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November 16, 2007

Good Ole Exhaustion

Consumers Union (CU) and the Electronic Frontier Foundation (EFF) filed a joint brief to the Supreme Court strongly urging the court to overrule the misguided Mallinckrodt line of cases, thereby restoring the traditional patent exhaustion doctrine.

The case in question is Quanta Computer v LG Electronics. LG sued several OEMs , including Quanta, for patent infringement in selling computer systems. LG licensed technology to Intel, which sold chips to Quanta, which built PCs for HP, Dell, and others. LG then sued Quanta for infringement. Although Quanta won the initial battle before the district court, on appeal, the Federal Circuit reversed the district court and found in favor of LG.

From the CU/EFF brief:

For more than a century, the patent exhaustion doctrine has marked the border between the intellectual property rights of patentees and the personal property rights of consumers. In the words of this Court, "in the essential nature of things, when the patentee, or the person having his rights, sells a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use." Adams v. Burke, 84 U.S. (17 Wall.) 453, 456 (1873). Consequently, according to a century old line of Supreme Court and lower court precedents, when a consumer purchases a patented product, that consumer owns it outright, and the patent owner may not thereafter invoke patent law to restrict its post-sale use, repair, or resale.

Isn't it amazing when simple laws just make sense? A consumer owns the products they purchase; without restriction.

In 1992, however, the Federal Circuit in Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), abruptly broke with this Court's patent exhaustion precedents, reimagining the doctrine as merely a unilaterally disclaimable "implied license." Thanks to Mallinckrodt and its Federal Circuit progeny, and despite contrary rulings by this Court, consumers now find themselves confronted by a growing array of "label licenses" that purport to impose post-sale restrictions on the patented goods they buy. See, e.g., Ariz. Cartridge Remfrs. Ass'n v. Lexmark Int'l, Inc., 421 F.3d 981, 983-84 (9th Cir. 2005) ("single use only" restriction on laser printer toner cartridges); Jazz Photo Corp. v. Int'l Trade Comm., 264 F.3d 1094, 1107-08 (Fed. Cir. 2001) ("single use only" language contained in camera instructions); Hewlett-Packard Co. v. Repeat-OType Stencil Mfg. Corp., 123 F.3d 1445, 1453 (Fed. Cir. 1997) ("single use only" language contained in insert for inkjet printer cartridges).

Although a few products come to mind where a single use may be advisable, why place such restrictions? In addition to restricting consumer rights, "single use only" and "not for resale" products also place a huge strain on the environment.

By empowering patent owners to conjure what amount to servitudes that run with patented goods, the Federal Circuit has impermissibly and unwisely expanded patent scope by judicial fiat. As patentees increasingly exploit their ability to impose such unfair restrictions and enforce them in infringement actions, consumers will increasingly suffer the following distinct harms:

• Increased information costs when trying to ascertain restrictions on patented goods;

• Erosion of the well-established right to repair patented goods;

• Interference with the functioning of vibrant secondary markets (such as eBay and Craigslist) enabled by new technologies;

• Diminished opportunities for "user innovation"; and

• Expanded use of inefficient and unfair price discrimination in connection with patented goods.

There are no countervailing policy advantages that justify the imposition of these harms on consumers and the economy at large.

All that harm and no advantage; surely that cannot be true. Let's not forget the strengthening of the economy from over-priced ink cartridge sales.

"Diminished opportunities for user innovation" really stands out in this list. Isn't the patent system supposed to foster innovation? How will we ever explore past eras in a time machine constructed from recycled ink cartridges, under this oppressive system?

At the same time, a return to the principles enunciated in this Court's patent exhaustion precedents will not undermine the incentives that patent law affords patent owners. Patent owners, like property owners generally, will remain free to rely on contract law if they would like to restrict post-sale uses of their products. From the perspective of consumers, however, contract law is better equipped to address the concerns that commonly arise when a patentee attempts to impose post-sale use restrictions on patented goods.

In the instant case, the Federal Circuit relied on its misguided Mallinckrodt line of cases in reversing the district court and holding in favor of Respondent LG Electronics, Inc. (LGE). This Court should take the opportunity to reverse the Federal Circuit's ruling and overrule its Mallinckrodt line of cases, thereby restoring the traditional patent exhaustion doctrine.

Although "single use only" might be a good suggestion, it is in no way a good mandate.

Posted by Mr. Platinum at November 16, 2007 2:26 PM | Exhaustion

Comments

This really seems like a freedom to contract question and not one of first sale doctrine. That is, how do you draw the line between purchasing the right to "use" a product and outright sale of the product.

Wouldn't this seem to put lots of contracts like material transfer agreements at risk?

Of course, there would seem to be a host of possible contract questions you could raise: offer, acceptance, consideration, assent, notice, unconscionability, etc.

Posted by: mmm at November 19, 2007 10:00 AM