on customers in the 1926 General Electric case. [FN22] The Court held that GE had not violated the anti-trust laws in imposing price-fixing. Some of GE's price-fixing restrictions occurred in transactions with its agents; other price-fixing provisions were limitations on GE's licence grant to a manufacturing licensee. There was no price-fixing in any transaction directly between GE and a customer — no post-sale restriction imposed on a customer. Hence, the exhaustion doctrine did not apply.

Subsequent patent—anti-trust cases involving restrictions on patentees’ customers typically involved price or tie-in restrictions, sometimes accompanied by customer or use restrictions intended to support the effectiveness of price-fixing systems. [FN23] In all of these decisions, however, [*463] the Court spoke of post-sale restrictions on patentees’ customers as unauthorised by patent law because of the exhaustion doctrine — because the patent law did not extend past the point of sale by the patentee — not because the cases involved tie-ins or price-fixes. Moreover, during this period the Court refused to overrule the General Electric decision, [FN24] which expressly permitted patentees to fix prices charged by manufacturer-licensees but not prices charged by customers. The high point of the exhaustion doctrine in US antitrust law occurred in the late 1960s when the Supreme Court extended the exhaustion doctrine to unpatented products. In United States v Arnold, Schwinn & Co., [FN25] the Court held it a per se violation of the anti-trust laws [FN26] for any seller of any goods to impose any post-sale restrictions on customers — for example, as in that case, territorial restrictions. The per se illegality of post-sale restraints did not long endure. In the 1970s, the Supreme Court reversed its course, in Continental T.V., Inc. v GTE Sylvania, Inc., [FN27] another territorial-restriction case. It held that post-sale restraints were anti-trust violations only when they restricted trade unreasonably, in the circumstances of the case. [FN28] Neither of these cases involved patents.

Between the Schwinn and GTE Sylvania decisions came the last Supreme Court decision, so far, that has involved patentees’ restrictions on their customers, United States v Glaxo Group Ltd. [FN29] Glaxo and ICI owned patents on an antibiotic, which they sold in bulk chemical form to US pharmaceutical manufacturers, with a restriction against resale in bulk form (that is, except as tablets, capsules and the like). Presumably, their purpose was to keep the bulk chemical out of the hands of other pharmaceutical manufacturers who were potential price-cutters. The trial court had found an anti-trust violation, but refused to order compulsory licensing of the patents and compulsory sales of the bulk chemical; it considered an injunction against the particular restrictions in the licences sufficient. The government appealed to the Supreme Court for further relief, which the Court ordered. [FN30] It ruled that compulsory licensing of the patents and compulsory sales of the patented product were presumptively appropriate and requisite to dissipate the wrong-doing of patentees in such cases. The Court’ opinion did not address whether Glaxo and ICI committed an anti-trust violation, for they did not appeal that ruling. However, the Court's insistence that the defendants' abuse of their patent rights required severe relief — compulsory licensing and compulsory sales — to dissipate the effects of their conduct must rest on the assumption that their conduct was definitely wrongful. Otherwise, such drastic relief would not be justified. [FN31]

Mallinckrodt’s Treatment of the Prior Case Law

The Mallinckrodt Court considered the exhaustion doctrine line of cases no longer viable precedents. The Court believed that GTE Sylvania’s overruling of Schwinn also overruled the exhaustion doctrine. Further, the Court distinguished the cases holding that customers’ disobedience of post-sale restrictions was not patent infringement, on the ground that their principle was that price-fixing and tie-in restrictions were illegal per se. It therefore concluded that the legal principle did not extend to the non-price-fix, non-tie-in forms of restriction before it. The Court dismissed the Supreme Court’s many statements about exhaustion of patent rights after a sale as mere general expressions that went “beyond the case” presented. The legal principle applicable instead, the Court said, is stated in the 1926 General Electric decision: “the patentee may grant a licence ‘upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure.’” [FN32] That was also the principle of the General Talking Pictures decision, the Court said, for it upheld “a restrictive licence to a particular use.” According to the Mallinckrodt Court, nothing in the General Electric or General Talking Pictures decisions limits the application of the principle allowing use restrictions to cases involving licences to manufacture a patented product. Rather, the principle applies with equal force when the patentee itself manufactures the product and then sells it to a customer. “We decline to make a distinction for which there appears to be no foundation.”

The Mallinckrodt Court’s legal analysis may be questioned on each of these grounds.

GTE Sylvania’s overruling of Schwinn

The ebb and flow of anti-trust doctrine between Schwinn and GTE Sylvania cannot tell one whether it is patent infringement for a purchaser of patented goods to disobey the patentee’s commands about how, or how many times, to use the goods. The reasons that led the Supreme Court in GTE Sylvania to excuse non-price, non-conspiratorial, post-sale restrictions from anti-trust sanctions provide no reasoned basis for making patent infringement sanctions available to enforce such restrictions.

In GTE Sylvania, the Supreme Court said that it was irrational to conclude that restrictions on customers should be punished as anti-trust violations in any and all circumstances. The Court found that the defendant GTE had a negligible and shrinking market position (approximately 1 to 2 per cent of TV set sales) and negligible market power. GTE had adopted territorial restrictions [*464] limiting GTE dealers as to where they might sell TV sets to the public. GTE’s purpose was to “bribe” its dealers to handle and promote its products, by offering its dealers protection against competition from one another. Because of GT’'s relative insignificance, and because many other competing sellers of TV sets existed in the United States, GTE’s restrictions were unlikely to have any adverse effect on the general vigour of competition in the market-place. The only possible effect would be on “intra-brand competition” in the sale of GTE’s “Sylvania” brand TV sets, which was of no importance because of all the other competing brands (“inter-brand competition”).

The Court therefore concluded that GTE’s territorial restrictions on its dealers should be legal under the anti-trust laws unless they were shown to harm competition. In excusing these so-called “vertical” restrictions by GTE on its distributor-customers, the Court emphasised that restrictions on price, and “horizontal” territorial restrictions resulting from a conspiracy or cartel among competitors, would continue to be per se unlawful, because they lacked the redeeming virtues and harmless character of GTE’s vertical restrictions on intra-brand competition in the resale of its products.

Clearly, the GTE Sylvania decision does not address the patent infringement issue in the Mallinckrodt case. [FN33] By the same token, Mallinckrodt does not address, as GTE Sylvania does, whether the anti-trust laws should permit sellers to engage in some degree of restriction of intra-brand competition, in order to create a greater amount of socially beneficial inter-brand competition. Promoting competition is not the legal issue in Mallinckrodt. The issue is whether intellectual property rights, or personal property rights, should govern what use an end-user or other customer may make of a patented article after puchasing it from the patentee. Conceivably, public policy concerning competition may in some way illuminate the resolution of the legal issue. But it is fallacious to maintain that, because policy does not command that anti-trust law shall suppress customer restrictions, it follows that policy requires that patent law shall compel obedience to such customer restrictions.

In short, that a court concludes that a restriction-imposing firm should not be subject to anti-trust law sanctions (treble damages, injunctions, compulsory licensing as in Glaxo, fines, imprisonment, and so on) does not mean that the same court is obliged to mulct as a patent infringer a customer that flouts the firm's restrictions. Non-interference by the state in both cases is perfectly reasonable.

What is dictum?

A pervasive flaw in the Mallinckrodt opinion is its concept of dictum and precedent. The Mallinckrodt Court’s position, baldly stated, is this:

-- Most or many of the line of exhaustion doctrine cases involved price-fixing or tie-ins.

-- Therefore, they could have been decided on the legal theory that price-fixes and tie-ins are illegal per se.

-- Any sweeping language by the Supreme Court about property rights, and about post-sale restrictions on customers’ use of patented products not being patent infringement, is mere obiter dictum that may properly be disregarded in cases not involving price-fixes or tie-ins.

The Mallinckrodt Court conceded that the language of the Supreme Court in the exhaustion doctrine cases went far beyond disapproval of price-fixing and tie-ins, but it stated that better jurisprudence confines precedents to what was necessary to the judgment and disregards everything else as obiter dicta. Significant difficulties attend the Federal Circuit’s position. First, many would perceive the Federal Circuit’s view to exceed the proper role of a lower court. Clearly, the Supreme Court’s GTE Sylvania decision did not purport to overrule a century of prior Supreme Court decisional law on the exhaustion doctrine; indeed, the GTE Sylvania opinion does not even mention patent infringement. The idea of overturning the Supreme Court’s exhaustion doctrine decisions on patent infringement comes exclusively from the Federal Circuit’s Mallinckrodt panel.

Is a lower court free to disregard what the Supreme Court explicitly says — whether what it says is dictum or ratio decidendi — particularly when the so-called dictum is consistently repeated in a long line of opinions? The Supreme Court consistently stated — indeed, insisted — that property-law rights of customers, not patent-law rights of sellers, govern after the point of sale — in cases involving and not involving price-fixes and tie-ins. These were not casual observations; rather, they were the Supreme Court’s rationalising principle for its decisions. Did the Federal Circuit panel simply have its own notion of whether it or the Supreme Court is in charge?

That foreshadows the next difficulty with the Mallinckrodt decision — the Court’s flawed concept of dictum. Of course, it would have been possible for the Supreme Court to have decided the exhaustion doctrine cases on the different rationale that the Mallinckrodt Court indicated that it preferred. But it is clear that the Supreme Court preferred, and deliberately selected, a different doctrinal route to its judgments, based on different legal concepts: its property law notions rather than any supposed abhorrence of price-fixing and tie-ins. The doctrinal route that the Supreme Court consistently took in the exhaustion doctrine line of cases does not support the rationale that the Mallinckrodt Court proposed as a substitute. Indeed, it is inconsistent with it. In the 1926 General Electric case, for example, the Court excused a patentee’s price-fixing on the ground that it occurred outside the context of any post-sale restriction on a customer. Clearly, the Supreme Court did not consider the basis of its prior decisions under the exhaustion doctrine to be a legal rule prohibiting all price-fixing. If it did, the Court would have held GE guilty of price-fix anti-trust violations, instead of exonerating it. The General Electric decision itself shows that there was no general legal principle prohibiting, or of abhorrence toward, price-fixing in patent licensing or patent-related transactions, which could provide a logical substitute for property rights as [*465] a rationalising principle for the Supreme Court’s exhaustion doctrine line of cases.

The Court’s rationale in exhaustion doctrine cases was that the purchasers acquired an unlimited property right in the patented products, and that it was inconsistent with that property right for the patentee to control how the purchasers used or disposed of the products once they had become the property of the purchasers. The legal reasoning in all of these decisions begins with that principle, and the rest of the analysis consists of applying it to the particular facts. The Court’s theory about property rights of purchasers is the centre-piece of its legal analysis. That is not obiter dictum. That is the holding in the case. When the Mallinckrodt panel says that this is dictum, it is merely saying in a peculiar manner that it does not like the Supreme Court’s reasoning and thinks that the Court should have held something else — that it should have reached its end result by a different conceptual route. But that is the kind of criticism levelled in law journal articles, not lower court opinions.

Licences, sales, and conditional and unconditional sales

The Mallinckrodt Court sought to support post-sale restrictions under the doctrine sustaining licences of limited scope. Indeed, the Court compressed the two into a single doctrine. But it would be obtuse to insist that the prior cases make no distinction between restrictions accompanying sales and those in licences to manufacture. A central point in the Supreme Court’s General Electric decision is that, while it is “well settled” that restrictions on use after the patentee sells a product to a customer are without legal force, the rule is different in regard to a limitation on the scope of a licence to manufacture the same product. Treating sales and licences to manufacture as legally equivalent is contrary to a vast body of case law, including the General Electric decision from which the Mallinckrodt Court extracted its rule governing legality. Licences create relational interests; sales create property rights. The legal consequences are very different.

That is not to say that the sale—licence distinction may not warrant legislative re-examination, or that policy arguments cannot be made for revising the law. But that is not what the Mallinckrodt Court did or said. It simply overruled the entire body of law in the field, in disregard of however“well settled” the Supreme Court said that body of law was.

Finally, the Court said that the remaining exhaustion doctrine cases that did not fit the tie-in and price-fix pattern that the Court proposed were cases of unconditional, as contrasted with conditional, sale. A conditional sale of a patented product should be enforced, the Court said, unless the condition is illegal. This argument is a replay of the Court's equation of licences to sales. Violation of a condition in a licence can be a patent infringement because the licence authorises the licensee to do something which would otherwise be patent infringement, and fails to authorise the licensee to do other things. When the licensee does the other things without having a patent licence to do so, its acts are patent infringement. A sale, whether or not conditional, does not authorise customers to perform otherwise unauthorised acts; it conveys ownership. Violation of a use-restrictive condition in a sale does not involve engaging in unauthorised acts, for owners of goods need no further authorisations to use their goods, unless some separate method patent covers the use in question. These differences in consequences follow from the different natures, respectively, of a relational interest and property. Perhaps that theory needs re-examination; perhaps not. Nevertheless, it is established law and it would take legislation to change it. Judicial fiat is a poor substitute for legislation.

Conclusion

The Federal Circuit’s Mallinckrodt decision seemingly puts to an end over a century of US case law ruling that personal property law, not patent infringement law, governs customers’ rights when they use products that patentees sold them. The flaws in Mallinckrodt’s legal analysis appear overwhelming. The decision is insupportable, except as an exercise in judicial legislation. Where does that leave one?

In principle, the Federal Circuit follows stare decisis. But like all courts, what it does may not coincide with what it claims it does. Because Mallinckrodt’s precedential support is negligible, its viability as a precedent may be limited. Subsequent panel decisions may distinguish it or limit it to its facts to the point of irrelevance. [FN34] On the other hand, the Mallinckrodt decision may prove a beacon — a precedent favouring greater recognition of patentees’ rights to govern their customers’ use of the products that the patentee sells them.

Taken at face value, the Mallinckrodt decision is a remarkable change in the law, which may have remarkable consequences. If followed as a precedent, Mallinckrodt would permit patentees to accomplish many things that previously were infeasible. Patentee-sellers may be able significantly to limit their customers in repairing, refurbishing, recycling, and modifying equipment. The Mallinckrodt decision may make it easier for patentee-manufacturers to maximise their revenue from niche or differentiated markets, in which the same technology may have different values and in which effective post-sale use restrictions would permit patentees to charge appropriately different value-based prices for the same product.

If one puts aside prejudices against judicial legislation, here, one may recognise that the previous asymmetry of legal treatment between customer restrictions and limitations on the scope of licences may long have called for reassessment and a coalescence of legal standards. The Court’s new standard, however, is unfortunately lacking in substantive content. A legal standard intermediate between the exhaustion doctrine and that adopted in Mallinckrodt, applied alike to customer restrictions and licensee limitations, might have better served the interests of patentees, their customers and the public.



© 1993 Richard H. Stern

FN1. The term "exhaustion doctrine' means that the patentee's sale of the product "exhausts' the patent monopoly on that article. Thereafter, the sold article is treated as unpatented.

FN2. 272 US 476 (1926).

FN3. Ibid., at 489 to 490.

FN4. Ibid.

FN5. For an example of such cartel use, see Hartford Empire Co. v United States, 323 US 386 (1945).

FN6. See, for example, United States v Jerrold Electronics Corp., 187 F. Supp. 856 (ED Pa. 1960), aff'd per curiam on other grounds, 365 US 567 (1961).

FN7. See, for example Merck v Stephar [1981] ECR 2063; Centrafarm v Sterling Drug [1974] ECR 1147; C. Fellner, The Future of Legal Protection for Industrial Design, 1985, at 76; T. Doi, 1 Trademark and Unfair Competition Law of Japan, 1980, at 253 to 263. The exhaustion doctrine applies to sales of copyrighted and trademarked goods, as well as patented goods. Centrafarm v Winthrop [1974] 2 CMLR 480; Deutsche Grammophon v Metro SB Grossmarket [1971] CMLR 631.

FN8. Thus, the House Report accompanying enactment of the Semiconductor Chip Protection Act of 1984 (SCPA) observed that "the exhaustion of any rights by the first authorised sale is a basic tenet of our intellectual property law'.

FN9. 976 F.2d 700 (Fed. Cir. 1992).

FN10. Apparently, there was no actual health or safety problem. At least, the opinion does not say that such a problem existed. However, Mallinckrodt asserted that "potential adverse consequences, such as infectious disease transmission' were its reason for using the restriction against reuse. Since Mallinckrodt did not prove its assertion on this point, some scepticism may be in order, and one may suspect that pecuniary considerations explain the arrangement.

FN11. The Federal Circuit is the only court of appeals that decides appeals from patent infringement trials, and further review of Federal Circuit patent decisions by the Supreme Court almost never occurs. Furthermore, the Federal Circuit has a rule that, once any panel of the court rules on an issue, all subsequent panels of the Federal Circuit must follow that ruling as a binding precedent, unless and until the Federal Circuit decides to have all of its active judges sit en banc and a majority of the en banc court overrules the precedent.

FN12. In the absence of a restriction or limited licence, however, it remains the law that the first authorised sale of a patented article places the article outside the reach of patent infringement remedies. See for example Intel Corp. v ULSI Sys. Technology Inc., 995 F.2d 1566, 1568 (Fed. Cir. 1993), rehearsing en banc denied, ibid., at 1576 (three judges dissenting).

FN13. The case law does not distinguish among sales by the patentee, its assignee or its licensee. The only relevant factor appears to be whether the sale was authorised by the patentee -- where "authorised' is used broadly.

FN14. Adams v Burke, 84 US (17 Wall.) 452 (1873); Hobbie v Jennison, 149 US 355 (1893); Keeler v Standard Folding Bed Co., 157 US 659 (1895).

FN15. Bobbs-Merrill Co. v Straus, 210 US 339 (1908).

FN16. Bauer & Cie. v O'Donnell, 229 US 502 (1913). Boston Store v American Graphophone Co., 246 US 8 (1918), involved an express such agreement rather than a mere notice, but the Court treated the case no differently from Bauer.

FN17. Straus v Victor Talking Machine Co., 243 US 490 (1917); Motion Picture Patents Co. v Universal Film Mfg Co., 243 US 502 (1917).

FN18. See, for example United States v Ciba-Geigy Corp., 508 F. Supp. 1118 (DNJ 1976). The Court held use limitations imposed on manufacturing licensees to be legal, while similar restrictions imposed on customers were held illegal per se under the anti-trust laws. The restrictions and limitations were on a drug chemical: no resale in bulk, and formulation only into combinations with specified other active drug chemicals.

FN19. General Talking Pictures Corp. v Western Elec. Co., 304 US 175 (1938), 305 US 124 (1938).

FN20. The term "amplifier' usually refers to a self-contained, standalone device that amplifies an electrical signal. In this sense, it is not just a component of such a device, as vacuum tubes are. Additional components (such as resistors and capacitors) must be combined with vacuum tubes to make an amplifier.

FN21. See 304 US at 184 and Note 1.

FN22. See Notes 2 and 3 above and accompanying text. The General Electric decision has never been overruled, although it has been qualified and limited by subsequent decisions. The Supreme Court has twice divided equally (4-4) on whether to overrule the General Electric decision's limited exoneration of price-fixing. United States v Line Material Co., 333 US 287 (1948); United States v Huck Mfg Co., 382 US 197 (1965). The subsequent qualifications occurred with regard to whether particular conduct patterns constituted illegal price-fixing or should be excused.

FN23. See Ethyl Gasoline Corp. v United States, 309 US 436 (1940); United States v Univis Lens Co., 316 US 241 (1942). The Supreme Court invoked the exhaustion doctrine to find the use and customer restrictions not supported by the patent laws, so that the restrictive licensing system should be suppressed as violative of the anti-trust laws.

FN24. See Note 22 above.

FN25. 388 US 365 (1967).

FN26. A per se violation of the anti-trust laws is conduct that violates section 1 of the Sherman Act irrespective of whether actual or probable adverse effects on the vigour of competition can be established. Price-fixing is an example of a per se violation. FN27. 433 US 36 (1977).

FN28. Ordinarily, that means causing a substantial decrease in the vigour of competition.

FN29. 410 US 52 (1973).

FN30. The government also appealed the trial court's refusal to permit the government to seek a declaration of invalidity of the patents. The Supreme Court ruled for the government on this issue, also.

FN31. The same conclusion would appear to follow from the Court's ruling that the government should be entitled to seek to invalidate the defendants' patents because the patents provided the foundation on which the defendants were able to effectuate their unlawful restrictions. 410 US at 59 (the patents "provided the leverage for or have contributed to the anti-trust violations adjudicated'). Generally, the range of sanctions in anti-trust cases goes far beyond that of other cases. Anti-trust santions include injunctions, treble damages, fines, and imprisonment. Injunctive relief may include, as in Glaxo, compulsory licensing and sales.

FN32. See text following Note 3 above. Like the General Electric Court, the Mallinckrodt Court did not articulate criteria for applying the test to particular facts and cases.

FN33. The GTE Sylvania ruling would probably not apply to Mallinckrodt's situation, however, even as a matter of anti-trust law. Mallinckrodt did not adopt these single-use restrictions to lessen intra-brand competition as a means of preserving itself as a factor in inter-brand competition in this product. There is no inter-brand competition in these products. Nor is Mallinckrodt a minor competitive factor in the industry, acting defensively to escape extinction at the hands of larger manufacturers. It could forcefully be argued (ignoring for the moment whether ownership of patents justifies the conduct) that Mallinckrodt, unlike GTE, is attempting to monopolise trade in these products or is, at least, coercively imposing on hospitals contracts to restrain such trade.

FN34. This may already have occurred; see Note 12 above. The majority opinion in the ULSI case reverted to an exhaustion-doctrine approach. Subsequently, three members of the Court dissented from denial of a rehearing en banc, insisting that the issue needed clarification. One of the dissenting judges was the author of the Mallinckrodt decision.