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Supreme Court Decides the Scope of Patent Exhaustion

On May 30, 2017, the Supreme Court issued a landmark 8-0 decision holding that when a patentee sells one of its products, the patentee can no longer control that item through the patent laws—its patent rights are “exhausted” upon the authorized sale of the item. Impression Products, Inc. v. Lexmark International, Inc., --S.Ct.-- No. 15-1189, 2017 WL 2322830 (May 30, 2017).

In addition, the Court ruled 7-1 that a patentee’s authorized sale of an item outside the United States, just as one within the United States, exhausts all rights under the Patent Act.
At its simplest, the doctrine of patent exhaustion is a defense to patent infringement based on the common law principle that the first authorized sale of a patented article exhausts the patent owner’s control over that article. Generally, a purchaser is free to use or resell the patented article as it sees fit without any further permission or constraint from the patent holder. This doctrine also allows for the creation of secondary markets through the purchaser’s resale of its property. The Court upheld the doctrine of patent exhaustion (also known as the “first sale doctrine”), citing that the exhaustion rule “marks the point where patent rights yield to the common law principle against restraints on alienation.” Id., at *8. Notably, however, the Court also held that if the patentee negotiates a contract restricting the purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law—but it may not do so through a patent infringement suit.
The case centered around a lawsuit filed by Lexmark, which alleged patent infringement based on Impression Product’s refilling and reselling on secondary markets certain Lexmark-manufactured printer cartridges sold in the United States and overseas, where Lexmark had sold to original purchasers “single-use” cartridges subject to express no-resale/no-refill provisions that were a condition of sale. Lexmark had a “Return Program” for its cartridges, whereby a customer who bought a discounted cartridge through the Return Program signed a contract agreeing to use it only once and to refrain from transferring the empty cartridge to anyone but Lexmark in exchange for the discounted price. Impression Products moved to dismiss the patent infringement suit on the grounds that Lexmark’s sales, both in the United States and abroad, exhausted all patent rights in the cartridges, so Impression Products was free to refurbish and resell them and to import them if the cartridges were acquired abroad.
In a controversial en banc decision last year that led to this Supreme Court case, the Federal Circuit ruled that the sale of patented articles subject to resale restrictions may limit the authority of the articles’ initial buyers or downstream buyers to resell such articles. Specifically, the Federal Circuit held that the doctrine of patent exhaustion can be limited, as a matter of patent law, by restrictions on resale or reuse that are clearly communicated to the purchaser at the time of the purchase. Such restrictions would then bind any persons who take title of the patented article in the future, regardless of their privity to the initial sale. In addition, the Federal Circuit held that a foreign sale of an article patented in the United States does not exhaust the patentee’s right to restrict importation into the United States absent a license—i.e., foreign sales of patented articles do not implicitly allow buyers to import the articles for later sale and use in the US. See Lexmark Intern., Inc. v. Impression Products, Inc., 816 F.3d 721 (Fed. Cir. 2016).
The Supreme Court reversed both of the Federal Circuit’s rulings and remanded the case for further proceedings consistent with the Supreme Court’s decision. Because Impression Products was not in privity of contract with the initial purchasers of the Lexmark cartridges, it is doubtful that Lexmark would be able to enforce any contract-based remedy to exclude Impression Products from refilling and reselling these cartridges on secondary markets. What is clear from the Supreme Court’s ruling is that Lexmark’s decision to sell the cartridges exhausts all of its patent rights to such cartridges, regardless of any contract-based restrictions that Lexmark purports to impose or the location of the sale. Lexmark cannot bring a patent infringement suit against Impression Products to enforce the single use/no-resale provision contained in the terms of its Return Program. 
This decision has substantial implications for patent holders and for purchasers in virtually all areas of commerce. The decision is welcome news for companies and industries that manufacture and sell complex products that utilize multiple patented components, because it simplifies concerns over having to ensure that they have clear title to each patented component before they can sell the final product to an end user. The decision will force patentees to evaluate more carefully what conditions of sale they are willing to try to enforce contractually against their customers; it will also motivate patentees to reflect upon their global pricing strategies and the markets in which they will authorize sales of patented articles. How this decision will ultimately influence the pricing and availability of patented products in a variety of industry sectors remains to be seen.


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