The Exhaustion Doctrine and Opt-Out Agreements
The exhaustion doctrine was designed to prevent patent owners from receiving royalty payments from multiple sources for the same invention. Thus, once the patent holder obtains a licensing royalty from the original licensee, he is barred from collecting royalties from every manufacturer in the subsequent supply chain who incorporates the patented device into its products. The patent is considered “exhausted” by the initial licensed sale of the invention by the patent holder. Although the exhaustion doctrine is not a statutory requirement, the Supreme Court has historically upheld its validity.
In order to maximize revenues from sales of the patented device, patent holders have attempted to draft licensing agreements that bar the application of the exhaustion doctrine. In general, when such agreements are formulated as post-sale limitations applicable to purchasers down the supply chain, they are found to be ineffective to prevent exhaustion. This provision has traditionally been drafted as a requirement that the purchaser of the invention, who has been granted a license to manufacture and sell the patented device, sell only to parties that would use the invention in connection with plaintiff’s other patents. For example, in one case, the licensing agreement for a film projector contained a post-sale provision that that projector could be used only to exhibit films that were claimed by a patent belonging to the plaintiff.
The general rule preventing post-sale limitations and upholding the exhaustion doctrine is grounded in important public policy goals. First, the courts want to avoid overcompensating a patent holder for a license in excess of its market value. Second, they want to maintain the free transferability of property, such that downstream purchasers are legally entitled to use the patented invention in any manner they choose without restrictions from preceding owners of the invention.
Connors & Associates provides experienced legal advice in the areas of patent, trademark and copyright law. John Connors and his team of associates have the expertise to counsel clients about protecting their intellectual property including pursuing, filing and enforcing patent rights. Contact Connors & Associates at (949) 833-3622 or visit them online to learn more about our services or to schedule a consultation.