On May 30, 2017, in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189, the Supreme Court reversed the Federal Circuit’s en banc decision on patent exhaustion, holding that a patentee may not rely on a patent infringement claim to restrict a purchaser from using or reselling a product purchased from a patentee or an authorized seller. 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.
A United States patent entitles a patentee to “exclude others from making, using, offering for sale, or selling [its] invention throughout the United States or importing the invention into the United States.” 35 U.S.C. § 154(a). The doctrine of “patent exhaustion,” however, posits that when a patentee sells one of its products, the patentee can no longer control that item through the patent laws – its rights are said to “exhaust.” Lexmark, slip op. at 1. At issue in Lexmark was whether a patentee may avoid the applicability of patent exhaustion as to sales of articles abroad, or by contract restrictions limiting the purchaser’s rights in the purchased article.
Lexmark manufactures and sells toner cartridges to consumers in the United States and abroad. Consumers are given a choice of either buying a cartridge at full price with no restrictions, or buying a cartridge at a discount in exchange for a post-sale restriction that the cartridge must be used only once. When Lexmark learned that companies known as remanufacturers buy empty Lexmark toner cartridges from Lexmark’s customers, refill them with toner, and then resell the cartridges, Lexmark sued those remanufacturers for patent infringement, including Impression Products, Inc. Two questions were at issue: (1) whether a patentee who sells an item under an express restriction on the purchaser’s right to reuse or resell the product may enforce that restriction through a patent infringement lawsuit; and (2) whether a patentee exhausts its U.S. patent rights by selling its product outside the United States.
With respect to the first issue, in an 8-0 decision, the Court held that all patent rights are exhausted upon sale, even where the article is sold under an express contractual restriction. Id. at 8. Rejecting the Federal Circuit’s focus on the patent infringement statute and the authority of the patentee, the Court instead focused on the old common law’s “refusal to permit restraints on the alienation of chattels,” and opined that “the backdrop of this hostility toward restraints on alienation” is reflected in the exhaustion doctrine. Id. at 7. Reasoned the Court, “[p]atent 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.” Id. at 11. The Court accordingly held that “even when a patentee sells an item under an express restriction, the patentee does not retain patent rights in that product,” but is limited to contractual remedies. Id. at 8. As applied here, Lexmark thus could not pursue Impression Products for patent infringement.
With respect to the second issue, a 7-1 majority observed that notwithstanding differences in statutory language, applying patent exhaustion to foreign sales is “just as straightforward” as copyright law, as the patent exhaustion and copyright first sale doctrines share a “strong similarity … and identity of purpose.” Id., slip op. at 14. Following the Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., the majority opined that the territorial limit on patent rights provides no basis for distinguishing patent exhaustion from copyright. The Court further reasoned, “[e]xhaustion 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.” Id. at 15. Thus, restrictions and location are irrelevant for patent exhaustion, and what matters in a patent exhaustion question is “the patentee’s decision to make a sale.” Id. at 18.
Justice Ginsburg, in her dissent, opined that foreign sales should not exhaust a U.S. inventor’s U.S. patent rights, as patent law is territorial. Justice Gorsuch did not participate in the decision.
What This Means for You
By creating a bright line rule that all sales, regardless of any post-sale restrictions or the location of the sales, exhaust U.S. patent rights, the Lexmark decision may significantly improve certainty and predictability in U.S. litigation concerning the applicability of the patent exhaustion doctrine. Those impacted by the decision are not limited to manufacturers who sell refillable items, but many others, including manufacturers who sell patented items in different markets, particularly if similar items are sold both in the U.S. and abroad. The Supreme Court’s opinion prioritizes the rights of the purchaser to be free from restraints on alienation of property over the rights of the patentee. Patentees, licensees and anyone in the chain of distribution may wish to review existing distribution and licensing arrangements in view of the potential for exhaustion of patent rights. U.S. patentees may wish to consider their foreign patent application strategies to avoid exhaustion from sales made in countries where there is no patent protection.