Edited by Irene Calboli and Edward Lee
Chapter 2: The economic rationale for exhaustion: distribution and post-sale restraints
The first sale doctrine, also known as the exhaustion rule of intellectual property (IP) rights, limits an IP owner’s power to control the downstream distribution and use of its intellectual goods. Despite its common law origins, “an impeccable historic pedigree,”1 and over a hundred years of adjudication, courts have never been able to draw the exact contours of the first sale doctrine or fully articulate its rationale. Proponents of narrow (or no) exhaustion rules began harnessing insights from modern antitrust law and economics to suggest that, just as antitrust law has recognized the efficiency of some post-sale restraints and relaxed its hostility toward them, so should IP law permit their imposition and provide remedies for their breach. This chapter challenges this position. It shows that post-sale restraints can be beneficial, mostly in situations of imperfect vertical integration between coproducing or collaborating firms, when used to solve organizational problems that occur during the production and distribution phases or shortly thereafter. In such situations, the law should allow IP owners and those with whom they collaborate to contract around the first sale doctrine. Beyond such limited circumstances, however, the first sale doctrine promotes important social and economic goals: it promotes efficient use of goods embodying IP, guarantees their preservation, and facilitates user innovation, while minimizing transaction costs that otherwise might impede those goals. Therefore, rather than undermining it, the economics of post-sale restraints confirm the validity of the first sale doctrine and support its continued vitality.
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