In late May, the Supreme Court of the U.S. (SCOTUS) issued its long-awaited decision in Impression Products v. Lexmark Intl.1 In Impression Products, the court held that a patent owner’s authorised sale exhausts all patent rights in the product sold regardless of whether the product is sold domestically or abroad. Exhaustion also prohibits a patent owner from enforcing post-sale restrictions through patent infringement suits. The Supreme Court did not, however, foreclose the possibility of using contract law as a mechanism to enforce post-sale restrictions on downstream purchasers.
While contract law may provide some optimism to patent owners, there are a number of practical considerations that arise out of the shift from using patent law to using contract law to enforce post-sale restrictions. Patent owners may choose to license or sell products and that choice likely depends on their specific industry and business. This article focuses on the second option, post-sale contractual restrictions, and looks briefly at when courts have allowed post-sale restraints on personal property in previous decisions and considerations for patent owners who may not be able to practically enforce contractual restrictions.
Lexmark manufactures and sells printers and printer cartridges. In the U.S., it sells cartridges under two purchasing options for buyers:
- ”Regular” cartridges, sold full price and not subject to any restrictions; or
- “Return Programme” cartridges, sold at a discount and subject to a restriction that the buyer will not reuse the cartridge or transfer the cartridge to anyone other than Lexmark when the toner runs out.2
Lexmark enforces the ‘return programme’ using a microchip that prevents reusing a refilled cartridge. Lexmark sells printer cartridges abroad as regular cartridges.
Impression Products collected used return programme cartridges, “hacked” the microchip so the cartridges could be reused, refilled the cartridges, and resold them in the U.S. for use with Lexmark’s printers. Impression Products also bought Lexmark’s used foreign cartridges, refurbished and refilled them, and resold them in the U.S.
Lexmark sued Impression, alleging patent infringement based on Impression’s sales of the refurbished return programme cartridges and the importation and sale of foreign-sold cartridges. Impression argued that Lexmark’s patent rights in both cartridges were exhausted by Lexmark’s sales of the cartridges both abroad and in the U.S. A district court found Lexmark’s rights in the return programme cartridges exhausted, but rights in the foreign-sold cartridges not exhausted. On appeal, the en banc Federal Circuit determined that neither sale exhausted Lexmark’s rights. Impression then appealed both issues to SCOTUS.
The Supreme Court reversed, holding 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.” 3
Patent Owner’s Authorised Sales Exhaust All Patent Rights, Precluding Post-Sale Enforcement Through Patent Infringement Actions
First, the Supreme Court held that Lexmark’s sale of the return programme cartridges precluded enforcing the restrictions under patent law. The court, however, explained that the restrictions might be enforceable under contract law, although it did not reach the merits of that enforceability. In finding Lexmark’s patent rights exhausted, the court explained that patent exhaustion stems from the common law’s general reluctance to permit restraints on the alienation of personal property and thereby limits a patent owner’s right to exclude. The court illustrated some policy reasons for exhaustion using the example of a used car. The court explained that cars may contain many patented products from different patent owners and if each patent owner could threaten infringement actions at each subsequent sale, it would “clog the channels of commerce, with little benefit from the extra control that the patentees retain”.4 The court supported this example by examining some of its prior exhaustion decisions that refused to enforce post-sale restrictions under patent law.
The court also held that Lexmark’s foreign sales exhausted the U.S. patent rights because Lexmark authorised those sales.
Although patent owners cannot use patent infringement suits to enforce post-sale restrictions, the court left open an opportunity for patent owners to use contract law to exert some control downstream to enforce restrictions on end users. Although licensing is also an option, courts may, in some circumstances, consider a licence transaction as equivalent to a sale. This discussion focuses on post-sale restrictions outside of the licensing context and assumes the product is actually sold to purchasers and proposes some considerations for patent owners to consider in that context. At least two important questions arise for patent owners: (1) what kind of restrictions may be enforceable after a sale, and (2) if contractual restrictions are not practicable, what other options might patent owners consider to control downstream use of their products?
Post-Sale Restrictions and “Reasonable” Restraints
In Impression Products, the SCOTUS reiterated that the “common law’s refusal to permit restraints on the alienation of chattels” gave rise to the patent exhaustion doctrine.5 This appears to create some tension with the court’s other statements that contract law might be available to enforce post-sale restrictions on patented products, which are usually chattels.6 A court’s willingness to permit contractual restrictions against this common law backdrop will likely be an important development as patent owners shift away from infringement actions and consider contractual alternatives.
Some courts, including the Supreme Court, have grappled with post-sale contractual restrictions, although not directly as they relate to patented products. Many of the cases arise in other contexts, such as antitrust or sales of stock certificates, but these cases may nonetheless provide some considerations for patent owners as courts contend with the changing legal landscape.
Courts that have examined this issue have often looked to whether a restriction is “reasonable” under the circumstances, sometimes considering the restriction in the context of what is reasonable to protect the party seeking to enforce the restriction.7 Two specific case studies–relating to steam ships and sugar–provide interesting examples of enforceable post-sale restrictions.
In Oregon Steam Navigation Co v. Winsor, the Supreme Court partially enforced a contractual restriction precluding a Washington navigation company from using the steam ship it purchased in California waters.8 In this case, a California company sold a steam ship to an Oregon company on condition that the Oregon company would not use the ship in California waters for 10 years. Three years after buying the ship, the Oregon company resold it to a Washington company, contractually restricting the Washington company from using the ship in Oregon or California waters for another 10 years (ie, 13 years from the original contract with the California company).9 The Supreme Court held that the restriction not to use the ships in California and Oregon was reasonable to protect the Oregon and California companies’ interests after selling the ship. The court also explained that it was reasonable for the Oregon company to require the Washington company to refrain from using the ship in California because it was part of the original agreement between the Oregon and California companies.10 But, the court refused to enforce the restriction that the Washington company not use the ship in California for the three years beyond the original Oregon and California companies’ agreement.11 Although the Supreme Court’s decision contains several caveats about when a restriction might be unenforceable, the fact that it upheld and enforced the post-restriction for a defined territory may offer some guidance to patent owners about when a restriction could be enforceable.
In another example, Chicago Sugar Co v. American Sugar Refining Co, the Seventh Circuit upheld a post-sale restriction requiring a sugar manufacturer to use sugar only in manufacturing and not resell the sugar in competition with the distributer that sold the sugar.12 In this case, the court determined that the restriction was reasonable to prevent the manufacturers who bought the sugar from distributers from competing with the distributers themselves.13 Thus, at least one court has also found that a post-sale restriction for a field of use may be enforceable to protect the seller of the product.
For patent owners concerned with refurbishers or resellers, these examples may provide some guidance for controlling downstream uses of products through contracts.
The Reconstruction Possibility
Some products may only be used once before they must be refilled, refurbished, or otherwise recreated to be used again. Lexmark’s printer cartridges provide one example–once the ink runs out, the ink must be replaced before reusing the cartridge. This may create other opportunities for patent owners to control downstream use of their products outside of contract law. In patent law, this “reconstruction” doctrine dates back at least 130 years to American Cotton-Tie Co v. Simmons,14 but the best known statement comes from a pair of Supreme Court decisions inAro I15 and Aro II.16 At a high level, this doctrine generally states that a party infringes a patent when it reconstructs the patented article, but it is generally not infringing to recondition an article worn out by use.17 In other words, “the exhaustion doctrine does not extend to the right to ‘make’ a new product.”18 While perhaps simple in theory, the repair-reconstruction doctrine has many nuances and a full discussion of it is beyond the scope of this article. But, a brief examination of the Supreme Court decisions in Cotton-Tie and Bowman v. Monsanto provides some considerations for patent owners developing products.
In Cotton-Tie, the patent owner sold buckles and metal bands for baling cotton. The buckles had to be combined with the bands to bale the cotton, and the patent owner had patent claims directed to both the buckles alone and baling the cotton with the buckle and band.19 The band also had to be cut to un-bale the cotton. The defendants bought the used buckles with cut bands, reconstructed the severed bands, and resold the buckles and bands for baling cotton.20 The Supreme Court held that defendants’ reconstruction of the bands and selling of the bands and buckles infringed the patent because “it was not repair of the band or the tie, in any proper sense”, in part because once the band was severed “it could not be used again as a tie”.21 By selling the buckles and refurbished bands to bale cotton, the defendants recreated the patented article and infringed the patent owner’s claims to the buckle-band combinations.22
InBowman, the SCOTUS reaffirmed that making a new patented article constitutes patent infringement.23 Here, a farmer bought and planted patented seeds without the patent owner’s authorisation. When planted, the seeds created new copies of themselves as the plants grew, thereby creating new copies of the patented seeds that did not previously exist.24 The court held that the planting of the seeds constituted “making” the patented seeds, and therefore, infringed the seed patents.25
The repair-reconstruction doctrine offers an interesting alternative to patent owners who seek to bring unauthorised use back under patent laws instead of contract laws. If, as in Cotton-Tie and Bowman, a subsequent user, refurbisher, or reseller must reconstruct the patented product, it may make the party liable for patent infringement rather than mere contract damages. Although repair-reconstruction cases are highly fact dependent, patent owners may wish to consider the doctrine and its implications moving forward as they design products, draft patent claims, and structure their transactions with end users.
Although the post-Impression Productslandscape is unsettled, prior court decisions may inform strategic options for patent owners. Depending on the industry, post-sale contractual restrictions may present a viable option to control the use and subsequent sales of patented products. In other industries, distribution chains and the realities of product purchasing may make enforcing such restrictions impractical. In either case, patent owners may also consider non-contractual strategies that are either technological designs, perhaps under the reconstruction doctrine, or purely business structures to accomplish the same outcome.
Are Post-Sale Contractual Restrictions Viable?
Placing post-sale restrictions on goods may be desirable to patent owners, but customers may be reluctant to accept such terms. For example, purchasers of products containing patented products from different patent owners – such as the Supreme Court’s used car example – may not agree to any post-sale restrictions because of the overlapping rights of different patent owners or the risk of conflicting obligations to different patent owners. Rather than protecting the patent owners, such restrictions may instead alienate potential customers.
In other contexts, licences or post-sale restrictions may not be practically enforceable, even if they are legally enforceable. For example, post-sale contractual restrictions have an inherent added difficulty that the end user must be in privity with the patent owners to be enforceable. As products move downstream, it may become harder to create a privity relationship with subsequent purchasers. In some cases, contract damages may be inconsequential compared to the cost of enforcement because end users may purchase only a few of the patented items and the contractual damages on each item are small. Using the used car example again, a consumer typically buys only one car, of which the patented item may be a small part. The contractual damages for reselling the patented component may not justify the cost of suing the buyer. Where there are many buyers of small items, such as printer cartridges, the cost of bringing and litigating contract suits may simply be impractical from a monetary standpoint. Moreover, such suits could alienate buyers or create hostility towards the company.
In other contexts, such as where patent owners distribute or sell to centralised organisations or where a small number of purchasers account for a large volume of the patented products’ uses, post-sale contractual restrictions may be practical because enforcement would be limited to a small number of entities.
The viability of post-sale restrictions will likely depend on the industry where it is being implemented in both a legal and practical sense. Patent owners might consider their distribution platforms, how products are sold and used, and whether such restrictions make sense for their industries, products, and business models.
Non-Contractual Control of Products
Where post-sale restrictions are unavailable or insufficient to protect patent owners, patent owners might consider non-contractual options. In some cases, patent owners may be able to design their products with built-in protection, such as software protections or encryption. As Impression Products shows, however, these types of controls may be subject to circumvention by third parties. Patent owners may be able to design in features that require refurbishers or resellers to “reconstruct” patented parts of the products, potentially bringing subsequent sales within the scope of the repair-reconstruction doctrine, which may create liability under the patent laws. Such features, however, may be expensive or time consuming to implement and the time or cost may not justify their implementation.
In such instances, patent owners may consider business incentives to encourage–but not legally require–consumers to restrict downstream use or control. One such example might be a “rebate” programme that achieves the same effect as post-sale restrictions but contains no legal obligations. For example, rather than providing a discount at sale in a contract with the end users, as Lexmark did, a patent owner might have considered providing a payment when the user returns the cartridge. Such programmes are implemented in some states for recycling bottles and cans – at purchase, a user is notified that they will receive a certain payment when they deposit the bottle or can at a recycling facility. Here, Lexmark might have achieved the same effect as the “return programme” by notifying customers that they would receive a payment by returning the cartridge to an authorised location and then requiring that location to return the used cartridges to Lexmark.
While these are some high-level options to consider, each industry, product, and business model is unique. Patent owners wishing to implement downstream control strategies post-Impression Products have some guideposts moving forward, but some options may be better for a patent owner in different situations. As the legal landscape develops, further opportunities may present themselves. Regardless, this area of the law will be closely watched by patent owners as it develops.