On Tuesday, May 30, 2017 the Supreme Court continued its trend of overruling the Federal Circuit, issuing a decision on patent exhaustion in Impression Products, Inc. v. Lexmark International, Inc. The doctrine of patent exhaustion, which is rooted in 17th century common law, generally holds that patented items, once sold, should not be subject to post-sale restraints by the patentee. A single sentence encapsulates the Supreme Court’s decision: “We conclude that a patentee’s decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale.” Slip Op. at 1. Notably, this conclusion broadens the reach of U.S. patent law by removing the location of the sale from the patent exhaustion equation. Judge Ginsburg, the lone dissenter, dissented in part on this aspect of the decision, specifically disagreeing that U.S. patent rights were exhausted by foreign sales.
The patent owner, Lexmark, makes and sells printer ink cartridges for use in its laser printers. The defendant-petitioner, Impression Products, acquires empty printer ink cartridges from purchasers of Lexmark cartridges, refills the cartridges, and then resells them for a lower price. Lexmark has a special “Return Program” for combatting this problem – it gives purchasers the option to buy new cartridges at a discount but limits purchasers from transferring the cartridge, once empty, to anyone but Lexmark. Lexmark installs a microchip in each cartridge to enforce the return policy; Impression Products (and others in the industry) have developed methods of neutralizing the microchip. Re-sellers are then free to use the discounted cartridges in their re-sell business.
However, in 2010 Lexmark sued a number of re-sellers, including Impression Products, for patent infringement on two groups of cartridges: cartridges sold in the United States that then were refilled and resold in the United States, and cartridges sold outside the United States that were then refilled and imported into the United States. The district court granted a motion to dismiss with respect to the cartridges sold in the United States but denied a motion on the second group. The Federal Circuit considered the appeal, and ruled in both instances that Lexmark’s patent rights were not exhausted (based on Lexmark’s contractual post-sale restrictions). Impressions appealed to the Supreme Court.
The Supreme Court first considered the cartridges originally sold in the United States. Tracing the common law doctrine of exhaustion from its 17th Century roots to the recent copyright exhaustion decision of Kirtsaeng v. John Wiley & Sons, Inc., 568 U. S. 519 (2013), the Court concluded exhaustion does not arise from the infringement statute (disagreeing with the Federal Circuit) but rather is a limit on the scope of the patentee’s rights. The sale of a product exhausts the exclusionary power of the patentee’s monopoly. Slip. Op. at 9-10. Importantly, the Court distinguished the relationship of a purchaser to a patentee from the relationship of a licensee to a patentee, stating that post-license restrictions in the license context involved the patentee “exchanging rights, not goods” and thus did not implicate patent exhaustion. Id. at 11-12.
With regard to the cartridges sold outside the United States, re-filled, and then imported into the United States, the Court again ruled for Impressions. Here, the Court again discussed its recent copyright decision in Kirtsaeng (which held that foreign sales exhaust copyright rights), and noted that the common law doctrine from which exhaustion was borne makes no geographical distinctions. Slip. Op at 14 (quoting Kirtsaeng, 658 U.S. at 539). Noting the historic kinship between copyright law and patent law, the Court stated “the bond between the two leaves no room for a rift on the question of international exhaustion,” and again ruled for Impression Products. Slip. Op. at 14-15. As the Court stated, “restrictions and location are irrelevant; what matters is the patentee’s decision to make a sale.” Id. at 18. Once that sale is made, the patentee’s patent rights in the item are exhausted.