United States: SCOTUS Clarifies Long Established Patent Exhaustion Doctrine

On Tuesday, May 30th, in its decision in Impression Products, Inc. v. Lexmark International, Inc., the U.S. Supreme Court provided clarity to the long-established patent exhaustion doctrine in connection with the resale of patented products, stating that a patent owner can no longer control its patented product under patent law after the authorized sale regardless of post-sale restrictions, but may restrict further sales of the product through other areas of law such as contract law.

Patent exhaustion is a U.S. common law patent doctrine that limits the extent to which patent holders can control an individual article of a patented product after a so-called authorized sale. Similar to copyright law's first sale doctrine, once an authorized sale of a patented article occurs, the patent holder's exclusive rights to control the use and sale of that article are said to be "exhausted," and the purchaser is free to use or resell that article without further restraint from patent law. Since its development by the courts in the late 19th century, the patent exhaustion doctrine has raised questions regarding the scope of exclusive rights granted by patents and the extent to which a patent owner may extend those rights to control downstream use and sales of patented articles.

The case revolved around Lexmark's patents covering laser printer toner cartridges and Impression Products' re-manufacturing business model of buying Lexmark's used cartridges from consumers, refilling them, and then reselling them. Under normal circumstances, Lexmark would have no cause of action against Impression Products due to the patent exhaustion doctrine. However, Lexmark advanced two reasons as to why the exhaustion doctrine did not apply to its sale of toner cartridges.

First, Lexmark offered consumers the opportunity to purchase Lexmark cartridges at a reduced price if they entered into a contract with Lexmark to use the cartridges only once and to not transfer the empty cartridges to anyone but Lexmark under its "Return Program." Lexmark argued that Impression Products' re-manufacturing of these cartridges infringed Lexmark's patents because Lexmark expressly prohibited reuse and resale of these cartridges. Second, Lexmark sold a portion of its printer cartridges abroad, which Impression Products then re-manufactured, imported into the United States, and resold. Lexmark argued that because it never authorized the importation of these cartridges, Impression Products' actions constituted patent infringement.

On appeal, the Federal Circuit held that Lexmark's domestic sales did not exhaust all of its patent rights in its cartridges because of the existence and Impression Products' knowledge of Lexmark's post-sale restrictions, allowing Lexmark to pursue infringement claims for the Return Program cartridges. The Federal Circuit further found that Lexmark could pursue claims against the resale of imported cartridges because Lexmark did not receive U.S. patent protection on the goods originally sold abroad, and thus, U.S. patent exhaustion could not apply.

The Supreme Court overturned the Federal Circuit's holdings. Focusing first on the Return Program printer toner cartridges, the Court found that while "the single-use/no-resale restrictions in Lexmark's contract with customers may have been clear and enforceable under contract law," the contracts did not "entitle Lexmark to retain patent rights in an item it has elected to sell." The Supreme Court found that once a patentee chooses to sell a patented item, that product is no longer within the limits of the monopoly of the patent, but rather, becomes the private property of the buyer. Further, the Court acknowledged that while a patent allows inventors a way to secure financial rewards through the limited monopoly granted to patent holders, once the patent owner receives its reward for the use of the invention via a sale, the purpose of the patent is fulfilled, and there is no basis to restrain the use of the item sold. The Supreme Court buoyed this position with three of its previous rulings in which the Court found no patent infringement where buyers violated post-sales restrictions.

In addition, the Supreme Court addressed concerns by the Federal Circuit regarding licensing agreements that restrict post sales by licensees. The Federal Circuit saw no difference between post-sale restrictions placed on licensees and post-sale restrictions placed on consumers who bought directly from the patent owner. The Supreme Court found the concern misplaced, stating that a license changes the provisions of the patent owner's monopoly, allowing, and not excluding, a licensee to make or sell the patented invention. As long as the licensee complies with the terms of the license when the good is sold, including mandating that a purchaser enter into contractual post-sale restrictions, the sale triggers patent exhaustion, eliminating the patent owner's claim of patent infringement, but not breach of contract claims. However, if a licensee makes sales outside of the license agreement, the patent owner may pursue a claim for patent infringement since the sale would not be considered an authorized sale.

The Supreme Court then turned to the alleged infringement of the import and resale of printer toner cartridges that were originally sold abroad by Lexmark. While Lexmark and the Federal Circuit advanced the position that the patent exhaustion doctrine was not triggered by foreign sales because the patentee's rights were not transferred, the Supreme Court disagreed. The Court looked to the international exhaustion of intellectual property rights in general, relying on its precedent under the first sale doctrine, which is applicable to both domestic and foreign sales of copyrighted material. In support of this decision, the Court determined that because both the patent exhaustion and first sale doctrines originate in common law, differentiating between the two would make little sense. Lexmark also argued that foreign sales miss the "reward" (i.e., higher price) provided by U.S. patents, but the Supreme Court also disagreed with this notion, providing that the Patent Act does not guarantee a particular price. Rather, exhaustion is triggered when the patentee sells the patented good for whatever fee it decides is appropriate.

What are the takeaways from this decision? First and foremost, the case does not eliminate post-sale restrictions on patented products; it may restrict patent infringement claims, but not causes of action for breach of contract. In Impression Products, Lexmark did not sue its customers who entered into the Return Program in exchange for the lower price, but rather sued a third party that was not subject to contract. As long as the post-sale restrictions do not run afoul of other legal provisions (e.g., antitrust laws), patent holders may sue violators under breach of contract. Second, securing foreign patent rights can help patentees sell their products and services in other protected countries at higher prices warranted by the potential invention. The foreign patent rights will not prevent the resale of such products, but at least provide the patentee a chance to receive the rewards provided by the patent system. Lastly, the patent exhaustion doctrine only applies to goods initially sold by the patent holder. If an individual resells products that do not originate from the patent owner, the patent owner may bring a patent infringement suit against the reseller or the original manufacturer of the infringing product.

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