Tuesday, October 16, 2018

Equitable Servitudes and Post-Sale Restrictions

I have continued to find the issue of post-sale restrictions vexing. On the one hand, I think that there are sound economic reasons for them. On the other hand, I really don't like them, especially when they limit what should otherwise be reasonable and free activities.

The Supreme Court's recent cases in this area have made it more difficult to enforce such restrictions, but they have done so in a way that leaves open the possibility that some restrictions might apply while also not giving much guidance about when.

A recent article takes this on. Tim Scott (King & Spalding) has published The Availability of Post-Sale Contractual Restrictions in the Wake of Impression Products, Inc. v. Lexmark, 581 U.S. 1523 (2017) in Les Nouvelle. It is available on SSRN as well, and the abstract is below. I write about this article in part because the abstract is uninspiring when compared to the high quality analysis in the article. Don't be fooled.
In Impression Products, Inc. v. Lexmark International Inc., 581 U.S. ___, 137 S. Ct. 1523 (2017), the United States Supreme Court reaffirmed the patent exhaustion rule; i.e., patent rights are exhausted upon the first sale of the patented item such that the patentee has no rights to impose any post-sale conditions or limitations on the use of the product, at least under the patent laws. Id. at 1529. In doing so, the Court left open the question of whether such conditions or limitations could be imposed as a matter of contract law. Thus, the “restrictions in Lexmark’s contracts with its customers may have been clear and enforceable under contract law, but they do not entitle Lexmark to retain patent rights in an item that it has elected to sell.” Id. at 1531 (emphasis added). In summarizing its decision in Quanta Computer, Inc. v. LG Electronics, Inc., 533 U.S. 617 (2008) ruling that the sale of computer components exhausted the plaintiffs patent rights in those components, the Court noted that it reached that conclusion “without so much as mentioning the lawfulness of the contract.” Lexmark, 137 S. Ct. at 1533. And it later summarized its holding by stating that “whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.” Id. (emphasis added).
This is my kind of article: it's short, it gets right to business, and it is thorough despite its brevity. The article introduces the cases, discusses contract v. property rights, discusses equitable servitudes, surveys the literature on equitable servitudes on personal property (including pros and cons), proposes alternatives to equitable servitudes (and points to critiques), and then discusses how the alternatives might have applied to Lexmark's activities in Impression Products.

Not bad for eight journal pages. This is recommended reading for anyone who wants a quick background on the state of post-sale restrictions.

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