May 31, 2017
Intellectual Property Alert
Intellectual Property Alert
Author(s): Richard H. Tilghman IV
The Court’s ruling that any sale, domestic or abroad, exhausts patent rights has significant implications for patent licenses.
Yesterday, the United States Supreme Court issued another reversal of long-standing Federal Circuit Court of Appeals precedent by limiting patent holders’ ability to use the patent laws to enforce post-sale restrictions on patented products.
Under the doctrine of patent exhaustion, a patent holder’s sale of a patented item is deemed to “exhaust” its patent rights in that item, such that it can no longer restrict the resale of the item through the patent laws. In Impression Products, Inc. v. Lexmark Int’l, Inc., the Court addressed whether a patent holder could avoid the doctrine of patent exhaustion by contractual restrictions on purchasers’ ability to use and sell the product after the initial sale. Relatedly, the Court considered whether a sale by the patent holder outside the United States exhausts the patent holder’s right to sue for infringement if the patented product is subsequently imported into the United States. On both questions, the Court ruled that any sale of a patented product exhausts the patent holder’s patent rights.
Impression Products involved several patents owned by Lexmark International, Inc. on reusable toner cartridges used in printers. With each sale of a toner cartridge, Lexmark gave consumers the option to either (1) pay full price, or (2) pay a discounted price and sign a contract prohibiting the consumer from transferring the cartridge to anyone but Lexmark. Several competing companies, known as remanufacturers, acquire Lexmark toner cartridges from purchasers, both in the United States and abroad, refill them with toner, and resell them. Lexmark sued Impression Products, Inc. both for its domestic sales activity and its importation of products sold by Lexmark outside the United States. Impression Products moved to dismiss the patent claims, arguing that sales in the United States and abroad exhausted Lexmark’s patent rights. The Federal Circuit, sitting en banc, ruled that Lexmark’s patent rights were not exhausted by either category of sales because Lexmark had communicated clearly post-sale restrictions to the purchasers of the cartridges.
In yesterday’s decision, the United States Supreme Court continued its recent trend of reversing the Federal Circuit on issues of patent law. The Court held that both domestic and foreign sales of the patented cartridges exhausted Lexmark’s patent rights and precluded Lexmark from suing for infringement based on the resold cartridges. The Court held that contractual post-sale restrictions on the purchaser’s ability to resell the cartridges could not save Lexmark’s patent rights from being exhausted. Instead, those post-sale restrictions must be enforced through contract law. As to its holding that Lexmark’s sales abroad exhausted its patent rights, the Court followed its 2013 decision in Kirtsaeng v. John Wiley & Sons, Inc., which applied the same rule to the sale of copyrighted items abroad.
While the Court’s decision does not take away contractual claims from companies like Lexmark, contract rights are subject to varying state laws and a company like Lexmark would have to overcome additional defenses that apply in contract cases. For example, a party generally is limited to enforcing contractual rights against the party with whom it contracts. Since Lexmark contracts with its purchasers, not remanufacturers, remanufacturers would argue that Lexmark does not have contractual rights it can enforce against them. The Court’s decision will make it far more challenging for patent holders like Lexmark to enforce post-sale restrictions on patented products, which exist in the vast majority of patent licenses.
Finally, the Court’s decision on the issue of sales abroad exhausting patent rights is likely to make companies that sell products covered by United States patents reticent to sell those products abroad at discounted prices, since the products could be sold back into the United States at lower prices, and undercut the company’s United States pricing policies.
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