The relative importance of intellectual property in commercial transactions has been increasing rapidly in the past few years, and accordingly an increased amount of scholarly attention and judicial decisions have emerged in this changing area of law. Intellectual property rights, like any other property rights, are subject to the contractual obligations of their owner and any other applicable laws. McCoy v. Mitsuboshi Cutlery Inc., 36 USPQ2d 1289, 1291 (Fed. Cir. 1995). Today's courts have been using rules of contract formation and the Uniform Commercial Code (UCC) when deciding intellectual property disputes within a commercial transaction, and whether contemplated by the parties or not, the UCC has been used by the courts as a "gap filler" for missing terms in intellectual property agreements or sales.

One of the most important recent developments is the clarification of the "exhaustion" or "first sale" doctrine, which states that some or all of the exclusive rights of intellectual property in a particular item are exhausted upon the first authorized sale of that item.

In Mallinckrodt, Inc. v. Medipart, Inc., 24 USPQ2d 1173 (Fed. Cir. 1992), Mallinckrodt sold patented inhalers to hospitals subject to a notice that they were for "single use only." The hospitals disregarded that notice and permitted the defendant, Medipart, to collect the used inhalers from the hospitals, recondition them, and sell them back to the hospitals for reuse. When Mallinckrodt sued Medipart for infringement, the district court held that all restrictions on a purchaser's use of patented goods were invalid as a matter of law, and therefore the "single use" notice placed on the inhalers was per se invalid and unenforceable.

The Court of Appeals for the Federal Circuit (CAFC) reversed and remanded the case for a proper determination of the enforceability of the single-use notice, holding that conditioning sale on an agreement to post-sale conditions is a legitimate exercise of patent rights if: (1) the restrictions are reasonably within the patent grant; (2) the restrictions do not violate some other policy such as patent misuse or antitrust; and (3) the restrictions do not cause an anti-competitive effect beyond the rule of reason. Id. at 1179. The court further clarified that anti-competitive effects were not per se violations of the law and must be analyzed in accordance with the rule of reason.

The Mallinckrodt court also declined to make a distinction on whether the enforceability of a restriction depended on whether the purchaser acquired the device from a manufacturing licensee or from a manufacturing patentee, concluding that such distinctions would be "formalistic line drawing." Id. at 1177.

The CAFC has cited its Mallinckrodt decision favorably in subsequent cases. In McCoy v. Mitsuboshi Cutlery Inc., 36 USPQ2d 1289 (Fed. Cir. 1995), the Mallinckrodt doctrine was interpreted as consistent with the rules of contract and the UCC. In this case, McCoy contracted with Mitsuboshi to manufacture McCoy's patented knives. McCoy then failed to purchase the knives in accordance with the contract. Mitsuboshi resold the knives to recoup its losses. The court found that Mitsuboshi received an implied license to use the intellectual property rights if the rights were not reserved before the sale, and that failure to comply with the terms of the contract allowed the aggrieved manufacturer to sell the patented and trademarked goods to other parties. The court also cited Mallinckrodt in dicta stating that patent holders could frustrate commercial remedies if an implied license was not granted (e.g. when a patentee reserved intellectual property rights, including the right to sell, before the license or sale). Id. at 1293. The purchaser must have notice of the restrictions before the sale is finalized; restrictions cannot be added later.

In Kendall Co. v. Progressive Medical Technology Inc., 38 USPQ2d 1917 (Fed. Cir. 1996), the CAFC distinguished a situation similar to Mallinckrodt in which a replaceable sleeve on a medical device was marked "For single patient use only. Do not reuse." In this case, the court found that another company's replacement of the sleeve did not constitute infringement. Unlike Mallinckrodt, the sleeve was not protected by a patent, and the notice was not disregarded. The hospitals were doing exactly what the notice instructed, by using each sleeve once; there was no notice that required purchase of new sleeves from the manufacturer. This case shows that it is important to make any restrictions consistent with the protection offered by the patent, and also to pay close attention to the language of the restriction.

The U.S. District Court for the Eastern District of Michigan has cited the Mallinckrodt doctrine and agreed with its teaching as long as the restriction does not attempt to extend to non-patented products the scope of the monopoly permitted by the patent. Tricom Inc. v. Electronic Data Systems Corp., 36 USPQ2d 1778 (E.D. Mich. 1995) (involving tying restrictions). In short, the Mallinckrodt doctrine enables a patentee to reserve patent rights in a sale, but does not extend those rights beyond the point allowed by other laws.

Of course, patentees have always had the option of licensing around the exhaustion doctrine. The Mallinckrodt doctrine gives patentees another option, but using it is not always advisable. If a patentee is not sure whether the restrictions to be imposed are beyond the scope of the patent, or if the patentee fears Mallinckrodt might be overturned, a licensing agreement limiting permissible uses may be preferable. However, this involves high transaction costs, such as legal fees and bargaining time. Furthermore, in the case of new technology, the best license agreements or "field of use" restrictions are not always foreseeable. Sometimes it might be easier to give a purchaser a "take-it-or-leave-it" option rather than go through a lengthy licensing dispute. Transaction costs are high in such situations, and could be avoided by using the Mallinckrodt doctrine. James B. Kobak, Jr., Contracting Around Exhaustion: Some Thoughts About the CAFC's Mallinckrodt Decision, 75 J. PAT. [& TRADEMARK] OFF. SOC'Y 550.

On the other hand, there are benefits to including intellectual property in commercial agreements. Courts may be more willing to order injunctions and do so sooner when intellectual property is involved, giving the owner of that property more leverage to enforce the contract than through more traditional techniques such as specific performance clauses, which courts are less likely to enforce. Through intellectual property rights, a licensor can more tightly control a licensee.

In both approaches there are strategies to maximize the benefits of intellectual property without overreaching the rights afforded thereby. Some techniques start with the formulation of patent claims. For instance, creative claim drafting might allow a patentee to sell separately the device and the technique for using it. Richard Stern, Post-Sale Patent Restrictions After Mallinckrodt - An Idea in Search of a Definition, 5 Alb. L.J. Sci. & Tech. 1, 24.

Other techniques include "field-of-use" agreements. In the case of medical equipment, a patent owner could define two markets, the "consumer" market and the "commercial" market. The consumer market would be defined as a sample from any patient who attends the licensed hospital, and the commercial market would be defined as samples originating from patients in other hospitals. Territorial field-of-use agreements - agreements that limit use to one geographical area - have encountered more resistance from licensees and the courts. Id. at 22.

Under the Mallinckrodt doctrine, similar results could be obtained by placing a restrictive notice on the device itself, such as "use restricted to patients of XYZ hospital only" or "all use subject to purchase agreement." Any use inconsistent with the restrictive notice would then constitute an infringement. In this scenario, a defendant might have available affirmative defenses of patent misuse and/or antitrust violation. A court would then decide whether the restriction is within the bounds of protection afforded by the patent, and rule accordingly. In a Mallinckrodt-type analysis, a restriction is legally enforceable if it is normally and reasonably adapted to the policy of permitting the inventor to realize the income for market demand from the technology covered by the patent. Once again initial claim drafting is important.

In conclusion, a patent holder may now accomplish with a restricted sale what was typically achieved with a license agreement. However, this may not always the best route to take in a commercial transaction, and a seller must be careful to not create a restriction that violates antitrust or patent-misuse laws. If such a violation were to arise, the buyer would have the burden of proof, and the court would analyze any alleged violation accordingly.

REVISED APRIL 17, 1998