Today, a nearly unanimous US Supreme Court in Impression Products, Inc. v. Lexmark International, Inc. greatly limited a patentee’s ability to restrict the use or resale of a product after the first authorized sale of the product (where patentee refers to both a patent owner and its licensees).
The Court did so in two ways: (1) it held that a patentee’s decision to sell a product exhausts all of its patent rights in the product, regardless of any restrictions imposed at the time of sale and (2) it held that an authorized sale of a product outside of the US exhausts all patent rights to that product inside the US. In effect, the Court concluded that any authorized sale of a product exhausts all patent rights to that product regardless of any purported restrictions or the sales location.
At issue in the case were patented laser printer cartridges. Lexmark sold cartridges domestically under two programs. A consumer could purchase a cartridge at full price under no restrictions or a consumer could purchase a cartridge at a discount under the condition it wouldn’t resell the cartridge to anyone except Lexmark. Impression Products bought used cartridges from consumers who purchased them under the discount restrictions, and then refilled and resold them. Lexmark sued Impression Products for patent infringement, arguing that the express condition placed on the original sale preserved its ability to do so.
The Federal Circuit had ruled for Lexmark by concluding that patent exhaustion is something that applies presumptively to the sale of a product but is something that the patentee can limit at the time of sale. In reaching its decision, the Federal Circuit focused on the language of 35 U.S.C. §271(a) which defines infringement as occurring when the specified activities take place “without authority.”
The Supreme Court found that logic to be incorrect because patent exhaustion is not merely a presumption that applies to a sale. Rather, patent exhaustion is an inherent limitation on the scope of a patentee’s rights, and not something that can be changed by the patentee. The Court ruled that 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 that the patentee purports to impose, either directly or through a license. In rejecting the Federal Circuit’s holding, the Supreme Court relied on the common law principles against restraints on alienation, finding that for hundreds of years courts have not allowed restraints because of their significant repercussions on commerce as a whole. It concluded that the Patent Act had been enacted and amended against the backdrop of these common law principles.
One noteworthy exception to the Court’s broad ruling is that it does not apply to sales by a licensee made outside the scope of its license. Exhaustion applies regardless of whether the patent owner sells the product or a licensee sells the product because a sale by a licensee is treated the same as if the patent owner had made the sale. On the other hand, if a licensee makes a sale outside of the terms of the license, then exhaustion does not apply because in this situation the licensee is acting outside of its authority and is not treated as if the patentee had made the sale.
International sales also invoke patent exhaustion. The Court again turned to common law principles against restraints on alienation. Even though the Patent Act does not provide patent rights abroad and a patentee might not receive the same price in an international sale a patentee has made the choice to forfeit its patent rights in the product for the reward of the sale. Patentees must weigh the reward of international sales versus the cost of forfeiting patent rights in the products sold. Justice Ginsburg dissented with the Court’s holding with respect to international exhaustion.
The decision in Impression Products was limited to a patentee’s rights arising under patent law, and did not prohibit post-sale restrictions imposed through contract terms. However, it may not always be practical for a patentee to impose contractual restrictions on its customers. Even if it does so, those restrictions will only apply to the customer and not to subsequent purchasers who have not agreed to be bound by them.
Patentees who rely on territorial or other restrictions in their sales of patented products will need to reconsider whether and how those restrictions can be implemented effectively, which may include using contractual restrictions. In doing so, they will have to consider the jurisdiction and venue of any such contracts, especially when dealing with customers outside of the US.