Yesterday, in a highly anticipated decision with potentially far-reaching implications for many industries, the Supreme Court clarified the common law doctrine of patent exhaustion, holding that (1) the doctrine, which has previously been held to apply to sales made in the United States, now also applies to sales made abroad; and (2) the domestic sale by a patentee of a patented article exhausts all of the patentee’s U.S. patent rights, regardless of any post-sale restrictions the patentee might have imposed on the sold article.1
Under the doctrine of patent exhaustion, a patent holder’s right to control a patented product based on the U.S. patent statute is “exhausted” once the product has been the subject of a so-called authorized sale. Under the doctrine, this means that a patent holder cannot enforce a patent against a party that has bought a patented product from the patent holder and then sold that product to a third party. Notwithstanding the doctrine of patent exhaustion, patent holders have often placed conditions on the sale of patented products to try to limit the doctrine’s scope. Until its decision today, the Supreme Court had left open the question of whether sales outside the United States invoke the doctrine of patent exhaustion, and had not clearly ruled out the possibility that at least some post-sale restrictions could limit the scope of the doctrine.
Lexmark marketed and sold toner cartridges for its printers and holds a number of U.S. patents that cover these cartridges and their use. Buyers had the choice of either purchasing “regular cartridges” at full price or “return program cartridges” at a discount. Lexmark imposed post-sale restrictions on return program cartridges so that they were not to be refurbished/reused or transferred to anyone but Lexmark after their original toner had run out. Impression acquired refurbished regular cartridges and refurbished return program cartridges abroad (which had also initially been sold by Lexmark abroad) and then imported them into the United States for sale and use by third parties without Lexmark’s permission. Additionally, Impression acquired refurbished return program cartridges in the United States (which had also initially been sold by Lexmark in the United States) and then sold them domestically.
Based on its U.S. patents, Lexmark then sued Impression for patent infringement under 35 U.S.C. § 271 for importing into and selling in the United States the return program cartridges and regular cartridges. Impression contested liability, arguing that Lexmark had exhausted its U.S. patent rights in the cartridges by its initial domestic and foreign sales of the regular cartridges and return program cartridges, and that Lexmark’s post-sale restrictions had no legal effect.
The district court granted Impression’s motion to dismiss regarding the return program cartridges that had initially been sold by Lexmark domestically, and rejected Lexmark’s argument that post-sale restrictions could limit the scope of the doctrine of patent exhaustion for the domestic sales of patented products. However, the district court denied Impression’s motion to dismiss regarding the cartridges that had initially been sold by Lexmark abroad and were then imported by Impression into the United States, holding that the doctrine did not apply to sales outside the United States.2
Impression appealed, and Lexmark cross-appealed the district court’s decision to the Federal Circuit, which decided sua sponte to hear the case en banc. On Feb. 12, 2016, a majority of the Federal Circuit panel reversed the district court’s ruling with respect to Lexmark’s cartridges initially sold in the United States (holding that post-sale restrictions could limit the doctrine of patent exhaustion regarding domestic sales), but affirmed the district court’s ruling with respect to Lexmark’s cartridges initially sold abroad (holding that the doctrine did not apply to sales outside the United States).3
The Supreme Court reversed the Federal Circuit on both points, holding that the doctrine of patent exhaustion applied to sales outside the United States and that post-sale restrictions could not limit the scope of the doctrine.4 While the full impact of the Supreme Court’s decision remains to be determined, it is already clear that it has potentially far-reaching implications for the business strategies of many companies in various industries. Thus, stakeholders are well-advised to review and potentially adjust their business and IP strategies at the earliest possible time in view of the new realities under the Supreme Court’s Impression Products decision.