Supreme Court Reverses Federal Circuit on the Issue of Patent Exhaustion – Impression Products, Inc. v. Lexmark International, Inc.

On May 30, 2017 the Supreme Court made it clear that “a patentee’s decision to sell a product exhausts all patent rights in the product regardless of any restrictions the patentee purports to impose or the location of the sale”, i.e., in the U.S. or elsewhere.  Impression Products, Inc. v. Lexmark International, Inc.  Restrictions placed on post-sale use may permit an action for breach of contract if the predicates for such an action exist, but a patent infringement action is not possible.

Under what has been termed the “patent exhaustion” doctrine, a patent owner’s rights to enforce its patent are typically “exhausted” once a patented product is sold.  Prior to the Supreme Court’s ruling last week, the exhaustion principal could be manipulated by the patentee imposing specific “clearly communicated” post-sale restrictions on the product. Failure to follow these restrictions could leave the purchaser exposed to claims of patent infringement.  The Impression decision effectively created a mandatory doctrine of exhaustion.

The specific facts relate to Lexmark toner cartridges.  Lexmark owns a number of patents covering cartridges.  When Lexmark sells toner cartridges, it gives consumers the option of either buying (1) a toner cartridge at full price, with no restrictions; or (2) buying a cartridge at a discount in exchange for the consumers signing a contract agreeing to use the cartridge only once and to refrain from transferring the cartridge to anyone but Lexmark.   Companies known as “remanufacturers” acquire empty Lexmark toner cartridges from purchasers, refill them with toner, and then resell them in the United States.

Lexmark sued Impression for patent infringement. Lexmark argued that, because it expressly prohibited reuse and resale, Impression infringed the Lexmark patents when it refurbished and resold them.  Lexmark further alleged that all of the toner cartridges that Lexmark had sold abroad which Impression refilled and imported back into the United States also infringed its patents.

The district court dismissed Lexmark’s case as it applied to U.S. sales but permitted claims alleging infringement for the sale of imported products.  The Federal Circuit affirmed the district court’s decision about imported products but reversed the lower court finding reuse of U.S. sourced cartridges were also subject to a claim of patent infringement.  The Federal Circuit held that a strategy of providing a discount if the purchaser agreed to only use the cartridge once and return them only to Lexmark gave Lexmark the right to enforce this restriction through patent infringement lawsuits.  It was further held that the patentee could sell cartridges overseas without exhausting its patent rights over the product.

The Supreme Court held that “a patentee’s decision to sell a product exhausts all of its patent rights in that product, regardless of any restrictions the patentee purports to impose or the location of the sale.”  The Court’s underlying rationale was that “[p]atent 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.”   As a result, Impression was not liable for infringement for its actions.

The Supreme Court grounded its analysis on long-standing common law principles of ownership opining that “[w]hen 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.”  The Court’s decision that foreign sales also exhausted U.S. patent rights was also based on a common law policy – one against restraints on the alienation of chattels.  The Court analogized the international exhaustion of patent rights to exhaustion principles under copyright law and its decision in Kirstaeng v. John Wiley & Sons Inc., 133 S. Ct. 1351 (2013) which held that lawfully made copyrighted works initially sold abroad could be resold in the United States.

Impression has made patent exhaustion now uniform and automatic. Once a patentee decides to sell a product (whether directly or through a licensee) the sale exhausts its patent rights – regardless of any post-sale restrictions the patentee purports to impose.  The Court expressly recognized that a patentee is still “free to set the price and negotiate contracts with purchasers, but may not, ‘by virtue of his patent, control the use or disposition’ of the product after ownership passes to the purchaser.” Although the decision did not eliminate post-sale restrictions of patented goods, such restrictions would have to be enforced under contract law which is often difficult to establish or pragmatically ineffective.

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