The Button-Fastener Case, Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co.,77 F. 288, 1896 U.S. App. LEXIS 2241 (6th Cir. 1896). also known as the Peninsular Button-Fastener Case, was for a time a highly influential decision of the United States Court of Appeals for the Sixth Circuit. Many courts of appeals, and the United States Supreme Court in the A.B. Dick case. adopted its "inherency doctrine"—"the argument that, since the patentee may withhold his patent altogether from public use, he must logically and necessarily be permitted to impose any conditions which he chooses upon any use which he may allow of it."The quoted language is from . In 1917, however, the Supreme Court expressly overruled the Button-Fastener Case and the A.B. Dick case, in the Motion Picture Patents case.
Background
Button-Fastener had patents on machines for fastening buttons to high-button shoes with staples.The staples were unpatented and were not even an element in a combination claim of the patents. 77 F. at 289. This was a labor-intensive operation formerly done by hand at a higher cost. The invention saved considerable labor in making the shoes, although commercially exploiting the invention presented a marketing problem. The machines were worth much more to high-volume users than to low-volume users since the labor-saving benefits were directly proportional to the number of shoes on which the machines fastened buttons. But if Button-Fastener tried to sell the machines at different prices to the different users, there would be problems. First, it would be difficult or impossible to determine in advance of sale how intensively each shoe manufacturer would use the machines. Second, if the machines were sold cheaply to low-volume users, it would have been difficult or impossible to prevent those buyers from reselling their machines to those manufacturers that "should" pay a high price.See Ward S. Bowman, Tying Arrangements and the Leverage Problem, 67 L.J. 19, 23 (1957). But Button-Fastener came up with a business model that solved the problem. It sold the machines subject to a condition spelled out in a plate fastened to each machine, that the machine must use only the staples that Button-Fastener made and sold. As it told the court in its legal papers, "it makes nothing in the sale of its machines, and ... the entire profits of its business are made in the sale of staples."Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 65 F. 619, 621, 1895 U.S. App. LEXIS 3022 (C.C.D. Mich. 1895). In effect, the tie-in operated as a counter on the machines, counting the number of uses made of the invention. An above-market price for the staples provided a patent royalty proportional to use of the invention.Bowman at 23-24.
But the high price for staples attracted an interloper. Eureka Specialty Co. began to sell the staples, an unpatented product, to some machine users. According to Button-Fastener, Eureka persuaded Button-Fastener's customers to disobey the notices on the machines.
Trial court opinion
Button-Fastener sued Eureka Specialty Co. for alleged infringement of its patents. In its pleadings, Button-Fastener described its business model of selling its patented machine only on condition that buyers of the machines obtain all their staples from Button-Fastener. It stated that notwithstanding its knowledge of this, Eureka "manufacture[d] staples adapted only for use in the machines so sold by [Button-Fastener], and persuade[d] the users of the machines to buy and use them in violation of the above-mentioned restriction."Heaton-Peninsular Button-Fastener Co. v. Eureka Specialty Co., 65 F. 619, 620, 1895 U.S. App. LEXIS 3022 (C.C.D. Mich. 1895).
Eureka responded to the suit with a "demurrer" in which it said (1) its only business is selling unpatented staples to people using the machines, for which "they are not accountable" to Button-Fastener, and (2) Button-Fastener's restriction on the use of the machines "whereby a monopoly in an unpatented article is secured to the complainant, is contrary to public policy, and that a court of equity will not enforce it."65 F. at 620.
The court dismissed the first argument, particularly because Button-Fastener alleged that Eureka actively "persuade[d] the users of the machines to violate the supposed rights secured to [Button-Fastener] by the patent, and the restriction in the sale of its machines." As to the second argument, however, the court agreed with Eureka, even though Button-Fastener submitted "a very able and ingenious argument ... to vindicate the general proposition that a patentee may deal with his patent as he likes and that the right is absolute." The court said that it was:
persuaded that the patentee's privilege has its limitations, in the rights and interests of the public, and that it is an abuse of his privilege to so shape his dealings with his patent as to secure a monopoly upon an unpatented article. It is hard to foresee to what extent such schemes might be carried if patents can practically be broadened so as to gather in a multitude of subjects now and always hitherto free from monopoly.65 F. at 621.
Button-Fastener argued that it, "having an absolute property right under its patent, might altogether refrain from putting its machines upon the market." The court said that if the patent owner did that, it "would defeat the just expectation of the public, and would not be consistent with the implications of his grant," because "[t]he expectation is that he will promptly disclose the nature of his invention, and accord to the public, on reasonable terms, the use of it, and not that others should be shut out of that field for the period of 17 years, and the public be debarred from the benefits of like inventions during that whole period." In any case, the court said, "I think a court of equity would be slow in lending its aid to such a course." He said he would exercise his discretion to deny relief to Button-Fastener and therefore sustained Eureka's demurrer, dismissing the case.65 F. at 621-22.
Sixth Circuit ruling
Button-Fastener appealed to the United States Court of Appeals for the Sixth Circuit. The panel included Judge Lurton (later Justice Horace Lurton), who wrote the opinion, and Judge William H. Taft (later the President and then the Chief Justice). The court unanimously reversed.
On appeal, Eureka "very earnestly and ably argued" that "the restrictions on use imposed by the complainant operate to create a monopoly in an unpatented article, and are therefore void as contrary to public policy, or, if valid as purely legal contracts, are so unconscionable as not to entitle complainant to equitable remedies for their enforcement."77 F. at 289.
The court acknowledged that it is the general rule that sale terminates the seller's rights over a sold article, as in Adams v. Burke. But the rule is different, the court said, when the sale is made subject to a condition. In this case, the court maintained:
In view of the conspicuous character of both the machine and the notice permanently affixed thereon, every one buying must be conclusively presumed to have notice that the owners of the patents intended by the inscription on the machine to grant only a restricted license for its use, and it is difficult to see why such purchaser is not to be regarded as acquiring and accepting the structure subject to this restriction.77 F. at 290.
Accordingly, the buyer does not acquire full rights over the purchased article:
The buyer of a machine undoubtedly obtains title to the materials embodying the invention, subject to reverter in case of violation of the conditions of the sale. But, as to the right to use the invention, he is obviously a mere licensee, having no interest in the monopoly granted by the letters patent. A license operates only as a waiver of the monopoly as to the licensee, and estops the licensor from exercising its prohibitory powers in derogation of the privileges conferred by him upon the licensee.
That is, the sale of a patented machine may convey title to the pieces of metal and other material comprising the machine, but not a complete right to use the machine in any way the buyer chooses. Since the buyer acquired only a limited and conditional right to use the machine, i.e., a right to use it with the seller's staples, any other use is outside the scope of the license granted to the buyer.77 F. at 290-91 ("It must follow, therefore, that the purchaser of one of the complainant's machines subject to a restricted use takes the structure with a license to use the invention only with staples made by the patentee." ).
On the other hand, the machine buyer who uses Eureka's staples is an infringer:
[A] use prohibited by the license is a use in defiance of the monopoly reserved by the patentee, and necessarily an unlawful invasion of the rights secured to him by his patent. The license would be no defense to a suit for infringement by a use in excess of its terms. The patentee has the exclusive right of use, except in so far as he has parted with it by his license. The essence of the monopoly conferred by the grant of letters patent is the exclusive right to use the invention or discovery described in the patent. This exclusive right of use is a true and absolute monopoly and is granted in derogation of the common right, and this right to monopolize the use of the invention or discovery is the substantial property right conferred by law, and which the public is under obligation to respect and protect.77 F. at 291.
Lurton then turned to the public policy arguments—that Button-Fastener was expanding its lawful monopoly over the patented machines to a second monopoly over unpatented staples:
What we are asked to do is to mark another boundary line around the patentee's monopoly, which will debar him from engrossing the market for an article not the subject of a patent. To do this, we are asked to say that he cannot license others to use his invention on condition that they shall use it only in conjunction with a nonpatentable article made by himself. The only reason suggested for this limitation upon his right to define the terms upon which others may use his invention is that a monopoly in the unpatented article may thereby be created. Upon what authority are we to circumscribe the exercise of the privileges awarded a patentee? In considering any question in respect of restraints upon the liberty of contracting, imposed by principles of public policy, we should bear in mind that very high considerations of public policy are involved in the recognition of a wide liberty in the making of contracts.77 F. at 294.
The court said that freedom of contract trumps public policy here because of the inherent rights of a patent owner:
If he see fit, he may reserve to himself the exclusive use of his invention or discovery. If he will neither use his device, nor permit others to use it, he has but suppressed his own. That the grant is made upon the reasonable expectation that he will either put his invention to practical use, or permit others to avail themselves of it upon reasonable terms, is doubtless true. This expectation is based alone upon the supposition that the patentee's interest will induce him to use, or let others use, his invention. The public has retained no other security to enforce such expectations. A suppression can endure but for the life of the patent, and the disclosure he has made will enable all to enjoy the fruit of his genius. His title is exclusive, and so clearly within the constitutional provisions in respect of private property that he is neither bound to use his discovery himself, nor permit others to use it.77 F. at 294-95.
Since the patentee has such absolute, inherent rights to withhold use of the patent, he could lawfully use that right to become the sole supplier of the article that the patent covers: