On May 30, 2017, the United States Supreme Court reversed the United States Court of Appeals for the Federal Circuit's decision in Impression Products, Inc. v. Lexmark International, Inc. altering the scope of the patent exhaustion defense. The Supreme Court held that patent exhaustion applies to both domestic and foreign sales of a patented product, reversing standing Federal Circuit precedent that held that foreign sales did not exhaust a U.S. patent owner's rights. Additionally, the Supreme Court held that once a patent owner or its authorized licensee sells its patented product, it exhausts all its patent rights in that item; irrespective of any contractual restrictions that it has attempted to impose on the purchaser.
The dispute in Lexmark related to third parties refilling and reselling used Lexmark printer toner cartridges. In addition to owning patents, Lexmark manufactures and sells printer toner cartridges. Lexmark offered the cartridges to customers under two models. In one offering, the cartridges were sold at full price. In the alternative offering, which Lexmark called its "Return Program", the customer was charged a significantly discounted price and entered into agreements with clearly communicated post-sale restrictions that prohibited the reloading and resale of Lexmark's cartridges. At the heart of the Lexmark litigation is this single use restriction.
Impression Products is what is called a "re-manufacturer". Impression Products purchases used Lexmark cartridges in the United States and abroad, refills and repackages them. Impression Products subsequently sold these refilled cartridges in the United States.
The trial court found that Impression's refilled cartridges sold in the United States were lawful (since Lexmark's patents were exhausted at the first sale). However, the trial court found that the international sales did not exhaust Lexmark's patent rights. In an en banc decision, the Federal Circuit first held that an agreement restricting post-sale reuse could be enforced so as to preserve a patent infringement claim. The Federal Circuit also concluded that the international sale of a patented product did not exhaust U.S. patent rights. The Supreme Court granted certiorari.
The Supreme Court specifically looked at two issues concerning patent exhaustion. First, does a patentee that sells an item under an express restriction on the purchaser's right to reuse or resell retain the right to enforce that restriction through a patent infringement suit? Second, is a United States patent exhausted if the product is lawfully sold outside the United States? The Supreme Court reversed the Federal Circuit on both issues.
In an 8-0 decision, the Supreme Court concluded that patent exhaustion applied to bar Lexmark's claims of patent infringement with respect to patent products originally purchased in the United States as part of the Return Program. Relying on its earlier decision in Quanta Computer, the Supreme Court held that "[a] patentee's decision to sell a product . . . terminates all patent rights to that item." The Supreme Court rejected the Federal Circuit's focus on infringement, noting that "a patentee is free to set the price and negotiate contracts with purchasers" but that a patent does not allow the holder to "control the use or disposition of the product after ownership passes to the purchaser." Noting the distinction between contractual liability and patent protection, the Supreme Court concluded that authorized sales of patented products nonetheless take them "outside the scope of the patent monopoly," thereby precluding claims for infringement.
Second, the Court also rejected, 7-1, the Federal Circuit's reasoning that only the domestic sale of a patented product exhausts patent rights in the United States. The majority concluded that any sale, domestic or abroad, exhausts a patentee's right to bring a suit for infringement. The Court reasoned that the Patent Act only ensures that "the patentee receives one reward . . . for every item that passes outside the scope of the patent monopoly." As the lawful patent holder, Lexmark actively decided to engage in international sales, thus exhausting its patent rights in the United States.
Application of the Supreme Court's Decision
There are a few takeaways and considerations to be made based on the Lexmark decision.
The Supreme Court left open the possibility that there may be a breach of contract claim even if there was not a patent infringement claim. Further consideration should be made in drafting to include provisions to better support a potential breach of contract claim since a patent infringement claim is no longer available. Additionally, businesses that sell their products through multiple levels of a supply chain, must carefully consider when exhaustion may now attach as it is likely to be found to occur earlier in the supply chain. As a result, further drafting should be done to try and position a stronger contract claim. Similar considerations should be made in customer contracts although this may be harder given that the dynamics between a seller and its customer are different.
The Supreme Court explained that licensing, even when including restrictions by way of contract on the licensee, raises issues different than the sale of a patented product. The law seeks to allow for the free alienation and further transfer of a tangible item in commerce once there has been an authorized sale. This is the basis of patent exhaustion. The same concerns do not exist with a license because the license is "about changing the contours of the patentee's monopoly" not "passing title to a product". Contractual restrictions may still apply to preserve a patent infringement claim against the licensee although parties need to be careful to keep in mind that exhaustion will attach once that licensee makes an authorized sale of the patented product.
Interplay Between Antitrust and Patent Law
The Lexmark case highlights the delicate balance between the limited monopolies granted by patents and the aim of antitrust laws to promote competition. The general antitrust rule for post-sale restrictions on use and resale also applies to restrictions on sold patented products. A restriction within the scope of the patent claims is valid. The Supreme Court's robust interpretation of the patent exhaustion doctrine limits the scope of the patent monopoly. Once products are outside of the patent monopoly, and consequently no longer immune from antitrust scrutiny, qualifying restrictions on the use of the products "must stand on the same footing as restrictions on unpatented goods."