The
use of patented technology or products requires the permission of the patent owner. However, in order to use all patented products, you do not have to contract or
obtain permission from the patent owner. For example, the smartphones we use
every day contain hundreds or thousands of patented technologies, but we don't
contract with every patent owner every time we buy a smartphone. Even if you
resell your old smartphone to someone else, you don't need to get permission
from the patent owner. This is because the amount we paid for the smartphone
already includes the cost of the patent, and the patent included in the product
with the purchase is exhausted. Therefore, the patent owner of the parts inside
the smartphone cannot claim their patent rights to the consumer who purchased
the smartphone.
Of
course, this case is just an example, and opinions are divided on how to view
patents exhausted on the sale of products that actually contain patents.
Whether or not a patent is exhausted affects not only the profits that a patent
owner has, but also the cost that a consumer must pay, so it is very important
how to interpret the exhaustion of a patent.
The
impact would be small if the patent owner simply sells its patented product to
the consumer. However, for systems such as 'produce-manufacture or
distribute-sale' where the manufacturer of a product get the license from a
patentee to produce the product, then sell it to a consumer or resell it to
another secondary producer, the impact of whether or not will inevitably
increase.
1.
Full Exhaustion of Patent
In
the aspect that a patent rights is exhausted, the patent owner loses all rights
under the patent is sold to the consumer when the manufacturer sells the
product containing the patent to the consumer, even if there is no separate
agreement.
The
patent owner can get benefit of a patent license only from the manufacturer who
originally supplied the patented product, and not from the individual consumer.
Thus, the manufacturer includes the license cost to the selling price for the
patent owner, and all consumers purchase the patented product at the same
price. In general, if the patent owner enters into a collective license with
the manufacturer, the license cost is lower than the case that the patent owner
makes an individual license agreement with the consumer, and no benefit from
the secondary manufacturer or consumer is obtained. So the patent owner’s
benefit is less than patent rights is not completely exhausted. On the
contrary, consumers or secondary manufacturers do not need to consider the
rights of patent owner, and it’s a big benefit to consumers because they can
purchase products at a lower cost than signing licenses with patent owners
individually.
2.
Exhaustion of patent rights by individual contract
According
to the interpretation that the patent rights are exhausted by each individual
contract, the patent rights are not exhausted collectively, but are determined
by the contract. In this case, unlike patent exhaustion, license fees may vary
because manufacturers require separate agreements.
If
the contract about the patent rights not exhausted between the primary
manufacturer and the patent owner, the primary manufacturer may be able to
reduce the license cost, but the secondary manufacturer also has to pay the
license fee to the patent owner to produce the product. As a result, consumers
must purchase the product including the license fee paid by the primary and
secondary manufacturers, so that the consumer must spend more money than the
case of complete exhaustion. On the contrary, patent owner can get benefits
greatly because they can receive license fees from everyone.
3.
Comparison of Social Benefits
Comparing
the complete exhaustion with the exhaustion under an individual contract, the
social benefit, which is the sum of the profits that patent owners can bring
and the profits that manufacturers and consumers can bring, can be the same in
theory. However, the total sum of society's profits may vary in considering
given other costs and non-transactional aspects such as negotiations for
license agreements, information retrieval, time and vendor selection.
In
order to maximize social benefits, the types and costs of products, patent
owners’ benefits and consumers’ benefits should be harmonized. If they’re not
harmonized with each other, they can affect to the transaction externally. If
the patent owner has little benefit, such as the complete exhaustion, the
number of social innovations can be reduced. If developers have less profit
than the R&D costs they invest in new inventions, companies will focus more
on marketing than on R&D, and makes it reducing more innovative inventions.
On
the contrary, if the product fee is excessively high due to the increase of the
license fee, the consumer's desire to purchase the product may be lowered. The
patent owner may have more benefits per product, but if the total quantity of
product selling decreases, the total profits for the patent owner and the
consumer will eventually decrease.
Excerpt
from “An Economic Model of Patent Exhaustion”, Olena Ivus, Edwin L.-C. Lai, Ted
Sichelman et al. (2017)
