Chapter 12: Limitations on Rights,
Misuse, and Abusive Enforcement of Rights





Introduction

This chapter addresses various aspects of the issue of limits. The intellectual property laws do not permit unlimited exploitation of the statutory monopolies that they grant. Some limits are set in the statutes, see 17 U.S.C. §§ 107-117; 35 U.S.C. § 271(d), and others by common (or case) law. The task with which legislators and courts have grappled is striking a proper balance between encouraging authors and inventors to advance the progress of science and useful arts, by granting them limited monopolies, and protecting the legitimate interests of competitors and the public by not letting the monopolies so granted get out of hand and thus, perhaps, hinder the progress of science and useful arts.





Bobbs-Merrill Co. v. Straus
United States Supreme Court
210 U.S. 339 (1908)

Mr. Justice Day delivered the opinion of the Court.


The plaintiff, appellant here, the Bobbs-Merrill Co. (Bobbs-Merrill), brought suit against the defendants, appellees here, Isidor Straus and Nathan Straus (Macy), partners trading as R.H. Macy & Co., in the Circuit Court of the United States for the Southern District of New York, to restrain the sale of a copyrighted novel, entitled “The Castaway,” at retail at less than $1 for each copy.

Bobbs–Merrill is the owner of the copyright upon “The Castaway.” Printed immediately below the copyright notice on the page in the book following the title page is inserted the following notice:

The price of this book at retail is $1 net. No dealer is licensed to sell it at a less price, and a sale at a less price will be treated as an infringement of the copyright.

Macy, before the commencement of the action purchased copies of the book for the purpose of selling the same at retail. Macy, at the time of purchase of copies of the book, knew that it was a copyrighted book and were familiar with the terms of the notice printed in each copy thereof, as above set forth, and knew that this notice was printed in every copy of the book purchased by them.

The wholesale dealers, from whom Macy purchased copies of the book, obtained the same either directly from the complainant or from other wholesale dealers at a discount from the net retail price, and at the time of their purchase knew that the book was a copyrighted book and were familiar with the terms of the notice printed in each copy thereof, as described above, and such knowledge was in all wholesale dealers through whom the books passed from the complainants to defendants. But the wholesale dealers were under no agreement or obligation to enforce the observance of the terms of the notice by retail dealers or to restrict their sales to retail dealers who would agree to observe the terms stated in the notice.

Macy sold copies of the book at retail at the uniform price of $0.89 a copy, and are still selling, exposing for sale and offering copies of the book at retail at the price of $0.89 per copy, without the consent of Bobbs–Merrill.

Much of the argument on behalf of Bobbs–Merrill is based upon the alleged analogy between the statutes of the United States securing patent rights to inventors and the copyright acts securing rights and privileges to authors and others. And this analogy, it is contended, is so complete that decisions under the patent statutes in respect to the rights claimed in this suit under the copyright act are necessarily controlling.

The question was supposed to be involved in the recent case of Cortelyou v. Johnson, 207 U.S. 196, where a patented machine, known as the Neostyle, was sold with a license, printed on the baseboard of the machine, limiting the use thereof to certain paper, ink and other supplies, made by the Neostyle company. While the question as to the validity of such license restriction was fully and ably argued by counsel, the case went off upon the finding that notice of the license restriction was not brought home to the defendant company.

If we were to follow the course taken in the argument, and discuss the rights of a patentee, under letters patent, and then, by analogy, apply the conclusions to copyrights, we might greatly embarrass the consideration of a case under letters patent, when one of that character shall be presented to this Court.

We may say in passing, disclaiming any intention to indicate our views as to what would be the rights of parties in circumstances similar to the present case under the patent laws, that there are differences between the patent and copyright statutes in the extent of the protection granted by them. This was recognized by Judge Lurton, who wrote a leading case on the subject in the federal courts (The Button Fastener Case, 77 Fed. Rep. 288), for he said in the subsequent case of Park & Sons v. Hartman, 153 Fed. Rep. 24:

There are such wide differences between the right of multiplying and vending copies of a production protected by the copyright statute and the rights secured to an inventor under the patent statutes, that the cases which relate to the one subject are not altogether controlling as to the other.

We therefore approach the consideration of this question as a new one in this Court, and one that involves the extent of the protection which is given by the copyright statutes of the United States to the owner of a copyright under the facts disclosed in this record. Cases in this court have affirmed the proposition that copyright property under federal law is wholly statutory, and depends upon the right created under the acts of Congress passed in pursuance of the authority conferred under the Constitution, White-Smith Music Co. v. Apollo Co., 209 U.S. 1, following the previous case of Wheaton v. Peters, 8 Pet. 590.

The statutory rights secured to one who has complied with the provisions of the law and become the owner of a copyright may be found in the Revised Statutes of the United States, and are as follows:

§ 4952. Any citizen of the United States or resident therein, who shall be the author, inventor, designer or proprietor of any book...shall, upon complying with the provisions of this chapter, have the sole liberty of printing, reprinting, publishing, completing, copying, executing, finishing and vending the same.

It is the contention of Bobbs–Merrill that the Circuit Court erred in failing to give effect to the provision of § 4952, protecting the owners of the copyright in the sole right of vending the copyrighted book or other article, and the argument is that the statute vested the whole field of the right of exclusive sale in the copyright owner; that he can part with it to another to the extent that he sees fit, and may withhold to himself, by proper reservations, so much of the right as he pleases.

What does the statute mean in granting “the sole right of vending the same”? Was it intended to create a right which would permit the holder of the copyright to fasten, by notice in a book or upon one of the articles mentioned within the statute, a restriction upon the subsequent alienation of the subject-matter of copyright after the owner had parted with the title to one who had acquired full dominion over it and had given a satisfactory price for it? It is not denied that one who has sold a copyrighted article, without restriction, has parted with all right to control the sale of it. The purchaser of a book, once sold by authority of the owner of the copyright, may sell it again, although he could not publish a new edition of it.

In this case the stipulated facts show that the books sold by Bobbs–Merrill were sold at wholesale, and purchased by those who made no agreement as to the control of future sales of the book, and took upon themselves no obligation to enforce the notice printed in the book, undertaking to restrict retail sales to a price of $1 per copy.

The precise question, therefore, in this case is, does the sole right to “vend” secure to the owner of the copyright the right, after a sale of the book to a purchaser, to restrict future sales of the book at retail, to the right to sell it at a certain price per copy, because of a notice in the book that a sale at a different price will be treated as an infringement, which notice has been brought home to one undertaking to sell for less than the named sum? We do not think the statute can be given such a construction, and it is to be remembered that this is purely a question of statutory construction. There is no claim in this case of contract limitation, nor license agreement controlling the subsequent sales of the book.

In our view the copyright statutes, while protecting the owner of the copyright in his right to multiply and sell his production, do not create the right to impose, by notice, such as is disclosed in this case, a limitation at which the book shall be sold at retail by future purchasers, with whom there is no privity of contract. This conclusion is reached in view of the language of the statute, read in the light of its main purpose to secure the right of multiplying copies of the work, a right which is the special creation of the statute. True, the statute also secures, to make this right of multiplication effectual, the sole right to vend copies of the book, the production of the author's thought and conception. The owner of the copyright in this case did sell copies of the book in quantities and at a price satisfactory to it. It has exercised the right to vend. What the complainant contends for embraces not only the right to sell the copies, but to qualify the title of a future purchaser by the reservation of the right to have the remedies of the statute against an infringer because of the printed notice of its purpose so to do unless the purchaser sells at a price fixed in the notice. To add to the right of exclusive sale the authority to control all future retail sales, by a notice that such sales must be made at a fixed sum, would give a right not included in the terms of the statute, and, in our view, extend its operation, by construction, beyond its meaning, when interpreted with a view to ascertaining the legislative intent in its enactment.

This conclusion renders it unnecessary to discuss other questions noticed in the opinion in the Circuit Court of Appeals, or to examine into the validity of the publisher's agreements, alleged to be in violation of the acts to restrain combinations creating a monopoly or directly tending to the restraint of trade.



Henry v. A.B. Dick Co.
United States Supreme Court
224 U.S. 1 (1912)

Mr. Justice Lurton delivered the opinion of the Court.

This action was brought by the complainant, A.B. Dick Co., for the infringement of two letters patent covering a stencil-duplicating machine known as the Rotary Mimeograph. The complainants sold to one Christina B. Skou, of New York, a Rotary Mimeograph embodying the invention described and claimed in said patents under license which was attached to said machine, as follows:

License Restriction

This machine is sold by the A.B. Dick Company with the license restriction that it may be used only with the stencil paper, ink, and other supplies made by A.B. Dick Co., Chicago, U.S.A.

The defendant Sidney Henry sold to Miss Skou a can of ink suitable for use upon said mimeograph, with knowledge of the said license agreement, and with the expectation that it would be used in connection with said mimeograph. The ink sold to Miss Skou was not covered by the claims of said patent.

The question is: Did the acts of the defendants constitute contributory infringement of the complainant's patents?

That the license agreement constitutes a contract not to use the machine in a prohibited manner is plain. That defendants might be sued upon the broken contract, or for its enforcement, or for the forfeiture of the license, is likewise plain. But if, by the use of the machine in a prohibited way, Miss Skou infringed the patent, then she is also liable to an action under the patent law for infringement. Now that is primarily what the bill alleged, and this suit is one brought to restrain the defendants as aiders and abettors to her proposed infringing use.

The bill alleges that the complainant's patent has been infringed by the breach of the conditions upon which the patented machine was sold. The remedy it seeks is an injunction against indirect infringement by the defendants. The facts stated upon the face of the bill may be insufficient to show an infringement of the patent; but the right to treat the conduct of the defendants as an indirect infringement is a right which the complainant sets up as arising under the patent law. One construction of the scope of the grant will sustain the rights asserted, if the facts be as alleged, and another will defeat those rights.

That a patentee may effectually restrict the time, place, or manner of using a patented machine, so that a prohibited use will constitute an infringement of the patent, is fully conceded. Thus, in the printed brief, counsel for defendants say: “Aside from such special contracts, an agreement that the article shall be used only in a certain manner can be made only by way of lease of the article, terminating the lease upon condition broken, or by way of conditional sale, by breach of which the title reverts to the seller.” In either such case, counsel say, “a use of the article in violation of the condition may terminate the lease or sale of the article, which would become the property of the patentee again, and a use thereof by the lessee or purchaser may constitute a violation of the patent, for which an infringement may lie. He cannot make a sale with the condition attached that the article shall be used or disposed of in a certain manner, leaving the title, however, in the purchaser in case of a breach of the condition.”

The books abound in cases upholding the right of a patentee owner of a machine to license another to use it, subject to any qualification in respect of time, place, manner, or purpose of use which the licensee agrees to accept. Any use in excess would obviously be an infringing use and the license would be no defense. This is so elementary we shall not stop to cite cases.

The contention is not that a patentee may not permit the use of a patented thing, with such qualifications as he sees fit to impose, and that a prohibited use will be an infringing one, but that he can only keep the article within the control of the patent by retaining the title. To put the contention in another form, it is that any transfer of the patentee's property right in a patented machine carries with it the right to use the entire invention so long as the identity of the machine is preserved, irrespective of any restrictions placed by the patentee upon the use of the article, and accepted by the buyer. It is said that by such a sale the patentee disposes of all his rights under his patent, and thereby removes the article from the operation of the patent law. If he attempts to sell the machine for specified uses only, and prohibit all others, the restriction is disposed of as constituting a collateral agreement such as any vendor of personal property might impose, and enforceable, if valid at all, only as a collateral contract.

The issue is a plain one. If it be sound, it concludes the case, and our response should be a negative one, since the violation of a mere collateral contract, which is not also an infringement of the patent, would not be a case arising under the patent law. But is it true that where a patentee sells his patented machine for a specific and limited use, he does not thereby reserve to himself, as patentee, the exclusive right to all unpermitted uses which may be made of his invention as embodied in the machine sold? Obviously, this is a question arising under the patent law. By a sale of a patented article subject to no conditions, the purchaser undeniably acquires the right to use the article for all the purposes of the patent, so long as it endures. He may use it where, when, and how he pleases, and may dispose of the same unlimited right to another. This has long been the settled doctrine of this and all patent courts. By such an unconditional sale of the thing patented it is said to be no longer within the limits of the monopoly. It passes outside of it, and is no longer under the protection of the act of Congress.

In the cases cited above, the statement that a purchaser of a patented machine has an unlimited right to use it for all the purposes of the invention, so long as the identity of the machine is preserved, was made of one who bought unconditionally; that is, subject to no specified limitation upon his right of use.

An absolute and unconditional sale operates to pass the patented thing outside the boundaries of the patent, because such a sale implies that the patentee consents that the purchaser may use the machine so long as its identity is preserved. This implication arises, first, because a sale without reservation, of a machine whose value consists in its use, for a consideration, carries with it the presumption that the right to use the particular machine is to pass with it. The rule and its reason is thus stated: The sale must furthermore be unconditional. Not only may the patentee impose conditions limiting the use of the patented article, upon his grantees and express licensees, but any person having the right to sell may, at the time of sale, restrict the use of his vendee within specific boundaries of time or place or method, and these will then become the measure of the implied license arising from the sale.

The argument for the defendants ignores the distinction between the property right in the materials composing a patented machine, and the right to use for the purpose and in the manner pointed out by the patent. The latter may be and often is the greater element of value, and the buyer may desire it only to apply to some or all of the uses included in the invention. But the two things are separable rights. If sold unreservedly the right to the entire use of the invention passes, because that is the implied intent; but this right to use is nothing more nor less than an unrestricted license presumed from an unconditional sale. A license is not an assignment of any interest in the patent. It is a mere permission granted by the patentee. It may be a license to make, sell, and use, or it may be limited to any one of these separable rights. If it be a license to use, it operates only as a right to use without being liable as an infringer. If a licensee be sued, he can escape liability to the patentee for the use of his invention by showing that the use is within his license. But if his use be one prohibited by the license, the latter is of no avail as a defense. As a license passes no interest in the monopoly, it has been described as a mere waiver of the right to sue by the patentee.

The property right to a patented machine may pass to a purchaser with no right of use, or with only the right to use in a specified way, or at a specified place, or for a specified purpose. The unlimited right of exclusive use which is possessed by and guaranteed to the patentee will be granted if the sale be unconditional. But if the right of use be confined by specific restriction, the use not permitted is necessarily reserved to the patentee. If that reserved control of use of the machine be violated, the patent is thereby invaded. This right to sever ownership and use is deducible from the nature of a patent monopoly and is recognized in the cases.

It is plain from the power of the patentee to subdivide his exclusive right of use that when he makes and sells a patented device, that the extent of the license to use which is carried by the sale must depend upon whether any restriction was placed upon the use and brought home to the person acquiring the article.

That here the patentee did not intend to sell the machine made by it subject to an unrestricted use is, of course, undeniable from the words upon the machine, viz. the License Restriction.

The meaning and purpose of this restriction was that while the property in the machine was to pass to the purchaser, the right to use the invention was restricted to use with other articles required in its practical operation, supplied by the patentee. It was stated at the bar, and appears that A.B. Dick sold its machines at cost, or less, and depended upon the profit realized from the sale of other unpatented articles adapted to be used with the machine, and that it had put out many thousands of such machines under the same license restriction. Such a sale, while transferring the property right in the machine, carries with it only the right to use it for practicing the invention according to the terms of the license. To no other or greater extent does the patentee consent to the use of the machine. When the purchaser is sued for infringement by using the device, he may defend by pleading, not the general and unlimited license which is carried by an unconditional sale, but the limited license indicated by the metal tablet annexed to the machine. If the use is not one permitted, it is plainly an infringing use.

If, then, we assume that the violation of restrictions upon the use of a machine made and sold by the patentee may be treated as infringement, we come to the question of the kind of limitation which may be lawfully imposed upon a purchaser.

To begin with, the purchaser must have notice that he buys with only a qualified right of use. He has a right to assume, in the absence of knowledge, that the seller passes an unconditional title to the machine, with no limitations upon the use. Where, then, is the line between a lawful and an unlawful qualification upon the use? This is a question of statutory construction. But with what eye shall we read a meaning into it? It is a statute creating and protecting a monopoly. It is a true monopoly, one having its origin in the ultimate authority, the Constitution. Shall we deal with the statute creating and guaranteeing the exclusive right which is granted to the inventor with the narrow scrutiny proper when a statutory right is asserted to uphold a claim which is lacking in those moral elements which appeal to the normal man? Or shall we approach it as a monopoly granted to subserve a broad public policy, by which large ends are to be attained, and therefore to be construed so as to give effect to a wise and beneficial purpose? That we must neither transcend the statute, nor cut down its clear meaning, is plain.

If the patent be for a machine, the monopoly extends to the right of making, selling, and using, and these are separable and substantial rights. In E. Bement & Sons v. National Harrow Co., 186 U. S. 70, there was involved the legality of certain contracts between patentees of and dealers in patented harrows. The purpose and effect of the combination and of the contracts between the parties was to fix and keep up the prices at which licensees might sell the patented harrows. It was claimed that the combination and contracts were obnoxious to the Sherman act; but, upon the other side, it was said that as the contracts concerned only the sale of patented articles, that the act did not apply. The character of the monopoly granted under the patent act was therefore involved. Touching the right of the patentee to exclude all others from the use of his invention, the court quoted with approval what was said in the Button-Fastener Case, 77 Fed. 288, as follows:

If he see fit, he may reserve to himself the exclusive use of his invention or discovery. If he will neither use his device nor permit others to use it, he has but suppressed his own. That the grant is made upon the reasonable expectation that he will either put his invention to practical use, or permit others to avail themselves of it upon reasonable terms, is doubtless true. This expectation is based alone upon the supposition that the patentee's interest will induce him to use, or let others use, his invention. The public has retained no other security to enforce such expectations. A suppression can endure but for the life of the patent, and the disclosure he has made will enable all to enjoy the fruit of his genius. His title is exclusive, and so clearly within the constitutional provisions in respect of private property that he is neither bound to use his discovery himself nor permit others to use it.

In the Paper Bag Case, 210 U. S. 405, this right to exclude others from all use of the invention was held to be so comprehensive that a patentee was allowed to restrain, by injunction, one who was infringing his patent, although he had, during a long term of years, neither used his invention himself, nor allowed others to use it.

The general rule is absolute freedom in the use or sale of rights under the patent laws of the United States. The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal.

Now, if this was a suit to recover damages upon the contract not to use the machine except in connection with other articles proper in its use, made by the patentee, the only possible defense would be that the agreement was one contrary to public policy, in that it affected freedom in the sale of such articles to the user of such machines. But that was the nature of the defense made to the suit to enforce the agreements under consideration in the Bement case. The Court in that case found that the contracts did include interstate commerce within their provisions and restrained interstate trade, but with reference to the Sherman act said:

But that statute clearly does not refer to that kind of a restraint of interstate commerce which may arise from reasonable and legal conditions imposed upon the assignee or licensee of a patent by the owner thereof, restricting the terms upon which the article may be used and the price to be demanded therefor. Such a construction of the act, we have no doubt, was never contemplated by its framers.

As to whether the restrictions upon sales imposed by the agreements were legal and reasonable conditions, the Court said:

The provision in regard to the price at which the licensor would sell the article manufactured under the license was also an appropriate and reasonable condition. It tended to keep up the price of the implements and sold, but that was only recognizing the nature of the property dealt in, and providing for its value so far as possible. This the parties were legally entitled to do. The owner of a patented article can, of course, charge such price as he may choose, and the owner of a patent may assign it or sell the right to manufacture and sell the article patented upon the condition that the assignee shall charge a certain amount for such article.

If the stipulation in an agreement between patentees and dealers in patented articles, which, among other things, fixed a price below which the patented articles should not be sold, would be a reasonable and valid condition, it must follow that any other reasonable stipulation, not inherently violative of some substantive law, imposed by a patentee as part of a sale of a patented machine, would be equally valid and enforceable. It must also follow that if the stipulation be one which qualifies the right of use in a machine sold subject thereto, so that a breach would give rise to a right of action upon the contract, it would be at the same time an act of infringement, giving to the patentee his choice of remedies.

But it has been very earnestly said that a condition restricting the buyer to use it only in connection with ink made by the patentee is one of a character which gives to a patentee the power to extend his monopoly so as to cause it to embrace any subject, not within the patent, which he chooses to require that the invention shall be used in connection with. Of course, the argument does not mean that the effect of such a condition is to cause things to become patented which were not so without the requirement. The stencil, the paper, and the ink made by the patentee, will continue to be unpatented. Anyone will be as free to make, sell, and use like articles as they would be without this restriction, save in one particular: namely, they may not be sold to a user of one of the patentee's machines with intent that they shall be used in violation of the license. To that extent competition in the sale of such articles, for use with the machine, will be affected; for sale to such users for infringing purposes will constitute contributory infringement. But the same consequence results from the sale of any article to one who proposes to associate it with other articles to infringe a patent, when such purpose is known to the seller.

But could it be said that the doctrine of contributory infringement operates to extend the monopoly of the patent over subjects not within it because one subjects himself to the penalties of the law when he sells unpatented things for an infringing use? If a patentee says, “I may suppress my patent if I will. I may make and have made devices under my patent, but I will neither sell nor permit anyone to use the patented things,” he is within his right, and none can complain. But if he says, “I will sell with the right to use only with other things proper for using with the machines, and I will sell at the actual cost of the machines to me, provided you will agree to use only such articles as are made by me in connection therewith” — if he chooses to take his profit in this way, instead of taking it by a higher price for the machines, has he exceeded his exclusive right to make, sell, and use his patented machines? The market for the sale of such articles to the users of his machine, which, by such a condition, he takes to himself, was a market which he alone created by the making and selling of a new invention. Had he kept his invention to himself, no ink could have been sold by others for use upon machines embodying that invention. By selling it subject to the restriction, he took nothing from others and in no wise restricted their legitimate market.

A like objection has been made against injunctions restraining the sale for infringing purposes of a single element in a patent combination. It was said that to enjoin such sales, although the thing sold was intended to be used with other elements to complete an infringing combination, was to extend the scope of the patent so as to give to the patentee the same advantage as if the element had been claimed alone. But the course of the law is not to be turned aside because the practical result may be to give a patentee for the time being more than the Patent Office contemplated, nor is the patentee to be deprived of his just rights because under some circumstances he gets incidental advantages beyond what he expressly bargained for.

Neither can we see that the liability of the defendants for aiding and abetting an infringing use by Miss Skou would be different whether she had made her machine in open defiance of the rights of the patentee, or had bought it under conditions limiting her right of use. If she had made it, she would have been liable to an action for infringement for making; and if she used it, she would become liable for such infringing use. But if the defendants knew of the patent and that she had unlawfully made the patented article, and then sold her ink or other supplies without which she could not operate the machine, with the intent and purpose that she should use the infringing article by means of the ink supplied by them, and that they would assist in her infringing use.

For the purpose of testing the consequence of a ruling which will support the lawfulness of a sale of a patented machine for use only its connection with supplies necessary for its operation, bought from the patentee, many fanciful suggestions of conditions which might be imposed by a patentee have been pressed upon us. Thus it is said that a patentee of a coffee pot might sell on condition that it be used only with coffee bought from him, or, if the article be a circular saw, that it might be sold on condition that it be used only in sawing logs procured from him. These and other illustrations are used to indicate that this method of marketing a patented article may be carried to such an extent as to inconvenience the public and involve innocent people in unwitting infringements.

But these illustrations all fail of their purpose, because the public is always free to take or refuse the patented article on the terms imposed. If they be too onerous or not in keeping with the benefits, the patented article will not find a market. The public, by permitting the invention to go unused, loses nothing which it had before, and when the patent expires will be free to use the invention without compensation or restriction. This was pointed out in the Paper Bag Case, where the inventor would neither use himself nor allow others to use, and yet was held entitled to restrain infringement, because he had the exclusive right to keep all others from using during the life of the patent. This larger right embraces the lesser of permitting others to use upon such terms as the patentee chooses to prescribe.

It must not be forgotten that we are dealing with a constitutional and statutory monopoly. An attack upon the rights under a patent because it secures a monopoly to make, to sell, and to use, is an attack upon the whole patent system. We are not at liberty to say that the Constitution has unwisely provided for granting a monopolistic right to inventors, or that Congress has unwisely failed to impose limitations upon the inventor's exclusive right of use. And if it be that the ingenuity of patentees in devising ways in which to reap the benefit of their discoveries requires to be restrained, Congress alone has the power to determine what restraints shall be imposed. As the law now stands it contains none, and the duty which rests upon this and upon every other court is to expound the law as it is written.

Arguments based upon suggestions of public policy not recognized in the patent laws are not relevant. The field to which we are invited by such arguments is legislative, not judicial. The decisions of this Court, as we have construed them, do not so limit the privilege of the patentee, and we could not so restrict a patent grant without overruling the long line of judicial decisions from circuit courts and circuit courts of appeal, heretofore cited, thus inflicting disastrous results upon individuals who have made large investments in reliance upon them.

The conclusion we reach is that there is no difference, in principle, between a sale subject to specific restrictions as to the time, place, or purpose of use, and restrictions requiring a use only with other things necessary to the use of the patented article purchased from the patentee. If the violation of the one kind is an infringement, the other is also. That a violation of any such restriction annexed to a sale by one with notice constitutes an infringing use has been decided by a great majority of the circuit courts and circuit courts of appeal, and has come to be a well-recognized principle in the patent law, in accordance with which vast transactions in respect to patented articles have been conducted. But it is now said that the numerous decisions by the lower courts have been erroneous in respect to the proper construction of the limit of the monopoly conferred by a patent, and that they should now be overruled. To these courts has been committed the duty of interpreting and administering the patent law. There is no power in this Court to review their judgments, except upon a writ of certiorari. This power to review by certiorari is one which has been seldom exercised in patent cases. A line of decisions which has come to be something like a rule of property, under which large businesses have been conducted, should at least not be overruled except upon reasons so clear as to make any other construction of the patent law inadmissible.

An unconditional or unrestricted sale by the patentee, or by a licensee authorized to make such sale, or an article embodying the patented invention or discovery, passes the article without the limits of the monopoly, and authorizes the buyer to use or sell it without restriction; but to the extent that the sale is subject to any restriction upon the use or future sale, the article has not been released from the monopoly, but is within its limits, and, as against all who have notice of the restriction, is subject to the control of whoever retains the monopoly. This results from the fact that the monopoly is a substantial property right conferred by law as an inducement or stimulus to useful invention and discovery, and that it rests with the owner to say what part of this property he will reserve to himself and what part he will transfer to others, and upon what terms he will make the transfer.

The precise question here involved has never been decided by this Court. In Bobbs-Merrill Co. v. Straus, it was urged that the analogy between the right of one under the copyright statute to fix the price at which a copyrighted book might be sold by retailers by a mere notice accompanying the book, and the right of one selling a patented article subject to a condition that it should not be sold at less than a prescribed minimum price was such as to entitle the owner of the copyright to treat a sale contrary to the notice as an infringing sale. But this Court declined to consider the rule applicable to restrictive licenses accompanying the sale of a patented article, saying: “If we were to follow the course taken in the argument, and discuss the rights of a patentee, under letters patent, and then, by analogy, apply the conclusions to copyrights, we might greatly embarrass the consideration of a case under letters patent, when one of that character shall be presented to this Court.

We come, then, to the question as to whether the acts of the defendants constitute contributory infringement of the complainants' patent. The facts upon which our answer must be made are somewhat meager. Undoubtedly a bare supposition that by a sale of an article which, though adapted to an infringing use, is also adapted to other and lawful uses, is not enough to make the seller a contributory infringer. Such a rule would block the wheels of commerce. There must be an intent and purpose that the article sold will be so used. Such a presumption arises when the article so sold is only adapted to an infringing use. It may also be inferred where its most conspicuous use is one which will cooperate in an infringement when sale to such user is invoked by advertisement.

These defendants are stated to have made a direct sale to the user of the patented article, with knowledge that under the license from the patentee she could not use the ink, sold by them directly to her, in connection with the licensed machine, without infringement of the monopoly of the patent. It is not open to them to say that it might be used in a noninfringing way, for the fact is that they made the sale, “with the expectation that it would be used in connection with said mimeograph.” The fair interpretation of the facts stated is that the sale was with the purpose and intent that it would be so used.

So understanding the import of the question in connection with the facts, we must answer the question affirmatively.


Mr. Chief Justice White, with whom concurred Justices Hughes and Lamar, dissenting.

My reluctance to dissent is overcome in this case: I am led to express the reasons which constrain me to dissent, because of the hope that if my forebodings as to the evil consequences to result from the application of the construction now given to the patent statute be well founded, the statement of my reasons may serve a twofold purpose: First, to suggest that the application in future cases of the construction now given be confined within the narrowest limits, and, second, to serve to make it clear that if evils arise, their continuance will not be caused by the interpretation now given to the statute, but will result from the inaction of the legislative department in failing to amend the statute so as to avoid such evils.

Let me briefly recapitulate the facts and the rulings based thereon. A machine styled a rotary mimeograph was covered by a patent. The claims of the patent, however, did not embrace the ink or other materials used in working the machine, nor were they covered by independent patents. The A.B. Dick Co., owner of the patent, sold one of the machines to a Miss Skou. The entire title was parted with; in other words, there was no condition imposed affecting the title or the uses to which the machine might be applied, or the duration of the use. Upon the machine, however, was inscribed a notice, styled a License Restriction, reciting that the machine “may be used only with the stencil paper, ink, and other supplies made by the A.B. Dick Co., Chicago, U.S.A.” The Henry Co., dealers in ink, sold to Miss Skou, for use in working her machine, ink not made by A.B. Dick. The court now decides that a use of such ink by Miss Skou would have been “a use of the machine in a prohibited way” and would have rendered her liable to an action under the patent law for infringement, and that the seller of the ink was liable as an infringer of the patent on the machine because of the aiding and abetting a proposed infringing use.

I cannot bring my mind to assent to the conclusion referred to, and shall state in the light of reason and authority why I cannot do so. As I have said, the ink was not covered by the patent; indeed, it is stated in argument, and not denied, that a prior patent which covered the ink had expired before the sale in question. It therefore results that a claim for the ink could not have been lawfully embraced in the patent, and if it had been by inadvertence allowed, such claim would not have been enforceable. This curious anomaly, then, results, that that which was not embraced by the patent, which could not have been embraced therein, and which, if mistakenly allowed and included in an express claim, would have been inefficacious, is now, by the effect of a contract, held to be embraced by the patent and covered by the patent law. This inevitably causes the contentions now upheld to come to this: that a patentee, in selling the machine covered by his patent, has power by contract to extend the patent so as to cause it to embrace things which it does not include; in other words, to exercise legislative power of a far-reaching and dangerous character.

The exclusive right of use of the invention embodied in the machine which the patent protected was a right to use it anywhere and everywhere, for all and every purpose of which the machine, as embraced by the patent, was susceptible. The patent was solely upon the mechanism which, when operated, was capable of producing certain results. A patent for this mechanism was not concerned in any way with the materials to be used in operating the machine, and certainly the right protected by the patent was not a right to use the mechanism with any particular ink or other operative materials. Of course, as the owner of the machine possessed the ordinary right of an owner of property to use such materials as he pleased in operating his patented machine, and had the power in selling his machine to impose such conditions in the nature of covenants not contrary to public policy as he saw fit, I shall assume that he had the power to exact that the purchaser should use only a particular character of materials.

But as the right to employ any desired operative materials in using the patented machine was not a right derived from or protected by the patent law, but was a mere right arising from the ownership of property, it cannot be said that the restriction concerning the use of the materials was a restriction upon the use of the machine protected by the patent law. When I say it cannot be said, I mean that it cannot be so done in reason, since the inevitable result of so doing would be to declare that the patent protected a use which it did not embrace.

And this, after all, serves to demonstrate that it is a misconception to qualify the restriction as one on the use of the machine, when in truth, both in form and substance, it was but a restriction upon the use of materials capable of being employed in operating the machine. In other words, every use which the patent protected was transferred to Miss Skou, and the very existence of the particular restriction under consideration presupposes such right of complete enjoyment, and because of its possession there was engrafted a contract restriction, not upon the use of the machine, but upon the materials. And these considerations are equally applicable to the exercise of the exclusive right to vend protected by the patent unless it can be said that, by the act of selling a patented machine, and disposing of all the use of which it is capable, a patentee is endowed with the power to amplify his patent by causing it to cover in the future things which, at the time of the sale, it did not embrace.

But the result of this analysis serves at once again to establish, from another point of view, that the ruling now made in effect is that the patentee has the power, by contract, to extend his patent rights so as to bring within the claims of his patent things which are not embraced therein, thus virtually legislating by causing the patent laws to cover subjects to which, without the exercise of the right of contract, they could not reach, the result to multiply monopolies at the will of an interested party.

The vast extent to which the results just stated may be carried will be at once apparent by considering the facts of this case, and bearing in mind that this is not the suit of a patentee against one with whom he has contracted to enforce, as against such person, an act done in violation of a contract as an infringement, but it is against a third person who happened to deal in an ordinary commodity of general use with a person with whom the patentee had contracted. And this statement shows that the effect of the ruling is to make the virtual legislative authority of the owner of a patented machine extend to every human being in society, without reference to their privity to any contract existing between the patentee and the one to whom he has sold the patented machine.

I do not think it necessary to stop to point out the innumerable subjects which will be susceptible of being removed from the operation of state judicial power, and the fundamental and radical character of the change which must come as a result of the principle decided. But nevertheless let me give a few illustrations:

Take a patentee selling a patented engine. He will now have the right by contract to bring under the patent laws all contracts for coal or electrical energy used to afford power to work the machine, or even the lubricants employed in its operation.

Take a patented carpenter's plane. The power now exists in the patentee by contract to validly confine a carpenter purchasing one of the planes to the use of lumber sawed from trees grown on the land of a particular person, or sawed by a particular mill.

Take a patented cooking utensil. The power is now recognized in the patentee to bind by contract one who buys the utensil to use in connection with it no other food supply but that sold or made by the patentee.

Take the invention of a patented window frame. It is now the law that the seller of the frame may stipulate that no other material shall be used in a house in which the window frames are placed except such as may be bought from the patentee and seller of the frame.

Take an illustration which goes home to everyone, a patented sewing machine. It is now established that, by putting on the machine, in addition to the notice of patent required by law, a notice called a license restriction, the right is acquired, as against the whole world, to control the purchase by users of the machine of thread, needles, and oil lubricants or other materials convenient or necessary for operation of the machine.

The illustrations might be multiplied indefinitely. That they are not imaginary is now a matter of common knowledge, for, as the result of a case [The Button Fastener Case] decided some years ago by one of the circuit courts of appeal, which has been followed by cases in other circuit courts of appeal, to which reference will hereafter be made, what prior to the first of those decisions on a sale of a patented article was designated a condition of sale, governed by the general principles of law, has come in practice to be denominated a license restriction; thus, by the change of form, under the doctrine announced in the cases referred to, bring the matters covered by the restriction within the exclusive sway of the patent law. As the transformation has come about in practice since the decisions in question, the conclusion is that it is attributable as an effect caused by the doctrine of those cases. And, as I have previously stated, it is a matter of common knowledge that the change has been frequently resorted to for the purpose of bringing numerous articles of common use within the monopoly of a patent when otherwise they would not have been embraced therein, thereby tending to subject the whole of society to a widespread and irksome monopolistic control.

That the sale here in question was one of all the rights which the patent protected has, it seems to me, at the outset been demonstrated beyond reasonable dispute. I mean, of course, within the limit of my powers of understanding, since, looking at the so-called license restriction again and again with a purpose, if possible, to bring my mind to assent to the view which the court takes of it, I find it impossible to do so. And in this connection it is to be observed that the real nature of the transaction is, in the argument of counsel for A.B. Dick, stated to be directly the opposite of that which the court now holds it to be. Thus, counsel say:

In the license plan in issue, the licensor, by limiting the market at which supplies may be purchased, is merely insuring to himself a royalty based upon the output of the machine. The licensor, by requiring the purchase of ink of him, in fact exacting a royalty (infinitesimal in amount) for every copy of the original produced by the mimeograph. The very nature of the work of these machines forbids the use of a fixed money royalty upon the work produced, since the money value is so small that the expense of the accounting would be prohibitive of such a method.

But even if I were to put aside everything I have said, and were to concede, for the sake of argument, that the power existed in a patentee, by contract, to accomplish the results which it is now held may be effected, I nevertheless would be unable to give my assent to the ruling now made. If it be that so extraordinary a power of contract is vested in a patentee, I cannot escape the conclusion that its exercise, like every other power, should be subject to the law of the land. To conclude otherwise would be but to say that there was a vast zone of contract lying between rights under a patent and the law of the land, where lawlessness prevailed and wherein contracts could be made whose effect and operation would not be confined to the area described, but would be operative and effective beyond that area, so as to dominate and limit rights of everyone in society, the law of the land to the contrary notwithstanding.

Again, a curious anomaly would result from the doctrine. The law, in allowing the grant of a patent to the inventor, does not fail to protect the rights of society; on the contrary, it safeguards them. The power to issue a patent is made to depend upon considerations of the novelty and utility of the invention. and the presence of these prerequisites must be ascertained and sanctioned by public authority; and although this authority has been favorably exerted, yet, when the rights of individuals are concerned, the judicial power is then open to be invoked to determine whether the fundamental conditions essential to the issue of the patent existed. Under the view now maintained of the right of a patentee by contract to extend the scope of the claims of this patent, it would follow that the incidental right would become greater than the principal one, since by the mere will of the party rights by contract could be created, protected by the patent law, without any of the precautions for the benefit of the public which limit the right to obtain a patent.

I have already indicated how, since the decision in the Button-Fastener Case, the attempt to increase the scope of the monopoly granted by a patent has become common by resorting to the device of license restrictions manifested in various forms, all of which tend to increase monopoly and to burden the public to the exercise of their common rights. My mind cannot shake off the dread of the vast extension of such practices which must come from the decision of the Court now rendered. Who, I submit, can put a limit upon the extent of monopoly and wrongful restriction which will arise, especially if by such a power a contract which otherwise would be void as against public policy may be successfully maintained?

What could more cogently serve to point to the reality and conclusiveness of these suggestions than do the facts of this case? It is admitted that the use of the ink to work the patented machine was not embraced in the patent, and yet it is now held that by contract the use of materials not acquired from a designated source has become an infringement of the patent, and exactly the same law is applied as though the patent in express terms covered the use of ink and other operative materials. It is not, as I understand it, denied and in reason it cannot be denied, that the particular contract which operates this result, if tested by the general law, would be void as against public policy. The contract, therefore, can only be maintained upon the assumption that the patent law and the issue of a patent is the generating source of an authority to contract to procure rights under the patent law not otherwise within that law, and which could not be enjoyed under the general law of the land. But here, as upon the main features of the case, it seems to me this court has spoken so authoritatively as to leave no room for such a view. In Pope Mfg. Co. v. Gormully, 144 U. S. 224, the validity of certain stipulations contained in a license to use patented inventions came under consideration. It was decided that contracts of that character, like all others, were to be measured by the law of the land, and were nonenforceable if they were contrary to general rules of public policy. And it was further held that even if contracts of that character were not void as against general principles of public policy, the aid of a court of equity would not be given to their enforcement if the stipulations were unconscionable and oppressive, as are, in my judgment, aside from the rule of public policy, the stipulations of the contract here involved.

Notes

1. The business reason for A.B. Dick's use restriction was given in the passage from its counsel's argument that Justice White quoted. The requirement that ink be purchased from the patentee permitted A.B. Dick to impose a running royalty proportional to the licensee's use of the invention. In effect, the restriction places a meter on the machine, permitting collection of a small, per–copy payment (the royalty is the difference between the market price for ink and the price A.B. Dick charges), in a case where the expense of the royalty accounting would otherwise be prohibitive.

Is that objectionable of itself? Is that the proper question to ask in a case in which the patentee seeks enforcement, not one in which the government is prosecuting the patentee?

2. Did the effect of the license restriction likely have an appreciable adverse impact on competition in the sale of ink or other supplies? Is that material? See 35 U.S.C. § 271(d):

No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: . . . (5) conditioned the license of any rights to the patent or the sale of the patented product on the . . . purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

Does 35 U.S.C. § 271(d)(5) look to the ink or the mimeo machine market? To what market does Clayton Act § 3 (15 U.S.C. § 14) look?

3. Suppose that Henry could show that a large part of the ink market in the United States was sales of ink to owners of patented Rotary Mimeograph machines.

What of the argument that this part of the present demand for ink is new and only the result of the invention? The part of the ink market not created by the invention is still open to competition.

4. What is the Court's definition of contributory infringement? Is it the same as that of 35 U.S.C. § 271(c)?

5. The oscillation in judicial attitude toward restrictions imposed on patented and copyrighted articles during this period reflects a continuing instability in this area of law.



Motion Picture Patents Co. v. Universal Film Mfg. Co.
United States Supreme Court
243 U.S. 502 (1917)

Mr. Justice Clarke delivered the opinion of the Court:

In this suit relief is sought against three defendant corporations as joint infringers of claim 7 of U.S. Pat, No. 707,934, granted for improvements in projecting-kinetoscopes. It is sufficient description of the patent to say that it covers a part of the mechanism used in motion picture exhibiting machines for feeding a film through the machine with a regular, uniform, and accurate movement, and so as not to expose the film to excessive strain or wear.

The defendants, in a joint answer, deny infringement and claim an implied license to use the patented machine.

Evidence which is undisputed shows that the plaintiff, in a paper styled License Agreement, granted to the Precision Machine Co. a right and license to manufacture and sell machines embodying the inventions described and claimed in the patent in suit, and in other patents, throughout the United States, its territories and possessions. This agreement contains a covenant on the part of the grantee that every machine sold by it shall be sold “under the restriction and condition that such exhibiting or projecting machine shall be used solely for exhibiting or projecting motion pictures containing the inventions of Patent No. 12,192, leased by a licensee of the licensor.”

The grantee further covenants and agrees that to each machine sold by it, except for export, it will attach a plate showing plainly not only the dates of the patent under which the machine is “licensed,” but also the following words and figures:

The sale and purchase of this machine gives only the right to use it solely with moving pictures containing the invention of reissued patent No. 12,192, leased by a licensee of the Motion Picture Patents Co., the owner of the above patents and reissued patent, while it owns said patents, and upon other terms to be fixed by the Motion Picture Patents Co. and complied with by the user while it is in use and while the Motion Picture Patents Co. owns said patents. The removal or defacement of this plate terminates the right to use this machine.

The agreement further provides that the grantee shall not sell any machine at less than the plaintiff's list price, except to jobbers and others for purposes of resale, and that it will require such jobbers and others to sell at not less than plaintiff's list price. The price fixed in the license contract for sale of machines is not less than $150 for each machine, and the licensee agrees to pay a royalty of $5 on some machines and a percentage of the selling price on others.

It is admitted that the machine, the use of which is charged to be an infringement of the patent in suit, was manufactured by the Precision Machine Co., and was sold and delivered under its License Agreement to the 72nd Street Amusement Co., then operating a playhouse in New York, and that when sold it was fully paid for and had attached to it a plate with the inscription which we have quoted as required by the agreement.

Patent No. 12,192, referred to in the notice attached to the machine, expired on August 31, 1914. The defendant Prague Amusement Co., on November 2, 1914, leased the 72nd Street playhouse from the 72nd Street Amusement Co., and acquired the alleged infringing machine as a part of the equipment of the leased playhouse. Subsequent to the expiration of patent 12,192, the defendant Universal Film Mfg. Co. made two films or reels, which were sold to the defendant the Universal Film Exchange, and were supplied to the defendant Prague Amusement Co. for use on the machine, acquired as we have stated, and were used upon it at the 72nd Street playhouse.

The plaintiff sent a letter to the 72nd Street Amusement Co., notifying it in general terms that it was using without a license a machine embodying the invention of patent No. 707,934 and warning it that such use constituted an infringement of the patent, and on the same day the plaintiff addressed a letter to the defendant Universal Film Exchange, notifying it that it also was infringing the same patents by supplying films for use upon the machine of the 72nd Street playhouse and elsewhere. The bill in this case was then filed.

The district court held that the limitation on the use of the machine attempted to be made by the notice attached to it after it had been sold and paid for, was invalid, and that the 72nd Street Amusement Co., the purchaser, and its lessee, the Prague Amusement Co., had an implied license to use the machine as it had been used, and it dismissed the bill without passing on the question raised in the pleadings as to the validity of the patent. The case is here for review on certiorari.

It was admitted at the bar that 40,000 of the plaintiff's machines are now in use in this country, and that the mechanism covered by the patent in suit is the only one with which motion picture films can be used successfully.

This state of facts presents two questions for decision:

It is obvious that in this case we have presented anew the inquiry, which is arising with increasing frequency in recent years, as to the extent to which a patentee or his assignee is authorized by our patent laws to prescribe by notice attached to a patented machine the conditions of its use and the supplies which must be used in the operation of it, under pain of infringement of the patent.

The statutes relating to patents do not provide for any such notice and it can derive no aid from them. The extent to which the use of the patented machine may validly be restricted to specific supplies or otherwise by special contract between the owner of a patent and the purchaser or licensee is a question outside the patent law, and with it we are not here concerned.

The inquiry presented by this record, as we have stated it, is important and fundamental, and it requires that we shall determine the meaning of Congress when, in Rev. Stat. § 4884, 9428, it provided that “every patent shall contain a grant to the patentee for the term of seventeen years, of the exclusive right to make, use, and vend the invention or discovery throughout the United States.” We are concerned only with the right to “use,” authorized to be granted by this statute, for it is under warrant of this right only that the plaintiff can and does claim validity for its warning notice.

The words used in the statute are few, simple, and familiar, they have not been changed substantially since they were first used in the act of 1790. Their meaning would seem not to be doubtful if we can avoid reading into them that which they really do not contain.

In interpreting this language of the statute it will be of service to keep in mind three rules long established by this court, applicable to the patent law and to the construction of patents, viz.:

1st. The scope of every patent is limited to the invention described in the claims contained in it, read in the light of the specification. These so mark where the progress claimed by the patent begins and where it ends that they have been aptly likened to the description in a deed, which sets the bounds to the grant which it contains. It is to the claims of every patent, therefore, that we must turn when we are seeking to determine what the invention is, the exclusive use of which is given to the inventor by the grant provided for by the statute He can claim nothing beyond them.”

2d. It has long been settled that the patentee receives nothing from the law which he did not have before, and that the only effect of his patent is to restrain others from manufacturing, using, or selling that which he has invented. The patent law simply protects him in the monopoly of that which he has invented and has described in the claims of his patent.

3d. Since Pennock v. Dialogue, 2 Pet. 1, was decided in 1829, this court has consistently held that the primary purpose of our patent laws is not the creation of private fortunes for the owners of patents, but is “to promote the progress of science and the useful arts.” While one great object of our patent laws was, by holding out a reasonable reward to inventors and giving them an exclusive right to their inventions for a limited period, to stimulate the efforts of genius, the main object was “to promote the progress of science and useful arts." The benefit to the public or community at large was doubtless the primary object in granting and securing that monopoly. This court has never modified this statement of the relative importance of the public and private interests involved in every grant of a patent, even while declaring that, in the construction of patents and the patent laws, inventors shall be fairly, even liberally, treated.

These rules of law make it very clear that the scope of the grant which may be made to an inventor in a patent, pursuant to the statute, must be limited to the invention described in the claims of his patent; and to determine what grant may lawfully be so made we must hold fast to the language of the act of Congress providing for it, which is found in two sections of the Revised Statutes. Section 4886 provides that “any person who has invented or discovered any new and useful art, manufacture or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor;” and § 4884 provides that such patent when obtained “shall contain a grant to the patentee of the exclusive right to use the invention or discovery.”

Thus, the inventor may apply for, and, if he meets the required conditions, may obtain, a patent for the new and useful invention which he has discovered, which patent shall contain a grant of the right to the exclusive use of his discovery.

Plainly, this language of the statute and the established rules to which we have referred restrict the patent granted on a machine, such as we have in this case, to the mechanism described in the patent as necessary to produce the described results. It is not concerned with and has nothing to do with the materials with which or on which the machine operates. The grant is of the exclusive right to use the mechanism to produce the result with any appropriate material, and the materials with which the machine is operated are no part of the patented machine or of the combination which produces the patented result. The difference is clear and vital between the exclusive right to use the machine, which the law gives to the inventor, and the right to use it exclusively with prescribed materials to which such a license notice as we have here seeks to restrict it. The restrictions of the law relate to the useful and novel features of the machine which are described in the claims of the patent; they have nothing to do with the materials used in the operation of the machine; while the notice restrictions have nothing to do with the invention which is patented, but relate wholly to the materials to be used with it. Both in form and in substance the notice attempts a restriction upon the use of the supplies only, and it cannot, with any regard to in the use of language, be termed a restriction upon the use of the machine itself.

Whatever the right of the owner may be to control by restriction the materials to be used in operating the machine, it must be a right derived through the general law from the ownership of the property in the machine, and it cannot be derived from or protected by the patent law, which allows a grant only of the right to an exclusive use of the new and useful discovery which has been made.

This construction gives to the inventor the exclusive use of just what his inventive genius has discovered. It is all that the statute provides shall be given to him and it is all that he should receive, for it is the fair as well as the statutory measure of his reward for his contribution to the public stock of knowledge. If his discovery is an important one, his reward under such a construction of the law will be large, as experience has abundantly proved; and if it be unimportant, he should not be permitted by legal devices to impose an unjust charge upon the public in return for the use of it. For more than a century this plain meaning of the statute was accepted as its technical meaning, and that it afforded ample incentive to exertion by inventive genius is proved by the fact that, under it, the greatest inventions of our time, teeming with inventions, were made. It would serve no good purpose to amplify by argument or illustration this plain meaning of the statute. It is so plain that to argue it would obscure it.

It was not until the time came in which the full possibilities seem first to have been appreciated of uniting, in one, many branches of business through corporate organization, and of gathering great profits in small payments, which are not realized or resented, from many, rather than smaller or even equal profits in larger payments, which are felt and may be refused, from a few, that it came to be thought that the “right to use the invention” of a patent gave to the patentee or his assigns the right to restrict the use of it to materials or supplies not described in the patent, and not by its terms made a part of the thing patented.

The construction of the patent law which justifies as valid the restriction of patented machines, by notice, to use with unpatented supplies necessary in the operation of them, but which are no part of them, is believed to have originated in Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co.. 77 Fed. 288 (which has come to be widely referred to as the Button-Fastener Case), decided by the sixth circuit in 1896. In this case the court, recognizing the pioneer character of the decision it was rendering speaks of the “novel restrictions” which it is considering, and says that it is called upon “to mark another boundary line around the patentee's monopoly which will debar him from engrossing the market for an article not the subject of a patent,” which it declined to do.

This decision proceeds upon the argument that, since the patentee may withhold his patent altogether from public use, he must logically and necessarily be permitted to impose any conditions which he chooses upon any use which he may allow of it. The defect in this thinking springs from the substituting of inference and argument for the language of the statute, and from failure to distinguish between the rights which are given to the inventor by the patent law and which he may assert against all the world through an infringement proceeding, and rights which he may create for himself by private contract, which, however, are subject to the rules of general, as distinguished from those of the patent, law. While it is true that under the statutes as they were (and now are) a patentee might withhold his patented machine from public use, yet if he consented to use it himself or through others, such use immediately fell within the terms of the statute, and, as we have seen, he is thereby restricted to the use of the invention as it is described in the claims of his patent, and not as it may be expanded by limitations as to materials and supplies necessary to the operation of it, imposed by mere notice to the public.

The high standing of the court rendering this decision and the obvious possibilities for gain in the method which it approved led to an immediate and widespread adoption of the system, in which these restrictions expanded into more and more comprehensive forms until at length the case at bar is reached, with a machine sold and paid for, yet claimed still to be subject not only to restriction as to supplies to be used, but also subject to any restrictions or conditions as to use or royalty which the company which authorized its sale may see fit, after the sale, from time to time to impose. The perfect instrument of favoritism and oppression which such a system of doing business, if valid, would put into the control of the owner of such a patent, should make courts astute, if need be, to defeat its operation. If these restrictions were sustained, plainly the plaintiff might, for its own profit or that of its favorites, by the obviously simple expedient of varying its royalty charge, ruin anyone unfortunate enough to be dependent upon its confessedly important improvements for the doing of business.

Through the twenty years since the decision in the Button-Fastener Case was announced there have not been wanting courts and judges who have dissented from its conclusions, as is sufficiently shown in the division of this Court when the question involved first came before it in Henry v. A.B. Dick Co.

The exclusive right to “vend” a patented article is derived from the same clause of the section of the statute which gives the exclusive right to “use” such an article, and following the decision of the Button-Fastener Case, it was widely contended as obviously sound, that the right existed in the owner of a patent to fix a price at which the patented article might be sold and resold under penalty of patent infringement. But this Court, when the question came before it in Bauer v. O'Donnell, 229 U.S. 1, rejecting plausible argument, and adhering to the language of the statute from which all patent right is derived, refused to give such a construction to the act of Congress, and decided that the owner of a patent is not authorized by either the letter or the purpose of the law to fix, by notice, the price at which a patented article must be sold after the first sale of it, declaring that the right to vend is exhausted by a single, unconditional sale, the article sold being thereby carried outside the monopoly of the patent law and rendered free of every restriction which the vendor may attempt to put upon it. The statutory authority to grant the exclusive right to “use” a patented machine is not greater, indeed, it is precisely the same, as the authority to grant the exclusive right to “vend,” and, looking to that authority, for the reasons stated in this opinion, we are convinced that the exclusive right granted in every patent must be limited to the invention described in the claims of the patent, and that it is not competent for the owner of a patent, by notice attached to its machine, to, in effect, extend the scope of its patent monopoly by restricting the use of it to materials necessary in its operation, but which are no part of the patented invention, or to send its machines forth into the channels of trade of the country subject to conditions as to use or royalty to be paid, to be imposed thereafter at the discretion of such patent owner. The patent law furnishes no warrant for such a practice, and the cost, inconvenience, and annoyance to the public which the opposite conclusion would occasion forbid it.

It is argued as a merit of this system of sale under a license notice that the public is benefited by the sale of the machine at what is practically its cost, and by the fact that the owner of the patent makes its entire profit from the sale of the supplies with which it is operated. This fact, if it be a fact, instead of commending, is the clearest possible condemnation of, the practice adopted, for it proves that, under color of its patent, the owner intends to and does derive its profit, not from the invention on which the law gives it a monopoly, but from the unpatented supplies with which it is used, and which are wholly without the scope of the patent monopoly, thus in effect extending the power to the owner of the patent to fix the price to the public of the unpatented supplies as effectively as he may fix the price on the patented machine.

We are confirmed in the conclusion which we are announcing by the fact that since the decision of Henry v. A.B. Dick Co. the Congress of the United States, the source of all rights under patents, as if in response to this decision, has enacted a law making it unlawful for any person engaged in interstate commerce “to lease or make a sale or contract for sale of goods, machinery, supplies or other commodities, whether patented or unpatented, for use, consumption or resale or fix a price charged therefor, on the condition, agreement or understanding that the lessee or purchaser thereof shall not use the goods, machinery, supplies or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract for sale, or such condition, agreement or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce.” (Section 3 of the Clayton Act [15 U.S.C. § 14].)

Our conclusion renders it unnecessary to make the application of this statute to the case at bar which the circuit court of appeals made of it, but it must be accepted by us as a most persuasive expression of the public policy of our country with respect to the question before us.

It is obvious that the conclusions arrived at in this opinion are such that the decision in Henry v. A.B. Dick Co. must be regarded as overruled.

Coming now to the terms of the notice attached to the machine sold to the 72nd Street Amusement Co. under the license of the plaintiff, and to the first question as we have stated it.

This notice first provides that the machine, which was sold to and paid for by the Amusement Co., may be used only with moving picture films containing the invention of reissued patent No. 12,192, so long as the plaintiff continues to own this reissued patent.

Such a restriction is invalid because such a film is obviously not any part of the invention of the patent in suit; because it is an attempt, without statutory warrant, to continue the patent monopoly in this particular character of film after it has expired, and because to enforce it would be to create a monopoly in the manufacture and use of moving picture films, wholly outside of the patent in suit and of the patent law as we have interpreted it.

The notice further provides that the machine shall be used only upon other terms (than those stated in the notice), to be fixed by the plaintiff, while it is in use and while the plaintiff owns said patents. And it is stated at the bar that, under this warrant, a charge was imposed upon the purchaser, graduated by the size of the theater in which the machine was to be used.

Assuming that the plaintiff has been paid an average royalty of $5 on each machine sold, prescribed in the license agreement, it has already received over $200,000 for the use of its patented improvement, which relates only to the method of using the films which another had invented, and yet it seeks by this device to collect during the life of the patent in suit what would doubtless many times this amount for the use of this same invention, after its machines have been sold and paid for.

A restriction which would give to the plaintiff such a potential power for evil over an industry which must be recognized as an important element in the amusement life of the nation, under the conclusions we have stated in this opinion, is plainly void, because wholly without the scope and purpose of our patent laws, and because, if sustained, it would be gravely injurious to that public interest, which we have seen is more a favorite of the law than is the promotion of private fortunes.

Both questions as stated must be answered in the negative, and the decree of the Circuit Court of Appeals is affirmed.

Mr. Justice Holmes, dissenting, with whom Justices McKenna and Van Devanter concur:

I suppose that a patentee has no less property in his patented machine than any other owner, and that, in addition to keeping the machine to himself, the patent gives him the further right to forbid the rest of the world from making others like it. In short, for whatever motive, he may keep his device wholly out of use. So much being undisputed, I cannot understand why he may not keep it out of use unless the licensee, or, for the matter of that, the buyer, will use some unpatented thing in connection with it. Generally speaking, the measure of a condition is the consequence of a breach, and if that consequence is one that the owner may impose unconditionally, he may impose it conditionally upon a certain event.

No doubt this principle might be limited or excluded in cases where the condition tends to bring about a state of things that there is a predominant public interest to prevent. But there is no predominant public interest to prevent a patented teapot or film feeder from being kept from the public, because, as I have said, the patentee may keep them tied up at will while his patent lasts. Neither is there any such interest to prevent the purchase of the tea or films that is made the condition of the use of the machine. The supposed contravention of public interest sometimes is stated as an attempt to extend the patent law to unpatented articles, which of course it is not, and more accurately as a possible domination to be established by such means. But the domination is one only to the extent of the desire for the teapot or film feeder. If the owner prefers to keep the pot or the feeder unless you will buy his tea or films, I cannot see, in allowing him the right to do so, anything more than an ordinary incident of ownership.

Not only do I believe that the rule that I advocate is right under the Paper Bag Case, but I think that it has become a rule of property that law and justice require to be retained. For fifteen years, at least since E. Bement & Sons v. National Harrow Co., if not considerably earlier, the public has been encouraged by this Court to believe that the law is as it was laid down in Heaton-Peninsular Button-Fastener Co. I believe that many and important transactions have taken place on the faith of those decisions. For that reason as well as for the first that I have given, the rule last announced in Henry v. A.B. Dick Co. should be maintained.

Notes

1. The Motion Picture Patents case is the source of the doctrine of misuse of intellectual property rights. What did the Court do or refuse to do, and why? Did the Court find that the patentee's restrictive practices had so adverse an effect on competition in the distribution of moving pictures that it violated section 3 of the Clayton Act? What is the relation of the misuse doctrine of this case to the doctrine of “unclean hands”?

2. Justice Holmes argues for the “inherency doctrine” — that a person having the right or privilege to do A inherently has the right or privilege to do something less than A (that is, something only a subset of A). Sometimes the doctrine is phrased in terms of the greater power always including the lesser.

Thus, Justice Holmes says that “if the owner prefers to keep the pot or the feeder unless you will buy his tea or films, I cannot see, in allowing him the right to do so, anything more than an ordinary incident of ownership.”

What harm is there in that? What if it's not a teapot but a film projector dominating the film industry? Are we, as Holmes says, just “allowing him the right to do so”? Or is the court issuing an injunction compelling Prague Amusement Co. to submit to the demands of the patentee? Perhaps awarding damages too? Is that difference material?

3. Is selling the teapot on condition that you buy his tea a subset of selling the teapot or an overlapping set? What of: I will employ you as my cook on condition that you will vote the Libertarian Party ticket? (It's a subset of whether or not I choose to employ you.) Are cruel and unusual punishments a subset of the death penalty? (Is flogging a subset of execution? Branding? Maiming?) Is this a helpful method of legal analysis? Can you formulate any general rule of what's an improper condition?

4. Does the rationale of the Motion Picture Patents decision appropriately extrapolate:

5. The doctrine of patent misuse developed primarily in response to tie–ins of the kind involved in A.B. Dick and Motion Picture Patents. The Straus brothers (d/b/a R.H. Macy), inveterate price cutters, were responsible for further development of the doctrine in respect of price fixing. In a companion decision to Motion Picture Patents, involving an arrangement for patented phonograph machines like that involved in Bobbs–Merrill v. Straus, supra, for copyrighted books, the Court refused to give effect to the price–restrictive “license.” Straus v. Victor Talking Machine Co., 243 U.S. 490 (1917). (In its decision, the Court also explained why it considered early shrinkwrap licenses of this type not to be genuine licenses, but rather mere shams to evade the general law governing sale of personal property.)

While tie–in cases have predominated, the misuse doctrine has addressed other restrictive practices, including those not involving outright sales but other arrangements as well, such as licenses to manufacture a patented product or practice a patented process. The distinction between misuse as a patent remedies doctrine and preemption of state contract law has at times been blurred in non–tying cases. For example, licensee estoppel is both (a) preempted under Lear, Inc. v. Adkins, 395 U.S. 653 (1969), and (b) a form of misuse. An agreement for collection of royalties for longer than the term of the licensed patents is both (a) preempted under Brulotte v. Thys Co., 379 U.S. 29 (1964), and (b) a form of misuse.

Different theories have been advanced for invocation of the misuse doctrine. One theory is that it is misuse for the patentee to seek to exercise through a license restriction patent–like power over something outside the scope of the underlying patent on which the license rests. Another theory is that courts will refuse to be enlisted on behalf of a patentee's effort to accomplish some project inimical to basic policies of the patent laws — for example, the policy to promote technological progress or the policy that the subject matter of expired patents should be open to free competition. Another theory, recently advanced in some lower courts, is that conduct should be considered misuse only if it actually violates the antitrust laws.

In Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 140 (1969), the Supreme Court indicated that the difference between misuse and antitrust violation (at least, in that case) was that to establish an antitrust violation the treble damage claimant had to show that the misuse had a substantial adverse effect on competition, i.e., antitrust violation = misuse + anticompetitive effect. (That presumably suggests the equation: antitrust violation – anticompetitive effect = misuse.) The Zenith case involved the patentee's compelling payment of royalties on all products of a given class regardless of whether an individual product actually used the technology (invention) of the licensed patents.

6. The Court said in this case: “It is obvious that the conclusions arrived at in this opinion are such that the decision in Henry v. A.B. Dick Co. must be regarded as overruled.” Was it necessary for the Court to overrule A.B. Dick? Could it have been distinguished on the ground that the sale was conditional in that case but unconditional in this case? Is the principle of this case limited to tie-ins of materials used with the patented machine or other patented product? Does it apply to use restrictions? See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).



United States v. General Electric Company
United States Supreme Court
272 U.S. 476 (1926)

The United States sued the General Electric Company (GE) to enjoin it and Westinghouse from violating the antitrust laws. Among other things, GE licensed Westinghouse to manufacture electric light bulbs under three patents that dominated the manufacture of light bulbs. The license provided that Westinghouse must follow the prices and terms for sale that GE prescribed and itself followed.

Mr. Chief Justice Taft delivered the opinion of the Court.

Conveying less than title to the patent or part of it, the patentee may grant a license to make, use, and vend articles under the specifications of his patent for any royalty, or 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. It is well settled, as already said, that where a patentee makes the patented article, and sells it, he can exercise no future 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 question is a different one which arises 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. The patentee may make and grant a license to another to make and use the patented articles but withhold his right to sell them. The licensee in such a case acquires an interest in the articles made. He owns the material of them and may use them. But if he sells them he infringes the right of the patentee, and may be held for damages and enjoined. If the patentee goes further and licenses the selling of the articles, may he limit the selling by limiting the method of sale and the price? We think he may do so provided the conditions of sale are normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly. One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is prohibitory. When the patentee licenses another to make and vend and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods. It would seem entirely reasonable that he should say to the licensee, “Yes, you may make and sell articles under my patent but not so as to destroy the profit that I wish to obtain by making them and selling them myself.” He does not thereby sell outright to the licensee the articles the latter may make and sell or vest absolute ownership in them. He restricts the property and interest the licensee has in the goods he makes and proposes to sell.

Nor do we think that the decisions of this court holding restrictions as to price of patented articles invalid apply to a contract of license like the one in this case. These cases, such as Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908), really are only instances of the application of the principle, already referred to, that a patentee may not attach to the article made by him or with his consent a condition running with the article in the hands of purchasers limiting the price at which one who becomes its owner for full consideration shall part with it. They do not consider or condemn a restriction put by a patentee upon his licensee as to the prices at which the latter shall sell articles which he makes and only can make legally under the license.

For the reasons given, we sustain the validity of the license granted by GE to Westinghouse.

Note

The GE ruling on price-fixing has been heavily qualified but never overruled. Any deviation from the GE-Westinghouse single-manufacturing-licensee paradigm is virtually certain to be held an antitrust violation (and therefore misuse as well). Thus, cross-licenses with price restrictions are illegal. So, too, are licenses to more than one licensee, which, in effect, put together a price-fixing combination among licensees. The Supreme Court has twice divided 4-4 on whether to overrule GE. United States v. Line Material Co., 333 U.S. 287 (1948); United States v. Huck Mfg. Co., 382 U.S. 197 (1965). The Antitrust Division has for years searched for a vehicle to overturn GE but has never succeeded in getting a candidate to hold still long enough to grab it. See ABA, Antitrust Law Developments 3d 822 & nn. 167-68.

The GE decision's distinction between post-sale restrictions on customers and limitations on the scope of a manufacturing license has not been successfully challenged.

The “reasonably within the reward which the patentee by the grant of the patent is entitled to secure” and “normally and reasonably adapted to secure pecuniary reward” standard or standards (which is it?) have been criticized as nonsensical or meaningless, but Federal Circuit panels have enthusiastically declared allegiance to it/them.



General Talking Pictures Corp. v. Western Elec. Co
United States Supreme Court
304 U.S. 175 (1938), reh. 305 U.S. 124 (1938)

[These three consolidated patent infringement suits involved eight patents relating to triode vacuum tubes, elements of the tubes, and circuits using the tubes. One patent covered negatively biasing the grid of a triode; one patent covered a triode where the grid was very close to the filament, the plate was near the filament for high current applications but far from it for high voltage applications, and the grid used a fine or coarse mesh depending on desired voltage or current; one patent covered coupling triode stages with R-C networks; and so on. The patents are described further in an opinion below by Judge Manton. 91 F.2d 922 (2d Cir. 1937), aff'g 16 F. Supp. 293 (S.D.N.Y. 1936). The Supreme Court's opinion refers to these patents as being directed to “amplifiers.” Apparently, that is an over-simplification.

AT&T, the parent of Western Electric (WE), pooled certain of these patents with GE and RCA; the pool designated RCA as licensing agent for the pool. AT&T's subsidiary was exclusively licensed to exploit the patents in the field of motion picture theaters (say, big amplifier systems). Others in the pool got exclusive licenses in the sound recording field and other non-overlapping (i.e., exclusively allocated) fields.

Other companies, including American Transformer Company (ATC), were nonexclusively licensed to manufacture the patented “amplifiers” for inclusion in radio receivers. Apparently, although only the dissent by Justice Black and the district court discuss this at all (and then perhaps obscurely), ATC manufactured power amplifiers in which R-C interstage coupling of triodes and other patented circuit expedients were used. ATC designed the amplifiers to use triode tubes made in accordance with other of the patents, and ATC purchased these triodes on the open market from RCA or triode manufacturers that RCA licensed.

GTP, knowing of the license limitation, bought the amplifiers from ATC and incorporated them (with ATC's knowledge) into motion picture theater systems. The patentees sued GTP for patent infringement.]

Mr. Justice Butler delivered the opinion of the Court.

The patent owner did not sell to GTP the amplifiers in question or authorize ATC to sell them or any amplifiers for use in theaters or any other commercial use. The sales made by ATC to GTP were outside the scope of its license and not under the patent. Both parties knew that fact at the time of the transactions. There is no ground for the assumption that petitioner was a purchaser in the ordinary channels of trade.

ATC was not an assignee; it did not own the patents or any interest in them; it was a mere licensee under a nonexclusive license. Pertinent words of the license are these: “To manufacture and to sell only for radio broadcast reception.” Patent owners may grant licenses extending to all uses or limited to use in a defined field. Unquestionably, the owner of a patent may grant licenses to manufacture, use, or sell upon conditions not inconsistent with the scope of the monopoly. There is here no attempt on the part of the patent owner to extend the scope of the monopoly beyond that contemplated by the patent statute. There is no warrant for treating the sales of amplifiers to GTP as if made under the patents or the authority of their owner.

ATC could not convey to GTP what both knew it was not authorized to sell. By knowingly making the sales to GTP outside the scope of its license, ATC infringed the patents embodied in the amplifiers. GTP, with knowledge of the facts, bought at sales constituting infringement. It therefore did itself infringe the patents embodied in the amplifiers when it leased them for use as talking picture equipment in theaters.


On rehearing, Mr. Justice Brandeis delivered the opinion of the Court.

For the private or home field the patent pool granted non_exclusive licenses to about 50 manufacturers. Among these was ATC. It was licensed “solely and only to the extent and for the uses hereinafter specified and defined...to manufacture...and to sell...only for...radio broadcast reception...licensed apparatus so manufactured by the Licensee.”

The license provided further: “Nothing herein contained shall be regarded as conferring upon the Licensee either expressly or by estoppel, implication or otherwise, a license to manufacture or sell, any apparatus except such as may be manufactured by the Licensee in accordance with the express provision of this Agreement.”

ATC, knowing that it had not been licensed to manufacture or to sell amplifiers for use in theatres as part of talking picture equipment, made for that commercial use the amplifiers in controversy and sold them to GTP for that commercial use. GTP ordered the amplifiers and purchased them knowing that ATC had not been licensed to make or sell them for such use in theatres. Any use beyond the valid terms of a license is, of course, an infringement of a patent.

If where a patented invention is applicable to different uses, the owner of the patent may legally restrict a licensee to a particular field and exclude him from others, ATC was guilty of an infringement when it made the amplifiers for, and sold them to, GTP. And, as GTP ordered, purchased and leased them knowing the facts, it also was an infringer.

The question of law requiring decision is whether the restriction in the license is to be given effect. That a restrictive license is legal seems clear. As was said in United States v. General Electric Co., the patentee may grant a license “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.” The restriction here imposed is of that character. The practice of granting licenses for a restricted use is an old one. So far as appears, its legality has never been questioned. The parties stipulated that “it is common practice where a patented invention is applicable to different uses, to grant written licenses to manufacture under U.S. patents restricted to one or more of the several fields of use permitting the exclusive or non-exclusive use of the invention by the licensee in one field and excluding it in another field.”

As the restriction was legal and the amplifiers were made and sold outside the scope of the license, the effect is precisely the same as if no license whatsoever had been granted to ATC. And as GTP knew the facts, it is in no better position than if it had manufactured the amplifiers itself without a license. It is liable because it has used the invention without license to do so.

We have consequently no occasion to consider what the rights of the parties would have been if the amplifier had been manufactured “under the patent” and “had passed into the hands of a purchaser in the ordinary channels of trade.” Nor have we occasion to consider the effect of a “licensee's notice” which purports to restrict the use of articles lawfully sold.


[Mr. Justice Black, dissenting, maintained that the patentees licensed ATC to manufacture amplifiers and ATC manufactured amplifiers “of a standard type usable in many fields.” He challenged the legal effectiveness of the restrictive notice:

Notice to the purchaser in any form could not — under the patent law — limit or restrict the use of the amplifiers after they were sold and knowledge by both vendor and purchaser that the articles were purchased for use outside the “field” for which the vendor had been given the right to sell, made the transaction between them no less a sale.

He denied the effectiveness of field limitations in a license to manufacture patented goods. In his view, a license to manufacture in any field or for any use is sufficient, once the licensee sells the goods, to exhaust the patent monopoly for all purposes:

a “common practice...to grant written licenses...restricted to one or more...fields of...use” cannot prevent the application of that line of cases in which this court has from the beginning held that a patentee who has parted with a patented machine by passing title to a purchaser has placed the article beyond the limits of the monopoly secured by the patent act.

Justice Reed joined in Justice Black's dissent.]

Notes

1. Muddled treatment of the facts about “amplifiers” notwithstanding, GTP has for decades been the leading case on field of use limitations in patent licenses. Does GTP declare a rule of per se legality of such limitations or restrictions? Consider Hartford Empire Co. v. United States, 323 U.S. 386 (1945), in which a cartel somewhat like that of AT&T-WE, GE, and RCA in this case was held illegal under the antitrust laws. The Hartford Empire patentees pooled patents covering the manufacture of glass bottles (primarily machinery) and they allocated different types of glassware and bottles (milk bottles, fruit jars, pressed glass) among themselves; they also engaged in some price fixing.

2. The distinction between post-sale restrictions on purchasers from an authorized seller (the patentee or its licensee) and limitations on the scope of a license to manufacture patented articles, emphasized in GE and carried forward in GTP, has remained a fixture of patent infringement and licensing law.

3. The government (Antitrust Division) filed an amicus curiae brief on rhearing supporting GTP's side of the case. The brief is discussed after Ethyl, below.



Ethyl Gasoline Corp. v. United States
United States Supreme Court
309 U.S. 436 (1940), aff'g 27 F. Supp. 959 (S.D.N.Y. 1939)

[Ethyl Gasoline Corp. (Ethyl) has as its sole business the manufacture and sale of a fluid consisting essentially of tetraethyl lead (TEL). When the TEL-containing fluid is added to gasoline in small amounts (about 0.02% to 0.05%), the combustion temperature of the resulting fuel mixture increases. That prevents premature ignition of the fuel and consequent engine “knocking,” even at increased compression ratios.

Ethyl owns four relevant patents. Different claims of the four patents are directed to (a) the TEL-containing fluid, (b) the process of making a motor fuel by adding the TEL-containing fluid to gasoline, (c) the resulting composition [for example, in simplified form, “A motor fuel for internal-combustion engines, said fuel comprising gasoline mixed with from 0.01% to 0.1%, by weight, of TEL.”], and finally (d) the use of such motor fuel in internal combustion engines (e.g., in driving a car).

Ethyl manufactures the TEL-containing fluid and sells it to its licensed refiners. (There is no patent royalty as such. Ethyl granted royalty-free, limited licenses under the patents to its licensees.) The refiners add the fluid to gasoline, thereby using the inventions of the (a) and (b) claims, and making and selling the invention of the (c) claims; perhaps the refiners actively induce or contribute to use of the (d) claims, as well. The refiners are licensed to sell the motor fuel of the (c) claims only to other refiners licensed by Ethyl, jobbers licensed by Ethyl, and retailers and consumers. Ethyl's licenses to refiners specify that the refiners will sell the motor fuel only at predetermined relative price levels to the various classes of customers. A jobber is licensed only to resell the patented motor fuel it purchases from a designated licensed refiner to retailers and consumers in a specified territory. Jobber licenses are terminable on 30 day notice.

Approximately 11,000 of the 12,000 U.S. gasoline jobbers are Ethyl licensees. Ethyl denied other jobbers licenses or cancelled them because Ethyl's field representatives reported adversely on their “business ethics.” That usually meant price cutting in violation of the licenses or in violation of prices that the licensed refiners posted.]

Mr. Justice Stone delivered the opinion of the Court.

The stipulation of facts shows that Ethyl, through its patents, its contracts, and its licensing policy, has acquired the power to exclude at will from participation in the nationwide market for lead-treated motor fuel all of the 12,000 motor fuel jobbers of the country, by refusing to license any of the 1,000 unlicensed jobbers, or by cancelling, as it may at will, the licenses of any of the 11,000 licensed jobbers. This we assume, for present purposes, it could lawfully do by virtue of the power conferred by its patent to exclude any or all others from selling the patented product.

But it does not follow that it can lawfully exercise that power in such manner as to control the patented commodity in the hands of the licensed jobbers who had purchased it, or their actions with respect to it in ways not within the limits of the patent monopoly. Conspicuously among such controls which the Sherman law prohibits and the patent law does not sanction is the regulation of prices and the suppression of competition among the purchasers of the patented articles. That Ethyl, by the plan and scope of its licensing policy has acquired vast potential power to accomplish that end cannot be doubted. The record supports the finding of the trial court that appellant has exercised that power continuously for a considerable period as a means of control over the price policies of the licensed jobbers. The record leaves no doubt that appellant has made use of its dominant position in the trade to exercise control over prices and marketing policies of jobbers in a sufficient number of cases and with sufficient continuity to make its attitude toward price cutting a pervasive influence in the jobbing trade. Large numbers of refiners and the majority of jobbers believe that the jobbers must maintain the required business ethics in order to obtain licenses, and a number of licensed jobbers believe that they are required by appellant's licensing practices to maintain prices and abide by the marketing practices of the major oil companies.

And so we turn to the consideration of the patents and the patent law to ascertain whether the monopoly which they have given appellant affords a lawful basis for the control over the marketing of motor fuel which the record discloses. Cf. United States v. General Electric. In considering that question we assume the validity of the patents, which is not questioned here.

The patent law confers on the patentee a limited monopoly, the right or power to exclude all others from manufacturing, using or selling his invention. He may grant licenses to make, use or vend, restricted in point of space or time, or with any other restriction upon the exercise of the granted privilege, save only that by attaching a condition to his license he may not enlarge his monopoly and thus acquire some other which the statute and the patent together did not give.

Ethyl, as patentee, possesses exclusive rights to make and sell the fluid and also the lead-treated motor fuel. By its sales to refiners it relinquishes its exclusive right to use the patented fluid and it relinquishes to the licensed jobbers its exclusive rights to sell the lead-treated fuel by permitting the licensed refiners to manufacture and sell the fuel to them. And by the authorized sales of the fuel by refiners to jobbers the patent monopoly over it is exhausted, and after the sale neither appellant nor the refiners may longer rely on the patents to exercise any control over the price at which the fuel may be resold.

Ethyl's dominion over the jobbers' business goes beyond its patent monopoly. That is emphasized by the circumstances here present that the prices and market practices sought to be established are not those prescribed by the patentee, but by the refiners. Ethyl neither owns nor sells the patented fuel nor derives any profit through royalties or otherwise from its sale. It has chosen to exploit its patents by manufacturing the fluid covered by them and by selling that fluid to refiners for use in the manufacture of motor fuel. Such benefits as result from control over the marketing of the treated fuel by the jobbers accrues primarily to the refiners and indirectly to Ethyl, only in the enjoyment of its monopoly of the fluid secured under another patent. The licensing conditions are thus not used as a means of stimulating the commercial development and financial returns of the patented invention which is licensed, but for the commercial development of the business of the refiners and the exploitation of a second patent monopoly not embraced in the first. The patent monopoly of one invention may no more be enlarged for the exploitation of a monopoly of another than for the exploitation of an unpatented article.

The decree below rightly suppressed the entire licensing device. It properly suppressed the means by which the unlawful restraint was achieved.

Notes

1. Ethyl sought to emphasize that it granted the refiners licenses to manufacture the patented motor fuel — the category (c) or “composition” claims described above. The government said that Ethyl “has chosen a particular method of exploiting its patent rights. It manufactures and sells the patented fluid [TEL]. When it receives the price for the fluid it has received all of the financial reward which it collects or claims from the exploitation of its patent rights. Having made this choice, it is subject to the fundamental rule laid down by this Court” in such cases as those which you have studied earlier in this chapter.

Does this suggest that Ethyl would have been better off if it had never claimed or had dedicated the patent on TEL fluid and kept perhaps just the motor-fuel, “composition” patent? Would that have brought Ethyl more closely under the protective wings of GTP? Or would the government then argue that the sale of an unpatented product (which TEL would then be), the only utility of which is in manufacturing a patented product (the patented fuel), is legally equivalent to selling the patented thing? See United States v. Univis Lens Co., 316 U.S. 241, 249 (1942). What if Ethyl let someone else sell the TEL and placed all focus on licensing refiners to manufacture the motor fuel?

Does the seeming paradox of fewer patents being better than more suggest that two things are converging here? One is any stick to beat a bad dog. The other is that restrictive sale vs. limited manufacturing license is an poor legal measuring stick for purposes of sound analysis.

2. Consider the following arguments of the government in its Ethyl brief while at the same time recalling your knowledge of how one can claim a business method or Internet-related invention as a method, system, programmed apparatus, encoded floppy disk, or encoded signal:

Ethyl assumes that the legality of its licensing scheme must be measured by the rules applicable to patent licensing arrangements [i.e., GTP] rather than the rules applying to sales of patented articles. This assumption is erroneous. When Ethyl sells the patented fluid it receives the full pecuniary consideration for the exploitation of its patent rights and its patent privilege is exhausted.

If the gasoline whose use and sale Ethyl seeks to control by its additional patents possesses any patentable peculiarity, that characteristic results from the presence in the gasoline of an infinitesimally small portion of the patent fluid which Ethyl has voluntarily sold for a valuable consideration. The control which Ethyl attempts to exert over the marketing of this gasoline is deliberate and detailed and is contrived to subject to Ethyl's dictation the marketing of 85% of all high grade gasoline sold in the United States. This employment of the additional patents runs afoul of the well-settled rule that the patent privilege cannot be used to maintain or establish the patentee's control over subject matter which lies outside the legal scope of that privilege, even though included within the claims made in the patent. That principle applies here because Ethyl is seeking to use its [motor-fuel/composition] patent to subject to its domination every jobber in the United States who wishes to deal in lead-treated gasoline.

Ethyl has made one important and novel contribution to the art, that is, the invention of the fluid for use as an ingredient in motor fuel. It has obtained not one patent on this contribution but four. It has reserved to itself a monopoly of the manufacture of the patented fluid and it derives all of its revenue from the sale of the fluid. At the same time, by an astute division of patent rights, it has attempted to control the subsequent use of that fluid and the marketing of the motor fuel in which the patented fluid is a minute ingredient. The right to exert this domination is asserted in terms which, if accepted, would justify control of the fuel not merely in the hands of the jobbers but all the way down the line of distribution to, and including, the ultimate consumer.

It is doubtful if any of the limitations which this Court has imposed on the patent privilege in the interest of preserving a free market and discouraging burdensome restraints on the alienation of chattels could long survive acquiescence in Ethyl's argument. To evade these limitations it would only be necessary for a patentee to be astute enough in subdividing the elements of his invention and the patents relating thereto. That kind of subdivision is by no means difficult. On the contrary, the complexity of modern technological process and the ingenuity of counsel combine to make it easy. Indeed, the facility with which a variety of patents can be obtained on what is essentially a single invention is one of the frequent causes of complaint against the present state of the patent law.

Having subdivided its patents, precisely as Ethyl has done here, the patentee could then, despite a sale of any of the elements of the invention, control the marketing and use of the patented article from the factory door to the hands of the ultimate consumer. How illusory the limitations upon the patent privilege would then become.

How far the patentee could go in extending his power over subject matter not properly within the scope of the patent privilege is shown by the facts of this case. Here Ethyl maintains a monopoly of the manufacture and sale of the patented fluid. It insists that after it has sold the patented fluid and received full compensation therefor, it can control on a nationwide basis the subsequent marketing of the motor fuel made with the fluid. And this claim is made despite the fact that the principal ingredient of the fuel is gasoline, a commodity which lies in the public domain and over which no patent rights can be claimed by Ethyl or anyone else.

It is immaterial whether Ethyl is regarded as a patentee who has sold the patented article and thereby exhausted his privilege or as one who by restrictive conditions in the license agreement has attempted to extend his domination over subject matter not within the scope of the patent. On either view of the case the licensing scheme is illegal.

Some of these arguments may be hard to fathom. Do you suppose, for example, that the government would have been any happier about Ethyl's scheme if the TEL content in the gasoline were 20% instead of 0.05%? In any event, this time a unanimous Supreme Court found the arguments of the Yale Law School's Professor Thurman Arnold (then in charge of the Antitrust Division) more persuasive than those of Dean Atcheson (counsel for Ethyl).

3. The government's brief in Ethyl is largely a second edition of its unsuccessful amicus curiae brief in GTP on rehearing, at the preceding Term. In its GTP brief, the government had attacked the electronic industry cartel that AT&T, GE, and RCA had formed, based on their patent pool. Going outside the record and relying on the “Brandeis brief” approach, the government documented how AT&T, GE, and RCA had divided and allocated markets among themselves in wireless telecommunications (RCA), wire telecommunications (AT&T), sound recording, motion picture equipment, and other electronics fields. In 1930 the government sued RCA and AT&T for antitrust violations. The case was settled by consent decree. The AT&T GTP brief had asserted that in the wake of the consent decree the government had approved an agreement among AT&T, GE, and RCA, from which it could be inferred that the government approved the licensing restrictions in issue in the GTP case. The government indignantly denied any such approval and argued that the licensing restrictions were a tool of the still untamed cartel.

The main thrust of the government's argument in GTP, echoed in Ethyl, was that no distinction should be recognized between a post-sale restriction incidental to a patentee's sale of a patented product to its direct customer (unlawful under GE) and a similar restriction that the patentee imposed on the customers of a manufacturer-licensee by means of a limited license to the licensee (lawful under GE). The government brief stated, in summary, that “it is the contention of the United States that the power of the owner of a patent to control the ultimate use and disposition of the patented article is no greater when he frames the provisions of a license agreement than it is when he sells the article.”

4. It remains unclear to what extent Ethyl cuts back on GTP, despite Ethyl's holding that the patent laws do not sanction Ethyl's exercise of its patent power “to control the patented commodity in the hands of the licensed jobbers who had purchased it.” The patented commodity to which the Court refers is the motor fuel, which the jobbers purchased from Ethyl's refiners who manufactured the fuel under licenses from Ethyl.

The Court does say of Ethyl:

By its sales to refiners it relinquishes its exclusive right to use the patented fluid and it relinquishes to the licensed jobbers its exclusive rights to sell the lead-treated fuel by permitting the licensed refiners to manufacture and sell the fuel to them. And by the authorized sales of the fuel by refiners to jobbers the patent monopoly over it is exhausted, and after the sale neither appellant nor the refiners may [any] longer rely on the patents to exercise any control over the price at which the fuel may be resold.

This appears to be an acceptance of the government's theory that the patentee's sale of the patented TEL fluid to refiners exhausts, not only the patent monopoly over TEL fluid, but also the additional patent monopoly over the fuel composition. The Court says that this results from Ethyl's permitting the refiners to sell the fuel composition to the jobbers after manufacturing it (presumably, Ethyl permitted this under the fuel-manufacturing process license, unless the sale of TEL by implication or estoppel obviated need for a manufacturing license). Anyhow, one way or another, selling TEL to refiners and expressly or constructively permitting refiners to sell TEL-containing fuel to jobbers exhausted all patent monopolies.

Clearly, this was not Ethyl's actual intent. By creating the licensing program, Ethyl wanted and intended to withhold any authorization of jobbers except insofar as jobbers would be under Ethyl's thumb (and thus observe “business ethics” as Ethyl defined them). Ethyl's express intent to limit its manufacturing licensees (the refiners) to the field of selling only to authorized jobbers was ineffective. This contrasts with AT&T's and RCA's expressed intent to limit manufacturing licensees of amplifiers to selling only to the radio market and not motion picture theaters, which the GTP Court made effective. (Recall, also, that the Court gave effect to A.B. Dick's intent and five years later gave no effect to the intent of the Motion Picture Patent Co.)

To be sure, Ethyl was an antitrust case and GTP was a patent infringement case. But would the Ethyl Court have ruled any differently if Ethyl had brought a patent infringement suit against an unauthorized (and “unethical”) jobber who managed to procure TEL-containing motor fuel from a licensed refiner? (One might ask as well what the GTP Court would have said if the Antitrust Division sued the AT&T-GE-RCA cartel to enjoin their licensing program.)

5. The present state of law on limited manufacturing licenses seems to be that GTP governs unless a significant anticompetitive effect is shown to be present, in which case Ethyl governs. Hartford Empire Co. v. United States, 323 U.S. 386 (1945), in which an industry-wide glass bottle cartel existed, may appropriately be analogized to Ethyl. In contrast, consider United States v. Ciba-Geigy Corp., 508 F. Supp. 1118 (D.N.J. 1976), in which the government challenged both post-sale restrictions on a patented drug chemical and manufacturing licenses with limitations corresponding to the post-sale restrictions. The court found the restrictions illegal per se because they amounted to a horizontal combination (“cartel activity”) between the licensor and each of its licensees to allocate markets. Id. at 1146-47 (citing GE). But the court exonerated the manufacturing licenses, citing GTP, id. at 1150, and also held (in the context of relief) that no showing of significant anticompetitive impact had been made, id. at 1156.

6. Whether a process patent may be used to divide fields is unresolved. An intra-circuit split occurred in the D.C. Circuit. In Robintech, Inc. v. Chemidus Wavin, Ltd., 628 F.2d 142 ((D.C. Cir. 1980), the court held it misuse to use a license under a patent on an apparatus and method for grooving pipe to divide markets (impose an “export ban”) in the unpatented pipe so made.

In United States v. Studiengesellschaft Kohle, mbH, 670 F.2d 1122 (D.C. Cir. 1981), the defendant patentee owned a process patent on the only commercially practicable method for making a particular known catalyst (aluminum trialkyls). A non-manufacturer, the defendant divided markets among different licensees, allowing one the exclusive right to make the unpatented product both for its own internal use and for resale to others. All other licensees were licensed only to make for their own internal use.

The government sued under sections 1-2 of the Sherman Act. The court of appeals held the licensing program lawful, on the theory that a patent on the only commercially practical process for making the product was tantamount to a patent on the product itself. More important, the court thought, the per se rule against post-sale restrictions on patented articles was no longer viable in the wake of the Supreme Court's retreat from that doctrine in regard to unpatented articles. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977). This suggested to the court that it should utilize a “rule of reason” analysis. Under that analysis, the court considered it important that the patentee might have granted the favored licensee a fully exclusive license rather than one exclusive only in the sales field. This version of the inherency doctrine tipped the scales, the court concluded, in favor of the patentee and its licensing program. (The court did not address whether the challenged provision was a limitation imposed by a non-manufacturing patent. Nor did it address whether this was a post-sale restraint imposed by a vendor patentee on its customer (which it was not) or a limitation imposed on a manufacturing licensee.)

7. It is also unresolved how small a tail can wag the dog after Ethyl. (Recall the government's griping about the TEL being only 0.05%.) Suppose that the pool or cartel in GTP had owned, say, just the patent on coupling one triode stage to another with an R-C network. Suppose that ATC/GTP designed a power amplifier with many components, only 0.05% of which involved the R-C coupling. Assume, however, that ATC/GTP could not invent around this part of the circuit, any more than a refiner could eliminate the 0.05% TEL. In this context, is the license restriction or limitation against motion picture theater use still valid and enforceable? Or would a court reject it as pretextual and an unlawful division of markets?



1988 Amendment to Section 271(d)
35 U.S.C. § 271(d)

§ 271. Infringement of patent

. . . (d) No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following:

. . . (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned.

Notes

1. The Senate passed a broader “misuse reform” bill, see S. Rep. No. 100–492, 2d Sess. (1988), which the House declined to adopt. The Senate bill would have followed the words “by reason of” in § 271(d) with:

his or her licensing practices or actions or inactions relating to his or her patent, unless such practices or actions or inactions, in view of the circumstances in which such practices or actions or inactions are employed, violate the antitrust laws.

2. The legislative history leaves it unclear how much market power a patentee must have to fall under amended § 271(d). The lack of clarity was intentional.



Mallinckrodt, Inc. v. Medipart, Inc.
United States Court of Appeals for the Federal Circuit
976 F.2d 700 (Fed. Cir. 1992)

Before Newman, Lourie, and Clevenger, Circuit Judges. Pauline Newman, Circuit Judge.

This action for patent infringement and inducement to infringe relates to the use of a patented medical device in violation of a “single use only” notice that accompanied the sale of the device. Mallinckrodt sold its patented device to hospitals, which after initial use of the devices sent them to Medipart for servicing that enabled the hospitals to use the device again. Mallinckrodt claimed that Medipart thus induced infringement by the hospitals and itself infringed the patent. The district court held that violation of the “single use only” notice can not be remedied by suit for patent infringement, and granted summary judgment of noninfringement. We reverse.

Background

The patented device is an apparatus for delivery of radioactive or therapeutic material in aerosol mist form to the lungs of a patient, for diagnosis and treatment of pulmonary disease. Radioactive material is delivered primarily for image scanning in diagnosis of lung conditions. Therapeutic agents may be administered to patients suffering various lung diseases.

The device is manufactured by Mallinckrodt, who sells it to hospitals as a unitary kit that consists of a “nebulizer” which generates a mist of the radioactive material or the prescribed drug, a “manifold” that directs the flow of oxygen or air and the active material, a filter, tubing, a mouthpiece, and a nose clip. In use, the radioactive material or drug is placed in the nebulizer, is atomized, and the patient inhales and exhales through the closed system. The device traps and retains any radioactive or other toxic material in the exhalate. The device fits into a lead-shielded container that is provided by Mallinckrodt to minimize exposure to radiation and for safe disposal after use.

The device bears the inscription “Single Use Only.” The package insert provided with each unit states “For Single Patient Use Only” and instructs that the entire contaminated apparatus be disposed of in accordance with procedures for the disposal of biohazardous waste. The hospital is instructed to seal the used apparatus in the radiation-shielded container prior to proper disposal. The hospitals whose activities led to this action do not dispose of the UltraVent apparatus, or limit it to a single use.

Instead, the hospitals ship the used manifold/nebulizer assemblies to Medipart, Inc. Medipart in turn packages the assemblies and sends them to Radiation Sterilizers Inc., who exposes the packages to at least 2.5 megarads of gamma radiation, and returns them to Medipart. Medipart personnel then check each assembly for damage and leaks, and place the assembly in a plastic bag together with a new filter, tubing, mouthpiece, and nose clip. The “reconditioned” units, as Medipart calls them, are shipped back to the hospitals from whence they came. Neither Radiation Sterilizers nor Medipart tests the reconditioned units for any residual biological activity or for radioactivity. The assemblies still bear the inscription “Single Use Only.”

Mallinckrodt filed suit against Medipart, asserting patent infringement and inducement to infringe. Both parties moved for summary judgment on all counts. The district court granted Medipart's motion on the patent infringement counts, holding that the “Single Use Only” restriction could not be enforced by suit for patent infringement.

The Restriction on Reuse

Mallinckrodt describes the restriction on reuse as a label license for a specified field of use, wherein the field is single (i.e., disposable) use. On this motion for summary judgment, there was no issue of whether this form of license gave notice of the restriction. Notice was not disputed. Nor was it disputed that sale to the hospitals was the first sale of the patented device. The issue that the district court decided on summary judgment was the enforceability of the restriction by suit for patent infringement. The court's premise was that even if the notice was sufficient to constitute a valid condition of sale, violation of that condition can not be remedied under the patent law.

Mallinckrodt states that the restriction to single patient use is valid and enforceable under the patent law because the use is within the scope of the patent grant, and the restriction does not enlarge the patent grant. Mallinckrodt states that a license to less than all uses of a patented article is well recognized and a valid practice under patent law, and that such license does not violate the antitrust laws and is not patent misuse. Mallinckrodt also states that the restriction here imposed is reasonable because it is based on health, safety, efficacy, and liability considerations and violates no public policy. Thus Mallinckrodt argues that the restriction is valid and enforceable under the patent law. Mallinckrodt concludes that use in violation of the restriction is patent infringement, and that the district court erred in holding otherwise.

The district court described the cases sustaining field of use and other restrictions as “in tension” with the cases prohibiting restrictions such as price-fixing and tying, and with the cases holding that the patent right is exhausted with the first sale. The court stated that policy considerations require that no conditions be imposed on patented goods after their sale and that Mallinckrodt's restriction could not “convert what was in substance a sale into a license.” As we shall discuss, on the premises of this summary judgment motion the court erred in its analysis of the law, for not all restrictions on the use of patented goods are unenforceable.

The enforceability of restrictions on the use of patented goods derives from the patent grant, which is in classical terms of property: the right to exclude. This right to exclude may be waived in whole or in part. The conditions of such waiver are subject to patent, contract, antitrust, and any other applicable law, as well as equitable considerations such as are reflected in the law of patent misuse. As in other areas of commerce, private parties may contract as they choose, provided that no law is violated thereby:

The rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the [patented] article, will be upheld by the courts. [E. Bement & Sons v. National Harrow Co., 186 U.S. 70 (1902).]

The district court's ruling that Mallinckrodt's restriction on reuse was unenforceable was an application of the doctrine of patent misuse, although the court declined to use that designation. The concept of patent misuse arose to restrain practices that did not in themselves violate any law, but that drew anticompetitive strength from the patent right, and thus were deemed to be contrary to public policy. The policy purpose was to prevent a patentee from using the patent to obtain market benefit beyond that which inheres in the statutory patent right.

The district court's holding that Mallinckrodt's restriction to single patient use was unenforceable was, as we have remarked, based on “policy” considerations. The district court relied on a group of cases holding illegal resale price-fixing of patented goods, Bauer & Cie. v. O'Donnell, 229 U.S. 1 (1913); Straus v. Victor Talking Mach. Co., 243 U.S. 490 (1917); Boston Store v. American Graphophone Co., 246 U.S. 8 (1918) — (“the Bauer trilogy”), and patent-enforced tie-ins, Motion Picture Pats. Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917).

In Bauer the patentee had sold a product with a notice stating that the product “is licensed by us for sale and use at a price not less than $1. Any sale in violation of this condition, or use when so sold, will constitute an infringement.” The Supreme Court held the license unenforceable.

Similarly, in Straus the patentee had attached a “License Notice” to its phonographic machines stating a minimum transfer price. The Court held that the patentee's “license” was “a mere price-fixing enterprise, which, if given effect, would work great and widespread injustice to innocent purchasers.” Because the purpose was to fix resale prices and “not to secure to the plaintiff any use of its machines", the Court refused to allow suit for patent infringement against one who had sold the machines at less than the specified price.

In Boston Store the Court again considered a minimum resale price condition imposed by the patentee. Citing Bauer and Straus, and a copyright case, Bobbs-Merrill Co. v. Straus, the Court held that the price condition was contrary to the general law, and also “not within the monopoly conferred by the patent law."

In Motion Picture Patents a license notice was attached to patented movie projectors, stating that the purchaser had the right to use the machine only with motion picture films that were leased from the patentee. The defendant used a patented projector with films leased from other sources. The Court condemned the patentee's tie-in as illegal, since it extended the “scope of its monopoly” to materials which were not part of the patented invention.

These cases established that price-fixing and tying restrictions accompanying the sale of patented goods were per se illegal. These cases did not hold, and it did not follow, that all restrictions accompanying the sale of patented goods were deemed illegal. In General Talking Pictures Corp. v. Western Elec. Co., 304 U.S. 175 (1938), 305 U.S. 124 (1938), the Court, discussing restrictions on use, summarized the state of the law as follows:

That a restrictive license is legal seems clear. As was said in United States v. General Electric Co., 272 U.S. 476, 489 (1926),the patentee may grant a license “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."

In General Talking Pictures the patentee had authorized the licensee to make and sell amplifiers embodying the patented invention for a specified use (home radios). The defendant had purchased the patented amplifier from the manufacturing licensee, with knowledge of the patentee's restriction on use. The Supreme Court stated the question as “whether the restriction in the license is to be given effect” against a purchaser who had notice of the restriction. The Court observed that a restrictive license to a particular use was permissible, and treated the purchaser's unauthorized use as infringement of the patent, deeming the goods to be unlicensed as purchased from the manufacturer. The Court, in its opinion on rehearing, stated that it did not—

consider what the rights of the parties would have been if the amplifier had been manufactured under the patent and had passed into the hands of a purchaser in the ordinary channels of trade.

The district court interpreted this reservation as requiring that since the hospitals purchased the UltraVent device from the patentee Mallinckrodt, not from a manufacturing licensee, no restraint on the purchasers' use of the device could be imposed under the patent law. However, in General Talking Pictures the Court did not hold that there must be an intervening manufacturing licensee before the patent can be enforced against a purchaser with notice of the restriction. The Court did not decide the situation where the patentee was the manufacturer and the device reached a purchaser in ordinary channels of trade.

The UltraVent device was manufactured by the patentee; but the sale to the hospitals was the first sale and was with notice of the restriction. Medipart offers neither law, public policy, nor logic, for the proposition that the enforceability of a restriction to a particular use is determined by whether the purchaser acquired the device from a manufacturing licensee or from a manufacturing patentee. We decline to make a distinction for which there appears to be no foundation. Indeed, Mallinckrodt has pointed out how easily such a criterion could be circumvented. That the viability of a restriction should depend on how the transaction is structured has been denigrated as “formalistic line drawing.” Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 57-59 (1977). The Supreme Court having disapproved reliance on formalistic distinctions of no economic consequence in antitrust analysis, we discern no reason to preserve formalistic distinctions of no economic consequence, simply because the goods are patented.

The district court, holding Mallinckrodt's restriction unenforceable, described the holding of General Talking Pictures as in “some tension” with the earlier price-fixing and tie-in cases. The district court observed that the Supreme Court did not cite the Bauer, Boston Store, or Motion Picture Patents cases when it upheld the use restriction in General Talking Pictures. That observation is correct, but it should not be remarkable. By the time of General Talking Pictures, price-fixing and tie-ins were generally prohibited under the antitrust law as well as the misuse law, while other conditions were generally recognized as within the patent grant. The prohibitions against price-fixing and tying did not make all other restrictions per se invalid and unenforceable. Further, the Court could not have been unaware of the Bauer trilogy in deciding General Talking Pictures, because Justice Black's dissent is built upon those cases.

Restrictions on use are judged in terms of their relation to the patentee's right to exclude from all or part of the patent grant. In Windsurfing International, Inc. v. AMF, Inc., 782 F.2d 995 (Fed.Cir.), cert. denied, 477 U.S. 905 (1986), this court stated:

To sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market.

The district court, stating that it “refuses to limit Bauer and Motion Picture Patents to tying and price-fixing not only because their language suggests broader application, but because there is a strong public interest in not stretching the patent laws to authorize restrictions on the use of purchased goods,” has contravened this precedent.

In support of its ruling, the district court also cited a group of cases in which the Court considered and affirmed the basic principles that unconditional sale of a patented device exhausts the patentee's right to control the purchaser's use of the device; and that the sale of patented goods, like other goods, can be conditioned. The principle of exhaustion of the patent right did not turn a conditional sale into an unconditional one.

Viewing the entire group of these early cases, it appears that the Court simply applied, to a variety of factual situations, the rule of contract law that sale may be conditioned. Adams v. Burke, 84 U.S. (17 Wall.) 452 (1873), and its kindred cases do not stand for the proposition that no restriction or condition may be placed upon the sale of a patented article. It was error for the district court to derive that proposition from the precedent. Unless the condition violates some other law or policy (in the patent field, notably the misuse or antitrust law), private parties retain the freedom to contract concerning conditions of sale. As we have discussed, the district court cited the price-fixing and tying cases as reflecting what the court deemed to be the correct policy, viz., that no condition can be placed on the sale of patented goods, for any reason. However, this is not a price-fixing or tying case, and the per se antitrust and misuse violations found in the Bauer trilogy and Motion Picture Patents are not here present. The appropriate criterion is whether Mallinckrodt's restriction is reasonably within the patent grant, or whether the patentee has ventured beyond the patent grant and into behavior having an anticompetitive effect not justifiable under the rule of reason.

Should the restriction be found to be reasonably within the patent grant, i.e., that it relates to subject matter within the scope of the patent claims, that ends the inquiry. However, should such inquiry lead to the conclusion that there are anticompetitive effects extending beyond the patentee's statutory right to exclude, these effects do not automatically impeach the restriction. Anticompetitive effects that are not per se violations of law are reviewed in accordance with the rule of reason. Patent owners should not be in a worse position, by virtue of the patent right to exclude, than owners of other property used in trade.

We conclude that the district court erred in holding that the restriction on reuse was, as a matter of law, unenforceable under the patent law. If the sale of the UltraVent was validly conditioned under the applicable law such as the law governing sales and licenses, and if the restriction on reuse was within the scope of the patent grant or otherwise justified, then violation of the restriction may be remedied by action for patent infringement. The grant of summary judgment is reversed, and the cause is remanded.

Repair and Reconstruction

Mallinckrodt charged, as an alternative ground of relief, that this prohibition was violated by Medipart's “reconditioning” of the used UltraVent devices. Medipart argued that it was merely cleaning the spent assemblies and replacing minor components. The district court found that Medipart's activities were “in the nature of repair not reconstruction.” However, should Mallinckrodt's restriction on reuse be sustained on remand, then Mallinckrodt must prevail on this issue as a matter of law. If the UltraVent device is validly licensed for only a single use, any reuse is unlicensed and an infringement, and there is no need to choose between repair and reconstruction.

The reconstruction-repair distinction is decisive, however, only when the replacement is made in a structure whose original manufacture and sale have been licensed by the patentee; when the structure is unlicensed the traditional rule is that even repair constitutes infringement.

This rule is dispositive if it is determined that the sale of the UltraVent device was accompanied by a valid restriction to single patient use, for “the traditional rule” is that even repair of an unlicensed device constitutes infringement. It follows that the district court's holding that the reconditioning was permissible repair is mooted, and is vacated.

Notes

1. For a doctrinal analysis approach to this decision, see Richard H. Stern, The Unobserved Demise of the Exhaustion Doctrine in U.S. Patent Law, [1993] Eur. Intell. Prop. Rev. 460. (The term “exhaustion doctrine” refers to the concept that the first authorized sale of a patented product “exhausts” the patentee's monopoly over the item sold.) It is unclear that the Mallinckrodt decision is indeed the Custer's Last Stand of the exhaustion doctrine, even in the Federal Circuit. See Intel Corp. v. ULSI Sys. Technology, Inc., 995 F.2d 1566 (Fed. Cir. 1993), cert. denied, 114 S. Ct. 923 (1994), which uses language as sweepingly in the opposite direction from that of Mallinckrodt as Mallinckrodt's language is the sweeping opposite of that of the preceding Supreme Court decisions. The Federal Circuit denied rehearing en banc of ULSI over the dissent of several judges, including the author of Mallinckrodt. 995 F.2d 1576. On the other hand, some subsequent decisions of the Federal Circuit have followed or approvingly cited Mallinckrodt. See, e.g., C.R. Bard, Inc. v. M3 Sys., Inc., 157 F.3d 1340 (Fed, Cir. 1998) (opinion of Newman, J.).

2. Your laser printer/copier manufacturer client comes to you and complains about toner refillers. Toner refillers take an empty, used toner cartridge, drill a hole in it, fill it with new toner, close the hole, and charge half the price of a new toner cartridge of your client. The cartridge is patented. Is the refill procedure just described a patent infringement? See Morgan Envelope Co. v. Albany Paper Co., 152 U.S. 425 (1894); accord, Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961). What do you advise you client to do? Is there a tie–in problem?

3. Your car manufacturer client comes to you and complains about replacement tailpipe vendors, who are taking a free ride on its advanced technology in exhaust systems. Midas, for example, charges much less than authorized dealers and therefore siphons away considerable business. The client has a patent on the exhaust system comprising a tailpipe and several other elements in combination. First, is it patent infringement to replace the worn out tailpipe, in general? See Aro Mfg. Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961). Could the case be made different by placing a notice on the car in an appropriate place, saying the following?—

This patented exhaust system is licensed for use only until the original tailpipe wears out. After that you must obtain a new license, for example, by going to your authorized dealer and having him install an authorized, licensed new tailpipe.

The patent is on the whole system, that is, the combination of all the components. Does it matter that the tailpipe, as such, is unpatented? The case is distinguishable from Mallinckrodt because the single-use notice in that case applied to the whole product, which was what the patent covered. Does that distinction make any difference?

4. Your inventory system vendor client markets a patented inventory control system comprising a combination of a general–purpose digital computer, memory, and computer program means for performing various inventory functions. The client markets the system in configurations with different amounts of memory at different prices. Your client's problem is that a free rider has taken to selling memory upgrades to your client's customers at a lower price than that of your client. Cf. Hubco Data Prods. Corp. v. Management Assistance, Inc., 219 U.S.P.Q. 450 (D. Idaho 1983). Is this patent infringement? See Wilbur-Ellis Co. v. Kuther, 377 U.S. 422 (1964). Will you be successful in overcoming the problem with a notice, such as “machine licensed only for use as is, without modification”?

5. For additional hypothetical applications of Mallinckrodt, see Richard H. Stern, Post–Sale Patent Restrictions After Mallinckrodt — An Idea in Search of Definition, 5 Alb. L.J. Sci. & Tech. 1 (1994).

6. Conventional patent misuse and antitrust parlance, in the latter half of the 20th century, distinguished three types of licensing provision from one another: restrictions, limitations, and conditions.

A restriction is a direct prohibition against specified acts or an affirmative promise to do something (or not do it). Usually, a restriction applies to what the licensee does but sometimes a restriction may apply to what the licensor (patentee) may do (e.g., a promise not to grant further licenses over the veto of the licensee).

A limitation (or limited license) is a grant to a licensee of less than all possible rights under the licensed patent. (This is considered the preferred form.)

A condition is a grant that applies (or remains in force) only if the licensee does or does not do specified acts.

Usage is not always consistent. Does the Mallinckrodt opinion use “restriction” as described above?

7. Writing restrictions, limitations, and conditions involves much the same skill as drafting patent claims. Moreover, just as a skilled drafter of claims can convert a process claim into an apparatus claim and vice versa, a skilled license drafter can rewrite a restriction as a limitation (or condition) and vice versa. After GE and GTP, almost all skilled license drafters preferred limitation format over restriction format. In particular, they avoided restrictions in the form of “negative covenants,” such as “licensee agrees not to do XYZ.” Why? Does a licensor lose any right or power by using the limitation format? See Automatic Radio Mfg. Co. v. Hazeltine Research, Inc., 339 U.S. 827, 836 (1950) (holding of no misuse because a “limited license for ‘home’ use production contains neither an express or implied agreement to refrain from production for `commercial' or any other use”). Does loss of breach remedies matter very much?

8. Is Mallinckrodt's analysis of Motion Picture Patents correct? Does MPP declare tie-in sales illegal per se? Does MPP say “all restrictions accompanying the sale of patented goods are deemed illegal”? Define “illegal.” Does MPP say that courts will not enforce restrictions accompanying the sale of patented goods? Does MPP say that it is never patent infringement to disobey restrictions accompanying the sale of patented goods? What's the difference?

9. Is what the Mallinckrodt court says about restrictions accompanying the sale of patented goods consistent with what GE says? Who gets the last word? The Mallinckrodt court says that the GTP Court did not decide the situation where the patentee was the manufacturer and the device reached a purchaser in the ordinary channels of trade. (That's right.) Did the GE Court say anything about that? Was it dictum or holding? Was it essential to the rationale? What about Ethyl?

10. The Mallinckrodt court equates, without citation, the GE test for permissible restrictions to whether the restriction relates to subject matter within the claims. Mallinckrodt says “reasonably within the patent grant, i.e., that it relates to subject matter within the scope of patent claims.” Where does the GE opinion make that equation?

Does the GE opinion anywhere define what it means by “any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure” or “normally and reasonably adapted to secure pecuniary reward for the patentee's monopoly”?

What about definition by example — the holding that fixing the price at which another person sells goods that the patentee licenses the person to make and sell is lawful under this standard? This holding is based on a stated premise that:

One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is prohibitory. When the patentee licenses another to make and vend and retains the right to continue to make and vend on his own account, the price at which his licensee will sell will necessarily affect the price at which he can sell his own patented goods. It would seem entirely reasonable that he should say to the licensee, “Yes, you may make and sell articles under my patent but not so as to destroy the profit that I wish to obtain by making them and selling them myself.”

The GE Court also said, 272 U.S. at 493, “Indeed, as already said, price fixing is usually the essence of that which secures proper reward to the patentee.”

Do these passages in GE give content to its standard for permissible limitations in a license to manufacture and sell or for permissible restrictions in a patent license? Does Mallinckrodt's measure for the GE standard correspond to what GE itself says?

Putting aside what GE does or doesn't say to explain how to apply its standard, does the Mallinckrodt test, considered by itself, furnish a sensible general measure for restrictions or limitations? When does, and doesn't, a restriction relate to subject matter within the scope of the patent claims? Is it sufficient to “relate” that the restriction applies only to products whose manufacture, sale, or use is within the scope of the patent claims (i.e., infringes them)? Does this test cover price-fixing? Tie-ins? What does this standard fail to cover?

11. Some subsequent Federal Circuit decisions have attempted to gauge conduct challenged as misuse by the test of relating to subject matter within the scope of patent claims. In Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed. Cir. 1997), the patentee was held not guilty of misuse under the Mallinckrodt standard; it had sent out notices of infringement under its patent in an apparent good faith belief that infringement had occurred. Query: Would sending out notices while believing that the accused devices did not infringe nonetheless relate to the subject matter of the claims?

A case more closely in point was Kendall Co. v. Progressive Med. Tech., Inc., 85 F.3d 1570 (Fed. Cir. 1996). The facts were similar to those of Mallinckrodt, and for that matter similar to A.B. Dick as well. Kendall, a manufacturer of an apparatus for measuring blood pressure, wanted to derive its revenue from the sale of replacement sleeves. For patient health and safety reasons the sleeves needed to be replaced with each use. (The number of sleeves used is obviously a direct measure of the amount of utilization of the patented apparatus.)

Kendall used two notices. One on the sleeves said, “For single patient use only. Do not reuse.” Another, in the instructions, said, “To ensure product safety and efficiency, the Kendall System must only be used with [Kendall] Sleeves.”

Kendall's customers did replace the sleeves with each use. But some of them bought replacement sleeves from the defendant. Kendall then sued for contributory infringement.

The Federal Circuit panel found no contributory infringement because there was no direct infringement. Kendall's first notice said to use the sleeves once and not to reuse them. The customers did that. The notice did not say, “Use only Kendall sleeves” or “System licensed for use only with Kendall sleeves.” As for Kendall's second notice, the panel said it was precatory rather than mandatory. It did not impose a “customer obligation.” (Apparently, Kendall did itself in with the soft introductory words, “To ensure product safety and efficiency....”)




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