Post-sale restraint

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A post-sale restraint, also termed a post-sale restriction, as those terms are used in United States patent law and antitrust law, is a limitation that operates after a sale of goods to a purchaser has occurred and purports to restrain, restrict, or limit the scope of the buyer’s freedom to utilize, resell, or otherwise dispose of or take action regarding the sold goods.[1] Such restraints have also been termed "equitable servitudes on chattels."[2]

Support for the rule against enforcement of post-sale restraints has at times been rested on the common law's hostility to restraints on the alienation of chattels. "The right of alienation is one of the essential incidents of a right of general property in movables, and restraints upon alienation have been generally regarded as obnoxious to public policy, which is best subserved by great freedom of traffic in such things as pass from hand to hand. General restraint in the alienation of articles, things, chattels, except when a very special kind of property is involved, . . . have been generally held void."[3]

Case law[edit]

Perhaps the earliest US discussion of post-sales restraints occurs in Adams v. Burke,[4] in which the US Supreme Court refused to find patent infringement when an undertaker — who purchased a patented coffin lid, and transported it outside the territory in which the manufacturer was licensed (the ten-mile radius surrounding Boston) — used the product to bury a client. The Court stated:

But 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. The article, in the language of the Court, passes without the limit of the monopoly. That is to say the patentee or his assignee having in the act of sale received all the royalty or consideration which he claims for the use of his invention in that particular machine or instrument, it is open to the use of the purchaser without further restriction on account of the monopoly of the patentees.[5]

Projector involved in Mot. Pict. Pats. case

On the basis of this doctrine, in Motion Picture Patents Co. v. Universal Film Mfg. Co.,[6] the Supreme Court refused to enforce by way of a patent infringement suit against a downstream purchaser an agreement requiring that a patented film projector be used only with films licensed by the Motion Picture Patents Co., that the same agreement be imposed on downstream purchasers, and that the machine be sold with a plate affixed to it stating the same requirement.

VictorTalkingLogo.jpg

Contemporaneously, in Straus v. Victor Talking Machine Co.,[7] the Court refused to enforce a post-sale price-fixing restraint imposed on phonograph machines by means of an affixed "License Notice." The defendants, the proprietors of Macy's department store in New York, disregarded the notice and proceeded to cut prices. The patentee sought an injunction under the patent laws to compel obedience to the notice and, also, damages. The Court held that the case fell within the principle of Adams v. Burke and denied any relief. In so holding, the Court explained:

Courts would be perversely blind if they failed to look through such an attempt as this "License Notice" thus plainly is to sell property for a full price, and yet to place restraints upon its further alienation, such as have been hateful to the law from Lord Coke's day to ours, because obnoxious to the public interest.[8]

TungFil.jpg

In 1926, in United States v. General Electric Co.,[9] the Supreme Court tried to make a bright-line distinction between post-sale restraints on patented goods, which the exhaustion doctrine did not allow, and limitations that a patentee imposed on the freedom of a manufacturing-licensee to sell goods manufactured under a limited license of a patent, which were permissible if “normally and reasonably adapted to secure pecuniary reward for the patentee’s monopoly.” It was well settled that, under the exhaustion doctrine, “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.”[10] But when a licensee is licensed only to make and sell goods in a particular field or through a particular channel of distribution, the patented goods so made are ordinarily subject to the limitations of the license, even when in the hands of a downstream purchaser. Accordingly, the Court upheld the legitimacy of price-fixing restrictions that GE imposed in its license to Westinghouse to manufacture light bulbs under GE's patents.

The bright-line distinction made in the 1926 GE case was blurred to some extent in the Supreme Court’s 1940 decision in Ethyl Gasoline Corp. v. United States .[11] In Ethyl Gasoline, Ethyl had established an elaborate licensing program under its patents on the fuel additive tetra-ethyl lead, a motor fuel containing tetra-ethyl lead, and a method of operating an automobile engine with fuel containing tetra-ethyl lead. Ethyl sold the fuel additive, and licensed purchasers to use it to practice the other patents. The licensing program fixed prices for the motor fuel and strictly limited the types of customer to which given licensees could sell the motor fuel. Ethyl emphasized to the Supreme Court the fact that while it sold the fuel subject to a post-sale restraint it licensed the other patents, which covered the manufacture of the fuel (by adding tetra-ethyl lead to ordinary gasoline) and the use of the fuel in automobile engines. The Supreme Court refused to make any distinctions among the different patents and struck the whole program down for improperly “regimenting” the industry.

See also[edit]

References[edit]

  1. ^ See, e.g., Peter Carstensen, Post-Sale Restraints via Patent Licensing: A “Seedcentric” Perspective, 16 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 1053 (2006) (“The use of post-sale restraints on buyers of patented goods is an increasingly common strategy of patent holders. The seller attaches a notice to the patented good or a good containing a patented component purporting to limit scope of what the buyer has bought and imposing explicit restraints on buyers’ freedom to resell the product or take other actions. The patent community has sought to justify and explain these post-sale restraints based on an analogy to the right of real property owners to encumber such property with covenants that restrict future owners. The key claim is that the patent owner has the right to divide the interests in the goods being sold and declare that only some rights were transferred. This conception provides a basis to bind not only the party in privity but all others who come, or might come, into possession of this property.”); [www.abanet.org/antitrust/at-source/03/01/frommskitol.pdf|Jeffery B. Fromm and Robert A. Skitol], Harmonization of the IP Misuse Doctrine and Antitrust Law, the antitrust source (Jan. 2003), p. 4 (“The Federal Circuit has addressed the application of the patent misuse doctrine to certain kinds of post-sale restrictions, such as “single-use only” provisions. According to the Federal Circuit, such restrictions cannot be deemed misuse unless they are both (1) found outside the scope of the patent grant and then also (2) found anticompetitive under full application of the antitrust rule of reason.”); Anne K. Bingaman, Assistant Attorney General, Antitrust Division, U.S. Department of Justice, antitrust and Innovation is a High Technology Society, Address at the celebration of the 60th anniversary of the founding of the Antitrust Division (Jan. 10, 1994) (“Whether the holder of a patent may, for instance, tie unpatented supplies to the patented product; engage in compulsory assignment grant backs; or place post-sale restraints on resale by purchasers are just a few of the host of issues that have been debated and litigated in the patent/antitrust field for several decades.”). See also B. Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419, 1429 (Fed. Cir. 1997) ("Moreover, the district court erred by instructing the jury that it must find patent misuse if Braun placed any post-sale restrictions on use of the SafSite valves it sold to Abbott."); United States v. Ciba-Geigy Corp., 508 F.Supp. 1118, 1147 n.14 (D.N.J., 1976) ("As noted, infra, CIBA's attempt to insulate itself from horizontal competition by use of illegal post-sale restraints did not appreciably enhance its market position.").
  2. ^ See Clairol, Inc. v. Cody's Cosmetics, Inc., 353 Mass. 385, 231 N.E.2d 912 (1967) (refusing to enforce servitude). See also Z. Chafee, Equitable Servitudes on Chattels, 41 Harv. L. Rev. 945 (1928); Z. Chafee,Comment: The Music Goes Round and Round: Equitable Servitudes and Chattels, 69 Harv.L.Rev. 1250 (1956).
  3. ^ Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 404 (1911). See also id. at 404-05 (quoting Coke on Littleton sec. 360: "If a man be possessed . . . of a horse or of any other chattel, real or personal, and give or sell his whole interest or property therein, upon condition that the donee or vendee shall not alien the same, the same is void, because the whole interest and property is out of him, so as he hath no possibility of a reverter, and it is against trade and traffic and bargaining and contracting between man and man.").
  4. ^ Justia, 84 U.S. (17 Wall.) 453 (1873).
  5. ^ 84 U.S. at 456.
  6. ^ Justia, 243 U.S. 502 (1917).
  7. ^ Justia, 243 U.S. 490 (1917).
  8. ^ 243 U.S. at 500-01.
  9. ^ 272 U.S. 476 (1926).
  10. ^ Id. at 489.
  11. ^ 309 U.S. 436 (1940).