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An Economic Take On Patent Licensing: Understanding The Implications Of The “First Sale Patent Exhaustion” Doctrine, Anne S. Layne-Farrar

Anne S. Layne-Farrar

Under the legal doctrine of first sale, or patent exhaustion, a patent holder’s ability to license multiple parties along a production chain is restricted. How and when such restrictions should be applied is a controversial issue, as evidenced by the Supreme Court’s granting certiorari in the Quanta case. The issue is important, as it has significant implications for how firms can license in vertically disaggregated industries. We explore this issue from an economic viewpoint and find that under ideal circumstances how royalty rates are split along the production chain has no real consequence for social welfare. Even when we depart …