The Economic Rationale of Exhaustion: Distribution and Post-Sale Restraints

Posted by Social Science Research Network

The Economic Rationale of Exhaustion: Distribution and Post-Sale Restraints Ariel Katz (University of Toronto)

Abstract: Despite 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. In recent years, insights borrowed from modern antitrust law and economics have been applied to suggest that just as that just as antitrust law has recognized the efficiency of 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 the main benefits of post-sale restraints involve situations of imperfect vertical integration between coproducing or collaborating firms, which occur during the production and distribution phases or shortly thereafter. In such situations, contracting out of the first sale doctrine should be permitted. 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 then undermining it, the economics of post-sale restraints confirm the validity of the first sale doctrine and support its continued vitality.