In 1628, Lord Coke in his “Institutes of the laws of England” summarized the common law on restraints on the alienation of chattels stating that any attempt by a seller to restrict resale or use of the chattel after selling it was “voide, because … it is against Trade and Traffique, and bargaining and contracting between man and man” (17th century spelling).
On May 31, 2017, in Impression Products Inc. v. Lexmark International Inc., the United States Supreme Court held that this principle precluded a patent from being used to control subsequent sales of a patented product originating from the patent owner even if such subsequent sales were in breach of the original contract of sale between the patent owner or the first purchaser of the product or if that first sale occurred outside the United States.
Lexmark held patents on components of toner cartridges and the way in which they were used. It sold such cartridges in the United States and abroad giving purchasers the choice between two options, either to make the purchase subject to an agreement to return the used cartridges to Lexmark for refilling after they become empty at one price or to make the purchase without such an agreement at a higher price. The cartridges that were sold subject to the agreement that they should be returned were installed with a microchip designed to prevent reuse once the toner had run out. Impression bought used cartridges originally sold both in the United States and abroad and where necessary disabled the microchip preventing reuse. It then refilled the cartridges and resold them.
Lexmark sued Impression for infringement of its patents. The Court of Appeals for the Federal Circuit hearing the case en banc held that refilling and selling cartridges that had originally been sold by Lexmark in the United states subject to an agreement that they should be recycled to Lexmark after use constituted patent infringement because the statute gave the patent owner the right to control any unauthorized use of the patented product and the nature of the original restriction made such use and sale by Impression an “unauthorized” use and sale (see our article on this decision). Although there is a presumption that a purchaser can resell something it owns freely, this right can be limited by a clearly indicated restriction communicated at the time of sale as long as that restriction is itself lawful. On the question of sales made by Lexmark outside the United States, the Federal Circuit concluded that since sales outside the United States were not protected by the US patent and so such sales did not provide the rewards available from selling in the US market, importation into the United States would constitute infringement. The situation was different from copyright law where the Supreme court had held in Kirstaeng v. Wiley that a copyright holder could not enforce copyright in the United States to prevent import of books it had sold in Thailand (see our article on this decision). The Federal Circuit saw patents as being clearly limited to national rights whereas copyright was of a more international nature.
As noted above, the United States Supreme Court disagreed with both conclusions of the Federal Circuit.
In an opinion by Chief Justice Roberts, the Court held on the question of domestic sales made subject to a restriction, that restriction was a matter of contract law that only applied between the seller and the buyer. The restriction did not attach to the goods themselves. The law against restraints on alienation of chattels had been in existence from before the first patent act and Congress had never made any exception for patented goods. Moreover, the Supreme Court had never indicated that any such exception should exist to the long-standing first sale doctrine that first sale of a patented product by the patent owner or with its license exhausts the patent owner’s rights. The situation was the same where sale was by a licensee. The patentee’s remedy for breach was against the licensee, not the down-stream purchaser. Allowing a restriction to remain applicable after the first sale would create inconvenience and annoyance to the public and so Lexmark’s rights were confined to those provided by contract law not patent law. On the question of domestic sales, the court concluded:
- In sum, patent exhaustion is uniform and automatic. 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, either directly or through a license.
The Court took a similar approach on imports into the United States of patented products first sold outside the United States. Unlike the Court of Appeals for the Federal Circuit, the Supreme Court saw no difference in principle to the application of the concept of international exhaustion between copyright and patent law. The Supreme Court noted:
- Patent exhaustion, [like copyright exhaustion], has its roots in the antipathy toward restraints on alienation … and nothing in the text or history of the Patent Act shows that Congress intended to confine that borderless common law principle to domestic sales. In fact, Congress has not altered patent exhaustion at all; it remains an unwritten limit on the scope of the patentee’s monopoly.
Lexmark’s arguments as to the differences between the territorial effects of copyright and patent law were of no avail:
- Exhaustion is a separate limit on the patent grant, and does not depend on the patentee receiving some undefined premium for selling the right to access the American market. A purchaser buys an item, not patent rights. And exhaustion is triggered by the patentee’s decision to give that item up and receive whatever fee it decides is appropriate for the article and the invention which it embodies. The patentee may not be able to command the same amount for its products abroad as it does in the United States. But the Patent Act does not guarantee a particular price, much less the price from selling to American consumers. Instead, the right to exclude just ensures that the patentee receives one reward—of whatever amount the patentee deems to be “satisfactory compensation,” for every item that passes outside the scope of the patent monopoly.
The decision as to domestic sales was not unexpected and is consistent with prior, but less clearly expressed Supreme Court decisions. One possible outcome of the decision would be an increase in the use of leasing agreements rather than sales where there is an issue of possible reuse that the patent owner would like to control. In the case of reusable ink cartridges, the manufacturer might sell the ink, but lease the cartridge. The packing should then include instructions for using the original packing to return the spent cartridge to the manufacturer. Another possibility is the incorporation in sales contracts of requirements for the purchaser to impose limitations on its purchaser in any resale agreement and an obligation to sue such a downstream purchaser if it breaches the resale agreement. How well this will work in practice remains to be seen.
As to international sales, it is likely that more steps may be taken to distinguish goods intended for the use in the domestic market from those intended for sale abroad by use of different trademarks, packaging, etc., and where possible and appropriate even physical differences in the products sold abroad from that sold in the United States.