Contract-Based Post-Sale Restrictions on Patented Products Following Quanta

Alfred C. Server and William J. Casey

Volume 64, Issue 3, 561-640

Supreme Court decisions regarding the doctrine of patent exhaustion have drawn a bright line for determining when patent exhaustion occurs. If a sale of a patented product is authorized, exhaustion occurs. If a sale is not authorized, there is no exhaustion and patent remedies remain available to the patent holder to enforce a breach of a contractual restriction placed by the patent holder on the buyer of its patented product. But a lack of precision in the Supreme Court’s patent exhaustion jurisprudence has resulted in uncertainty regarding the scope and impact of patent exhaustion. Specifically, questions persist as to whether a patent holder can preserve its patent infringement remedies by placing a contract-based restriction on a buyer’s use or disposition of its patented product as a condition of the sale of the product and whether breach of contract remedies remain available to a patent holder if an authorized first sale is made and exhaustion occurs.

The Supreme Court’s failure to answer these questions in its latest decision regarding patent exhaustion has prompted the Authors of this Article to seek these answers through a review of the relevant case law, in order to provide guidance to the patent holder who intends to control the use or distribution of its patented product following a sale. On the basis of their review, which involves an analysis of the conflict between federal patent law and state contract law that occurs in the context of an authorized first sale of a patented product, the Authors contend that a patent holder is unable to preserve patent infringement remedies by conditioning the sale of its patented product, and that contractual remedies remain available in many cases even when patent exhaustion occurs. Further, the Authors propose a case-by-case approach to assessing whether a contract-based post-sale restriction on a patented product is enforceable under state contract law. This approach involves determining whether (i) an objective of federal patent law preempts enforcement of the contractual provision; (ii) the inclusion of the provision in a contract constitutes patent misuse; (iii) the provision violates federal antitrust law; and (iv) public policy considerations (that is, regarding public health and safety) militate in favor of enforcing the restriction. The Authors conclude by noting that the distinction between patent remedies and contract remedies has diminished in the wake of the Supreme Court’s recent ruling that the proper test for the granting of an injunction upon a finding of patent infringement is the traditional four-factor test used for non-patent causes of action.

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