Post-sale Restraint - Case Law

Case Law

Perhaps the earliest US discussion of post-sales restraints occurs in Adams v. Burke, 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.

On the basis of this doctrine, in Motion Picture Patents Co. v. Universal Film Mfg. Co., 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.

Contemporaneously, in Straus v. Victor Talking Machine Co., 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.

In 1926, in United States v. General Electric Co., 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.” 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 . 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.