Authorized Product Sale Exhausts Patent Rights Worldwide

Tuesday, May 30, 2017

The U.S. Supreme Court has held that a patent owner’s sale of a patented product exhausts its ability to bring infringement claims against the purchaser, or subsequent owners, of the product. In so holding, the Court rejected cases, such as Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (1992), which recognized contractual limitations on a purchaser’s post-sale use or disposal of a product. In addition, the Court held that product sales in a foreign country trigger exhaustion, even when the product sold was not subject to patent protection in the place of sale. Impression Products, Inc. v. Lexmark Int’l, Inc., No. 15-1189 (U.S. May 30, 2017). So, for example, if a U.S. patent owner sells a product covered by its U.S. patent in Germany, the product sold in Germany could be imported into the U.S. without infringing (the U.S. patent) because all rights by the patent owner would have already been exhausted by the sale in Germany. The decision is likely to expand the exhaustion doctrine as a hurdle to patent enforcement, and will likely cause patent owners to reevaluate their product sales and distribution strategies.  Tempering the impact somewhat, the Court stated that contractual provisions may be used to control downstream uses of patented products.

Background:

The Court’s decision is the latest in a long-running litigation between Lexmark International. Inc., a maker of computer printers, and Impression Products, Inc., which refurbishes and resells used printer toner cartridges. Lexmark sells toner cartridges both in the U.S. and in foreign markets. In the U.S., Lexmark sells cartridges in two configurations. First, Lexmark sells cartridges at full price with no restrictions on the purchaser’s ability to refill and reuse the cartridges. Second, Lexmark sells its toner cartridges at a discount and the purchaser agrees to refrain from transferring spent cartridges to any person other than Lexmark (also called the Lexmark “Return Program”). All cartridge sales outside the U.S. were made without restriction on purchaser disposition of spent cartridges. In the litigation, Lexmark alleged that Impression infringed its patents by taking title to used toner cartridges, circumventing microchip technology intended to prevent refilling the cartridges, and reselling the refurbished cartridges in the United States (including importing cartridges from foreign markets).

Impression defended the infringement, arguing that the initial sales of Lexmark toner cartridges exhausted all patent rights, and thus the original purchasers and any downstream owners of the cartridges were free from infringement claims. The Federal Circuit held that patent exhaustion did not apply to either the domestic “Return Program” cartridges or the foreign-sale cartridges. Impression Products, Inc. v. Lexmark Int’l, Inc., 816 F. 3d 721 (2016).

Supreme Court Ruling:

In a decision written by Chief Justice John Roberts, the Supreme Court reversed the Federal Circuit and ruled that patent exhaustion applies both to “Return Program” cartridges in the U.S. and to cartridges sold outside the U.S.

First, the Court held that patent exhaustion occurs automatically whenever a patent owner sells a patented product. “When a patentee chooses to sell an item, that product ‘is no longer within the limits of the monopoly’ and instead becomes the ‘private, individual property’ of the purchaser, with the rights and benefits that come along with ownership.” Slip op. at 6, quoting Bloomer v. McQuewan, 14 How. 539 (1853). The Court noted that the principle of exhaustion had an “impressive historical pedigree[.]” “As Lord Coke put it in the 17th century, if an owner restricts the resale or use of an item after selling it, that restriction ‘is voide, because . . . it is against Trade and Traffique, and bargaining and contracting betweene man and man.’” Slip op. at 6-7, quoting 1 E. Coke, Institutes of the Laws of England §360, p. 223 (1628).

Further, the Court held that express restrictions on the purchaser’s right to use the patented product do not prevent exhaustion. Those restrictions may be enforceable under contract principles, but they do not preserve the right to bring a patent infringement claim. Relying on prior decisions finding exhaustion, including United States v. Univis Lens Co., 316 U. S. 241 (1942) and Quanta Computer, Inc. v. LG Electronics, Inc., 553 U. S. 617 (2008), the Court concluded that sales of cartridges under the “Return Program” resulted in exhaustion of Lexmark’s patents:

[W]e conclude that this well-settled line of precedent allows for only one answer: Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single-use/no-resale provision accompanying its Return Program cartridges. Once sold, the Return Program cartridges passed outside of the patent monopoly, and whatever rights Lexmark retained are a matter of the contracts with its purchasers, not the patent law.

Slip op. at 9.

Exhaustion will also occur when a product is sold by a licensee with authority to make the sale. “That licensee’s sale is treated, for purposes of patent exhaustion, as if the patentee made the sale itself.” Slip op. at 12. The Court noted, however, that exhaustion will not generally arise where the patent owner licensed rights to practice under the patent, as opposed to selling a patented product:

A patentee can impose restrictions on licensees because a license does not implicate the same concerns about restraints on alienation as a sale. Patent exhaustion reflects the principle that, when an item passes into commerce, it should not be shaded by a legal cloud on title as it moves through the marketplace. But a license is not about passing title to a product, it is about changing the contours of the patentee’s monopoly: The patentee agrees not to exclude a licensee from making or selling the patented invention, expanding the club of authorized producers and sellers. Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections.

Slip op. at 11 (citation omitted).

Second, the Court held that exhaustion applies to the sale of patented products outside the U.S., as well as domestic sales. It rejected the rationale adopted by the Federal Circuit that exhaustion should not apply to foreign sales because the seller is unable to command a premium price to compensate for a release of patent rights when the product sold is not covered by the patent. On this point, the Court looked to the contours of copyright’s first sale doctrine. See Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519 (2013). In the Kirtsaeng decision, one important factor supporting the Court’s decision to apply the first sale doctrine to non-U.S. sales was “the fact that the first sale doctrine originated in ‘the common law’s refusal to permit restraints on the alienation of chattels.’ That ‘common-law doctrine makes no geographical distinctions.’” Slip op at 14. Applying a parallel reasoning, the Court ruled that patent exhaustion should apply to non-U.S. sales:

Patent exhaustion, too, has its roots in the antipathy toward restraints on alienation, and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales. In fact, Congress has not altered patent exhaustion at all; it remains an unwritten limit on the scope of the patentee’s monopoly. And differentiating the patent exhaustion and copyright first sale doctrines would make little theoretical or practical sense: The two share a strong similarity and identity of purpose, and many everyday products —automobiles, microwaves, calculators, mobile phones, tablets, and personal computers — are subject to both patent and copyright protections. There is a “historic kinship between patent law and copyright law,” Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417, 439 (1984), and the bond between the two leaves no room for a rift on the question of international exhaustion.”

Slip op. at 14-15 (quotations and citations omitted).

Thus, the Court further held:

[a]llowing patent rights to stick remora-like to that item as it flows through the market would violate the principle against restraints on alienation. Exhaustion does not depend on whether the patentee receives a premium for selling in the United States, or the type of rights that buyers expect to receive. As a result, restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.

Slip op. at 18. Justice Ginsburg dissented from the ruling on this issue, arguing that exhaustion, like the first sale doctrine, should be limited to U.S. sales.

Practical Significance:

The Impressions decision is significant because it undercuts longstanding Federal Circuit law onwhich lower courts have relied upon to allow patent owners to sell products without losing the right to restrict post-sale activities. See Jazz Photo Corp. v. International Trade Commission, 264 F. 3d 1094 (2001) (holding that exhaustion does not apply to non-U.S. sales); and Mallinckrodt, Inc. v. Medipart, Inc., 976 F. 2d 700 (1992) (upholding post-sale restrictions on product use). The decision will force patent owners to review their current sales and distribution strategies, including any arrangements with licensees. The decision raises several issues that will be litigated in future cases.

For example, although the Court indicated that licenses typically will not result in exhaustion, it remains unclear whether standard, mass market licenses, such as those used in the distribution of computer software, will trigger exhaustion issues. In addition, the Court noted that restrictions on post-sale activity can be enforced as a breach of contract. Patent owners may consider bringing claims for interference with contract against competitors who encourage customers to breach their contractual obligations by transferring products in violation of purchase terms.

Disclosure:  Brook Kushman P.C. represented parties adverse to Lexmark International, Inc and argued in favor of the exhaustion principles adopted by the Supreme Court.