Chapter 2 The Development of Exhaustion Doctrine and Post-Sale Restriction
3. Post-sale Restriction
3.2 Restriction on Price
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to anyone and permitting them to sell patented articles which also prevent any licensee or assignee from being interfered with. The questioned articles here in this case were sold lawfully under the condition, and the purchaser only bought for the purpose of use and necessarily perished in the using.33 Therefore, the Supreme Court upheld that this transaction was made lawfully and has effected to the exhaustion.
3.2 Restriction on Price
A condition set forth to restrict the sales price is also an ordinary restriction but meanwhile a very tricky one. In most transactions, if not all, the price restriction is prohibited and lead to a violation of the common law and antitrust law. However, in terms of the disputes arisen in patent law referring to violate exhaustion doctrine, the opinions given by the Supreme Court in United States v. General Electric Co.
are carried out here to bring us a clearer picture34.
General Electric Co. (GE) owned a patented lamp and assigned certain layers of distributors to sell the lamps with fixed price decided by GE. The distributors were divided into B agent and A agent. The business model of GE in this case was also divided to three classes.35 At the first class, GE had its own employees so called sales team to deal directly with large consumers. The negotiation would be done directly by GE’s sales team and products would be delivered to consumers directly from GE’s factories and warehouse. At the second class, the large consumer might also deal with the agents which are identified as B agent and had contract
which will prevent any other licensee or assignee from being interfered with.)
33 Id. at 363 (because he had a right, under the patent, to make, use, and vend the patented article in the state if Michigan, and the article was lawfully made and sol d there….but were merely used there, and necessarily perished in the using.)
34 See United States v. General Electric Co., 272 U.S. 476 (1926)
35 Id. at 481 (The plan of distribution by the Electronic Company divided the trade into three classes.)
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with GE. The deliveries were made from the stock in agents’ custody. Interestingly, B agent did not own those goods though the goods were stock in their warehouse.
They were merely in charged of taking care of those goods and had to report to GE every certain period for the sales and stock volume. And the unsold stock must be returned to GE after the for-sale period. The agent would, on the other hand, earn the commission from selling those goods which also covered the expenses of delivering the goods to consumers’ place. The third class of sales consists of authorized A agent which bought those goods from either GE’s sales tram or the B agents. The A agent would therefore sell the goods to normal individual consumers.36
In terms of the custody of the B agent, the period of time to sell, to stock, and to return the goods was determined by GE. The company, GE, owns the right of the products until they were sold to the consumers. No matter under which class the products were sold to consumers, the prices were specified by the company. The United Sates as the appellant argued the transaction between GE and its agents have triggered the patent exhaustion that GE shall not control the selling price any more.
The Supreme Court, therefore, had to deconstruct the distribution structure in order to figure out the real ownership of the patented subjects.
The Court also emphasized on the spirit of patent right that is to monopoly the rights derived from the patent granted. The patentee owns the right to make, to sell, to use and to dispose the patent and the patented articles which allow him to exclusively or non-exclusively license such rights to its licensees.37 Patentees seek for money reward by setting conditions to secure his status of monopoly was seen normal and reasonable by the Court. On the other hand, the patentee may also earn
36 Id. at 481-483.
37 Id. at 485 (But under the patent law the patentee is given by statute a monopoly of making …, [a]nd the comprehensiveness of his control of the business in the sale of the patented article is not necessarily an indication of illegality of his method.)
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the profit in return by granting the right of patent to licensee, and more powerful of the right granted would bring more profit to patentee.38
In terms of this case, though there were contracts between GE and its agents for authorizing them to sell the product, no any given right were entitled in the patent.39 GE authorized those agents to vend the products but only gained the profit from the price sold instead of from the license on the patent. Although the products are patented, the Justice distinguished between the right of selling the patented products and the right of merely selling products would represent different levels of profit return to the patentee.
Moreover, the agents were not entitled to own the goods although the goods are in their custody, therefore no such pass-hand transaction took place as in Adam v.
Bruke. In light of the contract, no any evidence showed the agreements were made
to give the licensee the right of patent, in turns no patent exhaustion issue should be concerned here40. Based on the domination of the patent right and under the circumstances that GE did not grant the right away to others, the fixed selling price determined by GE simply referred to its power of monopoly over its patent. Every patentee should have the right given by patent law to decide the value of its patented inventions including to secure his proper reward.41 The Supreme Court therefore implicitly held GE’s price-fixing business model does not violate the exhaustion doctrine by referring Adams v. Burks.42
38 Id. at 490 (One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is
prohibitory.)
39 Id. at 489 (is a license giving the licensee no title in the patent and no right to sue at law in his own name for an infringement.)
40 Id. at 484-486.
41 Id. at 493 (price fixing is usually the essence of that which secure proper reward to the patentees.)
42 Id. at 493-494 (already referred to that a patentee may not attach to the article made by him or with his consent a condition running with the article in the hands of purchasers limiting the price at which one who becomes its owner for full consideration shall part with it.)
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In the later case, United States v. Univis Lens Co. , Inc,43 which was also involved in price restriction and moreover interfered the Sherman Act. The Supreme Court intended to explicitly distinguish the long-standing ambiguity between patent monopoly and antitrust. Univis Lens had a downstream distributor channel which seems similar to GE’s but technically worked in different way. Univis Corporation was entitled the interest in the patents and trademarks which in fact owned by Univis Lens Company. The corporation then licensed Univis Lens Company to manufacture lens blanks and to sell to the indicated licensees appointed by the Corporation. The Lens Company, on the other hand, agreed to pay royalty of 50 cents a pair upon the sales to the Corporation.
Referring to the sixteen patents that Univis owns, that includes three irrelevant and five for methods of producing lenses blanks implemented by the Lens Company instead of the process or method employed by licensees for completing the lens blanks. The rest of eight patents relates to only the size, shape, composition and disposition of the pieces of glass of different refractive power in the blanks into which they are fused. Be more specific, the each lens blank can only be functional and wearable after completing the combination.
Despite the royalty the Lens Company paid to the Corporation, the Lens Company once finished the manufacturing then subsequently sold the lens blanks to licensed wholesaler for $3.25 a pair, and to those finishing retailers for $4 a pair.
The finishing retailers would grind and polish the lens blanks then s old to final customer directly with a set price of $16 a pair for white, and $20 for tinted . The prices were decided by Univis Lens Co. On the other hand, the licensed wholesaler would also grind and polish the lens blanks into the final lenses and s old to licensed prescription retailers for a set price of $7. The retailers would later resell the lenses
43 See United States v. Univis Lens Co., Inc., 316 U.S. 241 (1942)
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to final customer with the same price of $16 and $20.44
In the GE case which related to the goods that were in the custody of distributors only instead of being sold or patent licensed. Therefore, the Court did not consider the goods were de facto passed hand. Contrary to GE, Univis Lens case referred to the lens blanks that manufacturer has practiced the patents while producing and were purchased by the wholesaler and retailers with fixed price set by the Company. Nonetheless, the wholesaler and distributor subsequently sold the ground and polished lens to consumers with fixed prices decided by the Company.
As mentioned earlier, the subsequent patents referring to the size, shape, composition, and others which are owned by Univis Company. A distributor or retailer without the licenses would have infringed Univis’ patents by practicing the grind and polish. The license that the distributors and the prescription retailer were required to sign had bound the set forth price and patent rights together.45 In the other words, the licensee would only be granted the right to franchise by accepting the clause of the retailing price decided by the Company under the license. The question arisen here is whether the Company can remaining its control power over the subsequent price making and sales after the original blanks have been sold.
The Court claims that regardless the sale of the blank is done by the patentee or his licensee, to the finishers, the only use of the lens blank is to enable the distributors to grind and polish it for use as a wearable lens. Though Univis argued about the novelty of the combination of shape, size, and arrangement, the Court ha s found no other function in the blanks besides of being ground and polished. The
44 Id. at 243-244; also see Yina Dong, A Patent Exhaustion Exposition: Situating Quanta v. LGE in the Context of Supreme Court Jurisprudence, Stan. Tech. Law Review 2, at 2-3 (2010)
45 Id. at 244-245 (The retailers are licensed to purchase the blanks of the Lens Company and to sell them to their customers at prices prescribed by the Corporation licensor.) ([i]n return for which the prescription retailer agrees to sell finished lenses only to customers an d only at prices prescribed by the Corporation.)
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only novelty feature claimed by the patentee id de facto embodied in the lens.46 Take a step further, regardless whoever sells the lens blank, the only purpose of the sale is to enable the later party to grind and polish is for the wearer. The Court therefore stated “[t]he authorized sale of an article which is capable of use only in practicing the patent is a relinquishment of the patent monopoly with respect to the article sold.”47
Following to the principle, the Court held the transaction between Univis and his distributor has consequently completed the transfer of ownership of the blank and has also permitted a license to practice the final stage of the combination. This action was protected under the patent law and had triggered the exhaustion.48 Moreover, the Court emphasized that the patentee has received the full compensation and consideration of its patent reward through selling its patented articles. Hence the patentee shall no more control the resale price of patented articles which he has already sold.
Price restriction normally is not only involved with patent law but also Sherman Act and Antitrust Act that may only be roughly mentioned in the later chapter in order to provide a comprehensive understanding. However, it is not hard to find from the above two cases which results into two different verdicts, whether the patented articles are virtually transferred or passed hand through purchase is the key to determine the exhaustion. And price restriction on the subsequent sale is anyway unlawful while the monopoly on the patent has been broken.
46 Id. at 248 (each blanks, as appellees insist, embodies essential features of the patented device and is without utility until it is ground and polished as the finished lens of the patent.)
47 Id. at 249
48 Id. at 249 (Sale of a lens blank by the patentee or by his licensee is thus in itself both a complete transfer of ownership of the blank, which is within the protection of the patent law, and a license to practice the final stage of the patent procedure.)