During its 2017 term, the Supreme Court decided two patent cases that are expected to have important repercussions on global supply chains and businesses, including manufacturing, sales, and the licensing of technology products.
The first decision, Life Technologies Corp. v. Promega Corp., 14-1538 (Feb. 22, 2017), held that the exportation of a single component that is intended to be combined with other components abroad cannot be subject to patent liability under 35 U.S.C. § 271(f)(1) of the Patent Act.
The second decision, Impression Products, Inc. v. Lexmark International, Inc., 15-1189 (May 30, 2017), held that patent owners cannot enforce post-sale restrictions on downstream sales of lawfully purchased goods through patent infringement lawsuits, whether those goods are sold domestically or internationally.
Both decisions have implications for companies that source, manufacture, distribute, or sell patented products internationally, as well as patent owners or licensors that enforce or monetize patents against competitors or licensees. Taken together, these decisions remind companies of significant traps for the unwary.
Life Technologies v. Promega Corp.
In Life Technologies, the Supreme Court held that exporting only a single component of a multicomponent product for manufacture abroad is insufficient to actively induce infringement under 35 U.S.C. § 271(f)(1). That provision states that “[w]hoever without authority supplies or causes to be supplied in or from the United States all or a substantial portion of the components of a patented invention, where such components are uncombined... in such manner as to actively induce the combination of such components outside of the United States” can be liable as an infringer (emphases added).
In the underlying case, Life Technologies sublicensed U.S. Reissue Patent No. RE 37,984, which claims a genetic testing kit, from Promega, the exclusive licensee, for use only in certain fields. The kit is used to take small samples of genetic material and synthesize multiple copies of a particular nucleotide sequence. The kit contains five patented components. Only one component (an enzyme) is manufactured in the United States. That component is shipped to a United Kingdom facility and then combined with the other four components that are manufactured there.
When Life Technologies began selling the kits outside the licensed fields of use, Promega filed suit, alleging that Life Technologies was actively inducing patent infringement under § 271(f)(1). Although the jury returned a verdict favoring Promega, the district court granted Life Technologies’ motion for judgment as a matter of law, holding that § 271(f)(1) does not encompass the supply of only a single component. The Federal Circuit reversed, finding that a single “important” component could satisfy the statute’s “substantial portion” requirement.
The Supreme Court reversed the Federal Circuit’s decision. The Court determined that the “substantial portion” requirement refers to a quantitative, rather than a qualitative, measurement. In support, the Court relied upon the context of the statute, including the neighboring terms “all” or “portion.” Because the statute consistently refers to “components” in the plural, the Court then concluded that, as a matter of law, a single component could never satisfy the “substantial portion” requirement. In a decision that will impact how companies manage their sourcing and supply chains, the Court thus sought to develop a more administrable, bright-line rule that a single component cannot constitute “a substantial portion of the components of an invention” under § 271(f)(1).
The Court, however, declined to address how close to “all” of the components “a substantial portion” must be. Moreover, while the supply of a single component from the United States for a multicomponent product assembled abroad does not infringe under § 271(f)(1), infringement may still be found for supplying a single component from the United States under another provision, § 271(f)(2), if the component “is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use.” Thus, in cases involving infringement allegations under § 271(f), both the quantitative number of components supplied from the United States and the qualitative purpose of those components will still have to be considered.
Impression Products, Inc. v. Lexmark International, Inc.
While Life Technologies deals with the exportation of components to manufacture abroad, Lexmark addresses post-sale restrictions that can be imposed on distribution channels and downstream customers, in the U.S. or abroad.
In Lexmark, the Supreme Court addressed whether a patentee should be able to control the resale of a patented article that has entered the stream of commerce following an authorized sale by the patentee. Reversing 25 years of Federal Circuit precedent, the Supreme Court first held that “once a patentee decides to sell — whether on its own or through a licensee — that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose.” The Court further held that it makes no difference for purposes of patent exhaustion whether the authorized sale of the article is first made in the United States or abroad. Both of these issues have important implications for sale and distribution of products, domestically and internationally.
U.S. patent law allows a patent holder to exclude others from making, using, offering for sale, selling in the U.S., or importing patented inventions into the U.S., without authority from the patent owner. Under the doctrine of patent exhaustion, however, a patentee’s right to exclude is exhausted after it sells (or authorizes the sale of) a patented product. Prior to Lexmark, a patentee could impose and enforce post-sale restrictions that can be enforced under patent law, if the restriction is otherwise lawful and within the scope of the patent grant (e.g., restrictions on reuse; geographical locations for sales; field of use; pricing). See Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992).
The Supreme Court’s Lexmark decision reversed this precedent, holding that all patent rights are exhausted upon an “authorized” sale, even where the article is sold subject to an express contractual restriction. Emphasizing the common law’s “refusal to permit restraints on the alienation of chattels,” the Court opined that “patent 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.”
In the underlying case, patentee Lexmark sought to prevent its printer cartridges from being refilled and resold by third parties in the U.S., directly or after importation. Toward that end, Lexmark imposed a post-sale restriction: in exchange for a price discount, purchasers were required to use each cartridge only once or return it to Lexmark for refilling.
Under the Court’s holding, Lexmark is free to attempt to enforce contractual provisions it may have against purchasers who breach the post-sale restriction under contract law, but it may not bring a patent infringement suit under patent law against a purchaser who fails to return an empty cartridge or against a subsequent reseller of refurbished cartridges.
In view of Lexmark, licensors would be well-advised to review all current license agreements to see which post-sale restrictions can still be enforceable. Patent owners will need to be more creative with their licensing terms if they want to enforce post-sale restrictions under contract law. Companies also may wish to explore new business models to address the risk of patent exhaustion. These are of course subject to antitrust or other relevant laws, including other aspects of patent law.
Both the Life Technologies and Lexmark decisions are reminders that companies should aim to obtain strategic patent protection, including in key jurisdictions and markets where a product may be manufactured, imported, or sold, by itself, or by its competitors or licensees, while balancing costs and benefits. Companies should also ask foundational questions about the scope of their patent claims, how well their patents are helping them advance their business strategies, and what legal recourse is available to enforce their intellectual property rights in the U.S. and in key markets around the world.